The Pros and Cons of Buying a Pharmacy Building

Buying the building that houses a pharmacy can be a smart first step into commercial property, but it comes with trade-offs you should weigh before you sign anything.

If you are a first-time property investor, the idea is appealing. You get a tenant, a rental income and a long-term asset. You also take on a loan that works differently from a home loan. This article walks through the upsides and downsides so you can decide whether it suits you.

What Is a Pharmacy Building Loan and How Does It Work?

A pharmacy building loan is a commercial property loan secured by the building itself. The lender holds the property as security, and you repay the loan from rent, business income or both.

This is different from a loan to buy the pharmacy business. A business purchase loan funds things like stock and goodwill. A property loan funds the bricks and mortar. Some buyers need both, and the two can sit under one structure or be set up separately. Our commercial property loans page explains the basics, and our business loans page covers the business side.

Lenders often look closely at the property type, the lease and the strength of the tenant. They also look at your overall position, including your cash flow and your business financial statements if you own the pharmacy as well.

The Pros of Buying a Pharmacy Building

The main advantages are rental income, control over your premises and a long-term asset that can grow alongside your business.

• Rent goes to you, not a landlord. If you run the pharmacy, you stop paying rent to someone else. If you lease it to another operator, you receive rent instead.
• Control over the site. You are not exposed to a landlord lifting rent or not renewing a lease.
• Possible diversification. A commercial property sits alongside any residential investments you hold. If you already own an investment property, see our guide to expanding your property portfolio.

The trade-off is that your money and your livelihood can become tied to one location. If the pharmacy struggles, the building and the business are both affected.

The Cons and Risks You Should Weigh Up

The main downsides are larger deposits, higher scrutiny from lenders and the risk of a vacant or hard-to-lease building.

Commercial loans usually need a bigger deposit than a typical home loan, though the amount depends on your lender and the property. Interest rates can differ from home loan rates, and the loan terms are often shorter. Lenders also tend to focus on the debt service coverage ratio, which compares the income available with the repayments due.

A pharmacy is a specialised building. If the tenant leaves, finding a new one can take time, and you still need to meet repayments while it sits empty. It pays to keep a cash buffer for that period.

Illustrative Example: Owner-Operator Buying the Building

Repayments can be higher or lower than current rent depending on the price, deposit and rate, and ownership brings extra costs that need to be budgeted for.

Consider a pharmacist who currently rents their shop. They plan to buy the building with a loan of $1,000,000. Using an illustrative rate of 6.75% p.a. over 25 years on principal and interest, the repayments come to about $6,910 per month. That is not a quote, and your actual rate will depend on your lender and deposit.

The pharmacist compares this with their current rent of $5,500 per month. The loan costs about $1,400 more each month before ownership costs such as council and water rates, insurance, maintenance and land tax, which must also be budgeted for. Part of each repayment reduces the debt rather than disappearing like rent. They set aside six months of repayments as a buffer and ask their broker to test the figures if the rate rose by 1%. At 7.75% the repayment would be about $7,560 per month, which still fits within their forecast.

The outcome is a purchase made with a clear picture of the risks. Nothing is certain, but they know what a rate rise would do before they commit.

Secured or Unsecured Business Finance: Which Suits a Property Purchase?

A property purchase is normally funded by a secured loan, because the building is the security. Unsecured business finance is more often used for working capital or equipment.

Unsecured loans usually have smaller limits and can cost more, so they rarely cover a building. They can help with fit-out costs or stock once you own the site. Secured loans offer larger amounts, but if you cannot repay, the lender can sell the property. That is the main risk to weigh.

Fixed or Variable Interest Rate on a Commercial Loan

A fixed interest rate gives you certain repayments for a set period, while a variable interest rate can move up or down with the lender's pricing.

Fixing helps with budgeting, but you may pay break costs if you leave early, and you may miss out if rates fall. Variable loans may offer features like redraw, but your repayments can rise. Some borrowers split the loan so part is fixed and part is variable. Features and availability differ between lenders, so check the details before choosing.

Using Your Home to Help Fund the Purchase

If you own a home with equity, a lender may allow you to use it as extra security, which can reduce the cash deposit you need.

The risk is that your family home is now tied to the commercial loan. If things go wrong, both properties are exposed. Our page on releasing equity to purchase explains how this works. Many pharmacy buyers also wonder whether their super fund can buy the building, which is covered on our SMSF loans page. SMSF rules are strict, so speak to your accountant and a licensed adviser first.

How to Check Your Numbers Before You Apply

Start by testing what you can afford to borrow and what the repayments might look like at different rates.

Our borrowing capacity calculator gives a rough starting point for residential lending. Commercial lenders assess applications differently, so treat it as a guide only. A cash flow forecast and a business plan help show a lender how the repayments will be met.

The tax treatment of rent, interest and depreciation on a commercial property can be complex. Speak with your accountant before you buy, as outcomes depend on your personal situation.

Call one of our team or book an appointment at a time that works for you. We can look at lenders across Australia and help you work out whether a pharmacy building suits your goals.

Frequently Asked Questions