eevBLAB #66 - Renting vs Buying a Commercial Office Lab

[nctnico]

for the same thing to happen to your home as well, do you think that's immune to the same possibility?

Homes can go fubar as well. At some point building new is cheaper (and a better investment) than fixing. With a commercial building as an investment you have to see if it is worthwhile to upgrade the building or only do necessary repairs. It is all numbers. It is no use to invest in a building if there is no ROI no matter how much you'd like to keep the building in good shape.

[nctnico]

But think about it: are you a real investor with just one investment?

Seriously?
I only have one business, guess I'm not a businessman...

Having only one investment is similar to having a business with only one customer. Like a freelancer who works for years at the same customer. On paper the freelancer has a company but he/she is effectively an expensive employee which can be fired at any time without anything to fall back on.

[EEVblog]

But think about it: are you a real investor with just one investment?

Seriously?
I only have one business, guess I'm not a businessman...

Having only one investment is similar to having a business with only one customer. Like a freelancer who works for years at the same customer. On paper the freelancer has a company but he/she is effectively an expensive employee which can be fired at any time without anything to fall back on.

Saying that only having one investment is not an investment because you only have the one is the dumbest thing I've heard in a long time.
You aren't invested in the share market because you only have shares in one company.
You aren't invested in the commodities market because you only own one commodity.
You aren't invested in the classic car market because you only have one Ferrari 250 GT California.
Keep trying to argue, I'm out.

[EEVblog]

Then you have leases with fixed price increases every year, and not uncommon for commercial businesses to have 5 or 10 year leases for the bigger companies, 2-3 years for small businesses.

Speaking of which, my old lab lease to the lawyers is very unusual at only 6 months with a 6 month option.
I wandered by a couple of times in the last few days and no one is there. I might check it out every day this week and see if they even use it at all...

[nctnico]

But think about it: are you a real investor with just one investment?

Seriously?
I only have one business, guess I'm not a businessman...

Having only one investment is similar to having a business with only one customer. Like a freelancer who works for years at the same customer. On paper the freelancer has a company but he/she is effectively an expensive employee which can be fired at any time without anything to fall back on.

Saying that only having one investment is not an investment because you only have the one is the dumbest thing I've heard in a long time.

If you think that then you shouldn't buy the commercial property! Every investment expert will tell you the same when investing: diversify and use money you can do without. Neither seems to be the case in your situation. You even need to take out a loan to do the investment. The latter means a double risk: the investment can lose value and/or the interest rate can rise. Worst case you'll take a double hit. And then there is also the chance your home loses it's value so the amount you borrowed is larger than what your home is worth. Banks don't like such a situation. During the global financial crash 10 years ago my home lost about 20% of it's value. Commercial properties where hit even worse. If you don't have enough meat on your bones it will end badly.

But don't take my word for it; ask an expert and he/she will tell you exactly the same.

Here are some interesting articles:
https://www.moneyunder30.com/why-your-house-is-not-an-investment
https://www.moneyunder30.com/real-estate-investing-in-your-twenties

[sokoloff]

There are definitely investing experts who do not diversify. Possibly the greatest investor of our time:

https://www.forbes.com/sites/karlkaufman/2018/07/24/heres-why-warren-buffett-and-other-great-investors-dont-diversify/

[nctnico]

There are definitely investing experts who do not diversify. Possibly the greatest investor of our time:

https://www.forbes.com/sites/karlkaufman/2018/07/24/heres-why-warren-buffett-and-other-great-investors-dont-diversify/

Well, Mr Buffet isn't investing in one company but has limited his investment to certain sectors. That still counts as diversifying (spreading risks).

An interesting quote from the articly:
this strategy is only useful if you intend to put the work into acquiring as much knowledge as you can about a few select investments.
In other words: if you want to invest right then turn investing into your daytime job.

[sokoloff]

You certainly seem to know everything about investing.

[nctnico]

You certainly seem to know everything about investing.

I know enough to know my own limits. A couple of decades ago I have worked at a stock broker / investment firm for a while so I have some insight in what effort & talent it takes to be really succesful.

[all_repair]

I didn't crank the number as Dave did.  I didn't want to buy at first, industrial space used to rent out at a relative low fee by a government body as an industrial policy here.  If your country still have that, you should seriously consider it.  But situation changes, these industrial space was transfered to a commercial body (REIT), and the REIT policy is to have rent increase every few year.  It was a no-brainer to discard renting, because setting up a lab shall cost me a lot of time and money.  There is no protection for my effort and money for rented space. I would price my time and attention as
the  most expensive component.  Renovation also cost me dearly.  I have seperate breaker for my workshop, and every bench also has its circuit breaker.  If it is rented place, the workshop or lab shall not be invested and so they cannot be continuous improved upon.  That mean my productivity shall not as high as it can be.  I have seen one of my friend rented office that stays the same for last 20 years with absolutely no improvement.   My workshop has been transformed so many cycles in a few years.

[EEVblog]

If you think that then you shouldn't buy the commercial property! Every investment expert will tell you the same when investing: diversify and use money you can do without. Neither seems to be the case in your situation.

You know absolutely nothing about my situation, and I don't need your advice.
Your comment is still as dumb as it was before.

[EEVblog]

I would say that it is worthy to invest money in building your own office if you have a successful business and you are planning to settle there for a long period, otherwise there is no need to spend money...

Depends entirely on what your other investment goals are.
Commercial realestate is a common investment even for those without a business. IIRC correctly around half the offices in my business park are not owner-occupied.

[TraceMillss]

Excellent video; thank you very much for sharing. I don't understand why buying an office space at all, because your business can expand or shrink at any time. Of course, perhaps "one's own" sounds more reliable, but it seems to me that in 2021 it is strange to buy an office space right away. When my business started to expand, I turned to a  co-working space in Singapore, as my friends have been using their services for a long time. The guys very clearly select offices for your requests, and the results for me personally were amazing. So good luck to everyone to find the answer to this question and productive work.

[coppice]

Excellent video; thank you very much for sharing. I don't understand why buying an office space at all, because your business can expand or shrink at any time.

That depends on your plans for life. Many people running a small business aren't planning on substantial expansion. They want long term stability. If they can lock surplus money into things they consider good long term investments, like property, buying the space you occupy can make a lot of sense.

It used to be common for large corporations to own their own property. This only changed in the 80s when some large companies who had had a couple of bad years saw their share price drop below the value of the all the property they held. They ended up as targets for corporate raiders. Quite a few companies who survived this started unloading their property after they had achieved stability, and it became the norm.

[EEVblog]

Excellent video; thank you very much for sharing. I don't understand why buying an office space at all, because your business can expand or shrink at any time.

As coppice said, it makes sense for a small one-man-band to own their own minimum space for a sense of security.
In my case it was practically the same cost to pay off the interest on the loan than it was to pay rent, so it was a no-brainer. My only regret is not buying something bigger, and with a window.
Again in my case I expanded by renting a smaller 2nd place, and then expanded again to an ever bigger consilidated space and rented out the space I owned. Now I'm back in the one I own as my needs srunk again, and there is very little outlay as I own it outright.
If this whole video blogging thing fell though and I went back to a day job, then I still had a commercial property investment I can rent out to pay it off. Turns out it's now worth 250% more than I paid for it.

[Brumby]

Not to mention the recent acquisition.  Is that still on track?

[SimonM]

Turns out its now worth 250% more than I paid for it

Hi Dave, I have subscribed to your channel and I do watch some of the videos that interest me. I do, however, try to stay away from content about why channel owners do things in a particular way, and my interest wanes. So I admit I haven't watched this particular episode. Then again, I haven't run out of the good stuff (so far).

You have a commercial property that is now worth more than you paid for it (that's good). If you had to start again, would the current prices now put you off considering buying something e.g. the viability of owning your own commercial property has declined for the type of work? Have commercial rents also increased so that trying to rent something has also affected the viability of what you do?

Or is it just an accountant's "rent vs buy" calculation e.g it matters little (in the grand scheme) because what you do either makes money or it doesn't? Businesses might say their business is to make or sell some service and not to be in real estate because that's where they specialize and make the best return (for themselves or their shareholders).

Simon

[EEVblog]

Not to mention the recent acquisition.  Is that still on track?

Contract was stamped yesterday atfer a lot of red tape because my company bought it. The government wanted me to prove I wasn't a foreign entity, and that as it turns out isn't easy

[EEVblog]

You have a commercial property that is now worth more than you paid for it (that's good). If you had to start again, would the current prices now put you off considering buying something e.g. the viability of owning your own commercial property has declined for the type of work? Have commercial rents also increased so that trying to rent something has also affected the viability of what you do?

Or is it just an accountant's "rent vs buy" calculation e.g it matters little (in the grand scheme) because what you do either makes money or it doesn't? Businesses might say their business is to make or sell some service and not to be in real estate because that's where they specialize and make the best return (for themselves or their shareholders).

It all depends on your personal financial situtation.
If you can afford to buy (and have cash for the desposit) and the interest repayments are similar to renting, then why rent? The only risk there is if your business tanks and you are forced to sell the property at the same time as the realestate market plummets and you are stuck with the loss.

In the case of my business park (and Sydney commercial realestate in general), rents have not increased, and prices have not dropped as many predicted.
As I outlined in my video, the reason the commercial realestate prices don't drop is because people mostly own them long term in their super fund, and there is no point selling, so there is little stock sold to make the market drop.

As for the market now, a 50sqm office in my park would cost $500k, so that's a big chunk of cash. And with commercial realestate loans you have to pony up 30-40% deposit. So if you are not sitting on a decent chunk of cash then buying isn't really an option.
Rent for the same 50sqm place is about $22k, so that's 4.4% of $500k, still not far off the interest, so the equation there hasn't really changed, if you have the means, buying likely makes more sense.

But because I'm my own bank, I have options many people don't. By that i mean I own my home and use it as equity, that's how I bought my office 10 years ago, I took it out of my home loan. So I got a commercial office at lower home loan interest rates, and I didn't have to put any cash for a deposit, and I effectively owned the office outright from day 1.

I'm not saying buying is for everyone, and clearly it's not, but if you can then I think it's a wise move to consider for a one-man-band operator.

And yes, I'm with you on the use of cash and the return on that cash. If you can get a guaranteed return of say 100% on your cash by investing it in making your widget, then that's obviously better than using it to buy an office and only getting effectively say 5% on that same cash, maybe 10% if you factor in potential capital gain in the market.

If I had to start again now, I'd still do the same thing and buy, because the equation hasn't changed for me. i simply don't have room at home to do any work at all, and we aren't going to move, and I know I'm still going to be doing this in a decades time, so buying is still the sensible option. And, renting just feels horrible.

[EEVblog]

Well, the prices for office properties keep growing even after the COVID-19 pandemic. This is strange because raising prices after a big crisis is not logical.

Residential property here in Sydney is plummeting at levels not seen for 40 years.
But commercial real estate is not dropping, just spoke to my agent mate yesterday about it, and an 80sqm office near mine just sold for over $12k/sqm 
For reference, I paid $3.9k/sqm, and it was considered peak insanity when prices hit $10k/sqm.
At that market rate my small windowless lab is worth $600k