eevBLAB #66 - Renting vs Buying a Commercial Office Lab

[Lord of nothing]

Here any business purchase under $30k you can immediately claim as a deduction/expense.

Is there a Time Period in which you have to claim it?
Sure when your Company, Income is big enough you will pay a very low Tax %ige because your income goes to quite 0AUS.
For smaller Company it could mean Tax wise a loss because there (Virtual) income on the Paper goes to -X AUS, €, $,... so the loose over Time Tax. But then the Spend the Money for Rent lets say over 10 Years you can constantly save on Tax.
(Sure it dependent what kind of Company is it. When the Company is a Parcel Delivery, Fright Company sure its better to buy than rent.)

Another think I forgott to say here in Vienna what I saw it could be very hard to impossible to buy an Office Space in an Office Building. (Shops, Mini Office Spacecs with 2- 5 Officec are maybe available to buy instead of rent.) The Company who Build that Building are not Stupid. I guess the say to them self: "Why selling when rent brings more Money..." 

[nctnico]

In short: The whole idea of buying rests on the assumption that the building can be sold for at least the purchase price. From a risk management & business perspective it might be better to rent because the costs are fixed and can be planned for. So basically renting is an insurance against real estate prices going down the drain.

Unless you never plan to sell it and use it until you retire and then you rent it out. The price falling makes absolutely no difference.

Another way of dealing with your own commercial building is to write it off so at some point the worth of the building goes to zero.

You can't write off a realestate investment down to zero worth, that's ridiculous.

You can and you have to. At some point a building will need to be replaced. You can't assume a building will last and/or be fit for purpose forever. I've seen this happen to relatives. In some cases the building's worth ended up being negative.

[coppice]

Another way of dealing with your own commercial building is to write it off so at some point the worth of the building goes to zero.

You can't write off a realestate investment down to zero worth, that's ridiculous.

You can and you have to. At some point a building will need to be replaced. You can't assume a building will last and/or be fit for purpose forever. I've seen this happen to relatives.

A lot of commercial buildings have quite a short life. You see 20 or 30 year old buildings being replaced all the time, as needs change. Frequently its just cheaper to tear the old one down than to refurbish it for a different use. If the property is leasehold there may be zero value left. If the property is freehold it may still have zero value left, if changing circumstances mean people have no interest in redeveloping the site for a new application.

Thinking back, every building where I worked in the 70s and 80s is no longer there. None of them were very old, and one of them was brand new when I started there.

[Brumby]

Here any business purchase under $30k you can immediately claim as a deduction/expense.

Is there a Time Period in which you have to claim it?

You claim it for the tax year in which the purchase was made.

Typically in Australia a tax year runs from July 1st of one calendar year to June 30th of the next.  Once you pass the 30th June, your tax return for that financial year needs to be lodged by a specified date.  All income, expenses and deductions that occurred at any time during that year^** are entered into your tax return - so it doesn't matter if your expense was incurred 4 months before Christmas or 4 months after, it all gets bundled into the same tax period.

^** There are other provisions for Capital Gains (or losses) that occur over a number of years, such as can occur with real estate and shares, for example.

[EEVblog]

Here any business purchase under $30k you can immediately claim as a deduction/expense.

Is there a Time Period in which you have to claim it?

Not sure about that actually, but why wouldn't you claim it that year?

Sure when your Company, Income is big enough you will pay a very low Tax %ige because your income goes to quite 0AUS.

I could make my company pay zero tax.
Set up a company is low (or zero) corporate tax region, give rights to my Trademark to that company, then come tax time, what's that?, I have $100k taxable income left? Well what a coincidence, the rights to use the Trademark cost exactly $100k!

The trick of course is getting your money back out of the country.

[EEVblog]

You can't write off a realestate investment down to zero worth, that's ridiculous.

You can and you have to. At some point a building will need to be replaced. You can't assume a building will last and/or be fit for purpose forever. I've seen this happen to relatives. In some cases the building's worth ended up being negative.

The land is still worth a metric crap ton.
And any idiot owner who can't see a buildign become so derelict that's unusable deserves to loose their money. If you care at all about your investment you will be on the strata committee and you have your ear to the ground, you can see something like that coming a decade or two away.

[Lord of nothing]

And any idiot owner who can't see a buildign become so derelict that's unusable deserves to loose their money.

That happen in Germany especially in the Big Citys like Berlin where have damn cheap Rents. So new Owner (a Law Firm for example or a Trust,...) try everything to get the People out of "there" Building and than renovate it, make bigger apartments (for example 3 -> 2) and than rent them for +100% more than before. 

[nctnico]

You can't write off a realestate investment down to zero worth, that's ridiculous.

You can and you have to. At some point a building will need to be replaced. You can't assume a building will last and/or be fit for purpose forever. I've seen this happen to relatives. In some cases the building's worth ended up being negative.

The land is still worth a metric crap ton.
And any idiot owner who can't see a buildign become so derelict that's unusable deserves to loose their money. If you care at all about your investment you will be on the strata committee and you have your ear to the ground, you can see something like that coming a decade or two away.

But everyone will see it coming a decade or two away so there is no leg up to hit the eject button and recoup the money. And there is no guarantee against a business park becoming less popular so value and rent income goes down. Like with any investment you'd have to spread the risk across several investments otherwise it isn't an investment but just something you own. Look at what coppice wrote a few posts back.

[EEVblog]

Like with any investment you'd have to spread the risk across several investments otherwise it isn't an investment but just something you own.

An investment stops becoming an investment because you don't have other investments?

[EEVblog]

But everyone will see it coming a decade or two away so there is no leg up to hit the eject button and recoup the money.

You overestimate the intelligence of Joe Average.
And you fail to realise the inside information owners on a strata committee can have.

And there is no guarantee against a business park becoming less popular so value and rent income goes down.

Who said any investment is guaranteed?
And local knowledge can help mitigate that to a large degree.

[sokoloff]

The Sorites Paradox of investing, I guess.

I think it’s obvious that a concentrated investment position has higher volatility than a diverse, low correlation portfolio, but it doesn’t make it not an investment.

[EEVblog]

Thinking back, every building where I worked in the 70s and 80s is no longer there. None of them were very old, and one of them was brand new when I started there.

And I'd bet that NONE of them went to zero value.

Let's say a commercial building you bought did last 30 years, you are still almost guaranteed to be better off buying it over those 30 years than renting for 30 years. Because you are likely going to pay it off quicker than those 30 years, so that's money in your pocket and you'll be away ahead and can leverage that asset in the mean time etc. And it's most likely not going to go to zero value, so the land gets sold to a new developer for example in the case the building is no longer salvageable.
Sure it's possible that the business park falls out of favor and it's impossible to resell it developers, and the building gets so dilapidated that it's not worth fixing etc. But geeze, if you are worried about that then you should be ready with your bug-out bag for the zombie apocalypse. AND for the same thing to happen to your home as well, do you think that's immune to the same possibility?

Once again, local knowledge goes a long way to mitigating this sort of eventuality.

[EEVblog]

A lot of commercial buildings have quite a short life. You see 20 or 30 year old buildings being replaced all the time, as needs change. Frequently its just cheaper to tear the old one down than to refurbish it for a different use. If the property is leasehold there may be zero value left. If the property is freehold it may still have zero value left, if changing circumstances mean people have no interest in redeveloping the site for a new application.

I'm not sure what's it like where you live, but here in Sydney I do not know of a single abandoned commercial office block, let alone one in an A grade business park, it just doesn't happen. Happy to be corrected if someone knows of one. Abandoned warehouses do appear for various reasons, but we are talking an office in an A grade corporate office tower. It's not uncommon for the local planning laws to prohibit development of abandoned sites BTW.
Yes, some commercial buildings get old, but one of two things usually happens:
1) The dozens to hundreds of vested interest owners maintain the building to current standards. Basically the ongoing goal of the strata committee is to maintain the building to an A grade level.
or
2) Developers come in and make an offer that the owners cannot refuse. And/or they buy out a bulk lot and eventually force the other owners to sell.

Again, not saying it can't happen, but the odds in Sydney of a commercial office unit going to literally zero value is practically zero.

For those interested, my building was built in 2006 so I think I'm pretty safe for quite some time.

[EEVblog]

And any idiot owner who can't see a buildign become so derelict that's unusable deserves to loose their money.

That happen in Germany especially in the Big Citys like Berlin where have damn cheap Rents. So new Owner (a Law Firm for example or a Trust,...) try everything to get the People out of "there" Building and than renovate it, make bigger apartments (for example 3 -> 2) and than rent them for +100% more than before. 

Yep, gentrification is common. Fran for example has been hit by this in Philadelphia.
In the commercial space world, usually C grade and even B grade office towers get bought by developers and demolished and rebuilt to whatever the latest wanky A grade trend is this year.

[nctnico]

The Sorites Paradox of investing, I guess.

I think it’s obvious that a concentrated investment position has higher volatility than a diverse, low correlation portfolio, but it doesn’t make it not an investment.

But think about it: are you a real investor with just one investment? Can you put the effort in to keep up to date on what is happening to your investment besides your daytime job? Is it even worth the effort? Dave is mentioning being part of the strata commity. I see a potential time sink there due to attending meetings, reading reports, etc. Time that could otherwise be spend on the core business.

I've seen it in the late 90's early 00's: people where buying shares and since the stock market went up most where making a profit. However quite a few ended up losing their money due to the tech-bubble crash around 2001. They didn't had the knowledge to mitigate the risks properly using derivatives (which are a more complicated financial product compared to just buying & selling shares).

[Syntax Error]

The "rent or buy decision" taxes the mind of even the best Harvard M.B.A graduate.

Here in the UK, the financial advantage of business leasing is operating leases are chargeable against operating profits; vis rent is tax allowable. However, if a business owns it's premises, this value becomes a fixed asset on the balance sheet. As an asset, if property values go up the business enjoys a capital gain, but a gain that's very taxable. Upside, tangable assets mean a business is more likely to raise finance for its projects but, a large chunk of liquidity is already tied up in bricks and motar; not in a gleaming new pick and place machine, for example. Some businesses opt for sale-and-lease-back agreements; they rent the premises they've just sold for a fixed period. Just remember, leasing companies are not there to make money for your company, they are there to make money from your company.

In the UK, just about every empty factory and office block is now being converted into luxury appartments! Imagine how many British sized condos would cram into 50m²?

_{(answer 6)}

[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...

Can you put the effort in to keep up to date on what is happening to your investment besides your daytime job?

Yes, it's not hard.

Is it even worth the effort?

Yes, arguably even more so if it's your biggest and only real estate investment.

Dave is mentioning being part of the strata commity. I see a potential time sink there due to attending meetings, reading reports, etc. Time that could otherwise be spend on the core business.

Nope, not a big deal, a handful of hours a year. If you can't afford that time then you are doing something seriously wrong, or you don't give a toss about your investment.

[EEVblog]

The "rent or buy decision" taxes the mind of even the best Harvard M.B.A graduate.
Here in the UK, the financial advantage of business leasing is operating leases are chargeable against operating profits; vis rent is tax allowable.

You can own it personally (or through another company) and rent it to yourself. Either way all expenses on a business, be they rent or interest payments on property are tax deductible against your business income.

However, if a business owns it's premises, this value becomes a fixed asset on the balance sheet. As an asset, if property values go up the business enjoys a capital gain, but a gain that's very taxable.

Only if you sell it do you pay capital gains tax.
Don't want the business to own an asset? easy, own it personally or set up another company just to own the property, or under your self managed super fund, which as I said in the video is the most popular for commercial realestate. Which is also why most owner of commercial property do not care if the market crashes and it drops 50%, as long as the rent is coming from that lease everything is fine.

[Syntax Error]

Dave, thanks for your reply. I just looked up what that super fund thing was. The scope of the SMSF is certainly something we don't have here in the UK.

  Ripper!

[coppice]

Which is also why most owner of commercial property do not care if the market crashes and it drops 50%, as long as the rent is coming from that lease everything is fine.

When property prices halve, don't rents follow suit after a while?

[maginnovision]

Which is also why most owner of commercial property do not care if the market crashes and it drops 50%, as long as the rent is coming from that lease everything is fine.

When property prices halve, don't rents follow suit after a while?

Not if everyone keeps the prices up. Can you buy for cheap? Then buy. Otherwise you rent for what people are charging. Typically rents do not go down.

[Marco]

It was amounts above 100,000 as well, as below is insured, same as here. If you want you can open accounts at multiple banks with 100k in each and you should be safer.

It was nationally insured and the EU/ECB tried forcing Cyprus to not pay out to get a bail out, the law was there already but their parliament rejected it and saved us all a whole lot of trouble in the process. We have no full faith and credit from a sovereign government which ultimately controls the printing press in the EU. FDIC insurance is rock solid ... government will pay out, Federal reserve will simply QE if no investors buy US bonds at reasonable rates, there might be some inflation but you will get your money. Euro bank insurance doesn't work that way even though it should.

Trying to force the responsibility for moral hazard in the financial system on relatively unsophisticated small savers is madness (they would have responded by stuffing their beds with bills en masse, like the old days). That's EU bureaucrats for you, they are too far removed from reality and real people ... even relative to national bureaucrats.

[all_repair]

Which is also why most owner of commercial property do not care if the market crashes and it drops 50%, as long as the rent is coming from that lease everything is fine.

When property prices halve, don't rents follow suit after a while?

Supposed to, that means there are more supply than demand on the market for property.  But landlord shall let some of the units be vacant, and hold the rent of the rest high (especially the big boy) or some shall use this period to do renovation,  people are tied down with lease duration, and also people do not want to relocate unless force to.  All these factors make rental easy to go up but difficult to come down.

[EEVblog]

Which is also why most owner of commercial property do not care if the market crashes and it drops 50%, as long as the rent is coming from that lease everything is fine.

When property prices halve, don't rents follow suit after a while?

It doesn't have too, no.
For example, in the recent Sydney real estate slump, prices dropped but rents went up.
Rent in my business park didn't rise with the more than doubling of prices, hence the return on investment halved.
So again, in my park and Sydney commercial property in general, if prices halved I can't see rental prices dropping as a result.
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.

[EEVblog]

Dave, thanks for your reply. I just looked up what that super fund thing was. The scope of the SMSF is certainly something we don't have here in the UK.

Yep, it's pretty good. Guess who owns my bunker and who rents it
It's not a magic bullet tax wise though, but there are several advantages come retirement or pre-retirement time though.