eevBLAB #66 - Renting vs Buying a Commercial Office Lab

[EEVblog]

Dave runs the numbers on renting vs buying a commercial office space to use as a new lab here in Sydney.
Commercial vs residential loans, business loans, interest rates, location, office fit out, outgoings.

[johnlsenchak]

In the United  States  when you   take  equity   from a bank in lieu of  your residential   property it's  called a "HeLoC"   ( home equity line of credit)

[EEVblog]

In the United  States  when you   take  equity   from a bank in lieu of  your residential   property it's  called a "HeLoC"   ( home equity line of credit)

Ah, I've heard that before. It's basically just "line of credit loan" here.
But that's only if you own the home an/or take out credit on the portion you own. Otherwise you just take the money form your existing loan as a "redraw" or from an offset bank account built into most loans here.

[ebclr]

Have one unpredictable component on the equation, whos is real state valuation/devaluation, and this can be a game-changer especially in bubbled markets ( I believe Australia  is on that class )

[nctnico]

Have one unpredictable component on the equation, whos is real state valuation/devaluation, and this can be a game-changer especially in bubbled markets ( I believe Australia  is on that class )

Do like Trump: sit on it forever and make a whopping 1.25% interest rate (corrected for inflation).

[Grapsus]

In the meantime somewhere in Europe banks started to give 25 year residential loans at 1% fixed annual interest rate. As a consequence, prices went up 20-30% in 3 years. This is fine...

[Lord of nothing]

Well have Money on the Bank could be very risky. In Cyprus the Gov. collected all Money above 10.000€ to save the country from Bankruptcy and a lot of People lost there savings. 

Another think is when you declare for Tax your income and spendings when you Rent you can Yearly declare it as loss. But when you Buy you can declare that loss (just 4 Years I guess?!) as loss so you way more Tax when you Buy than when you Rent. If you are genius you Start another Company who Buy that Office Place and Rent it to your "Main" Company. 

[thm_w]

Well have Money on the Bank could be very risky. In Cyprus the Gov. collected all Money above 10.000€ to save the country from Bankruptcy and a lot of People lost there savings. 

Another think is when you declare for Tax your income and spendings when you Rent you can Yearly declare it as loss. But when you Buy you can declare that loss (just 4 Years I guess?!) as loss so you way more Tax when you Buy than when you Rent. If you are genius you Start another Company who Buy that Office Place and Rent it to your "Main" Company. 

Seems less "collected" and more taken. 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.

https://www.cbc.ca/news/business/bank-of-cyprus-savers-to-lose-47-above-100-000-1.1407015

[Lord of nothing]

as below is insured

Not relay there are good article about that topic.

[EEVblog]

More:

[VK3DRB]

Sometimes you have to think outside the nine dots to beat the system.

I paid $75k (not a typo) cash for a new 70 sq m building I use for my electronics business. I own it outright. It has all facilities I need, including a kitchenette, 96 power outlets, two RC air-conditioners, fully equipped with an internal office, shelving, internet, state-of-the-art lighting, excellent security system. There is off-street parking as well. This is in the located in the hub of where most of the electronics industries are in Melbourne and a just a short walking distance from where I live. About 5 minutes drive to the train station and there are shops close by.

[VK3DRB]

Dave is right, the commercial real estate will stagnate for a long time. Manufacturing is continuing to decline and we may well be heading into a recession. Retail real estate is suffering in Melbourne and rents are dropping as on-line shopping accelerates. That will also have a flow-on effect to general commercial real estate.

[thm_w]

as below is insured

Not relay there are good article about that topic.

Well, in the case of Cyprus it "worked" and they kept their 100k.
For Canada historically it works: "In CDIC’s 50-year history, they’ve handled the failures of 43 of their members. These failures affected over 2 million Canadians, but not a single dollar under CDIC protection was lost."
But something I wasn't aware of is that they don't cover: stocks, bonds, mutual funds, or cryptocurrencies. So thats most of my savings not covered, good to know.

Sometimes you have to think outside the nine dots to beat the system.

I paid $75k (not a typo) cash for a new 70 sq m building I use for my electronics business. I own it outright. It has all facilities I need, including a kitchenette, 96 power outlets, two RC air-conditioners, fully equipped with an internal office, shelving, internet, state-of-the-art lighting, excellent security system. There is off-street parking as well. This is in the located in the hub of where most of the electronics industries are in Melbourne and a just a short walking distance from where I live. About 5 minutes drive to the train station and there are shops close by.

Interesting but you haven't provided any information to explain why it was cheap or what year this transaction occurred.

[EEVblog]

Dave is right, the commercial real estate will stagnate for a long time. Manufacturing is continuing to decline and we may well be heading into a recession.

Like a recession is a bad thing?
It's actually part of a normal healthy economic system.

[EEVblog]

Sometimes you have to think outside the nine dots to beat the system.

I paid $75k (not a typo) cash for a new 70 sq m building I use for my electronics business. I own it outright. It has all facilities I need, including a kitchenette, 96 power outlets, two RC air-conditioners, fully equipped with an internal office, shelving, internet, state-of-the-art lighting, excellent security system. There is off-street parking as well. This is in the located in the hub of where most of the electronics industries are in Melbourne and a just a short walking distance from where I live. About 5 minutes drive to the train station and there are shops close by.

Interesting but you haven't provided any information to explain why it was cheap or what year this transaction occurred.

Yes, sounds like it would have been quite some time ago.

BTW, my old 50sqm lab originally cost $197k in 2004 when it was built, I paid less than that when I bought it in 2011 
More industrial type ones VK3DRB seems to be talking about typically go for half that cost.

[EEVblog]

This is that 70sqm next to my old lab I considered buying in 2015 (wow that long ago)
You can see how stagnant commercial property usually is in capital growth. And this is in a popular park that has always had sub 5% vacancy rates.
The same unit is now worth about $700-800k.

 

[VK3DRB]

I built it on land I own... myself in my spare time between 2015 and 2017. The building is superior to anything a typical builder would build for double the price. A 5 inch thick raft slab, dual layered reinforcement, 30MPA concrete, 10 concrete piers up to 3.5m deep. OK, I cheated a bit because I did own the land! And I have contacts in the building industry so I got raw materials cheaper. I even wrote some code in return for ten novel industrial lights. I did all the plastering, roofing, insulation etc myself using superior materials. Only thing I didn't do myself was the bricklaying, and the smooth level finishing of the slab surface.... some things are worth paying people to do. I have literally built my own house before as an owner builder, so I had experience. Ignoring my own spare time labour (I was working in full time electronic engineering), the total cost came to $75K...  including a nice two car carport.

I am extremely adverse to debt. I don't want to be a slave to the banks here that have a reputation for ripping people off including charging deceased people for financial advice and other vile behaviour. Hence I decided to build my own office on land that I happened to own without borrowing a cent. The bank's shareholders can go and get stuffed.

In Australia with our relatively low interest rates there is record debt and these interest rates are going to increase eventually, and when this happens there will be a lot of tears.

[EEVblog]

I built it on land I own... myself in my spare time between 2015 and 2017.

 

Hardly what we are talking about here.

[Lord of nothing]

@Dave How does the Tax System work in AUS?
As I mention before when here a Company rent the can save Tax by declare the loss so the make less profit and pay less tax on them.
When the Buy something the just can declare it on the upcoming 3 or 4 Years I dont know it right now. (Thats why the Most Company buy every 3, 4 Yars total new Hardware and sell the old for Tax savings.)

So are in AUS any benefit in Tax Savings when you Rent?

[VK3DRB]

I explained why it was so cheap. The point is, if commercial real estate is so expensive (and it is), then there may be much lower cost alternatives that might solve the problem. Virtual offices or shared offices also work well for some people, where the grunt work is done in some dive elsewhere or at their customers' sites.

Incidentally, the value of an office should take more into account than just location, sq m, modernity, visible facilities etc. I know people who have got caught out badly because they forget to consider Internet prior to leasing or buying an office (and house), and how their air-con bills will increase in summer if the big windows of the office are facing the summer sun.

[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.

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. And for sure there will be maintenance and upkeep costs which come with owning a building. All things considered renting may be cheaper.

Ultimately a commercial building is a tool used for the business so there should be a positive ROI at some point.

[thm_w]

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. And for sure there will be maintenance and upkeep costs which come with owning a building. All things considered renting may be cheaper.

Ultimately a commercial building is a tool used for the business so there should be a positive ROI at some point.

Although he doesn't own the building, but an office inside that building. Presumably some of that $5k per year is going towards building maintenance costs (at least exterior and shared areas), which you pay either way.

[EEVblog]

@Dave How does the Tax System work in AUS?
As I mention before when here a Company rent the can save Tax by declare the loss so the make less profit and pay less tax on them.

Exactly the same here. Rent is business expense that reduces your total taxable income.

When the Buy something the just can declare it on the upcoming 3 or 4 Years I dont know it right now. (Thats why the Most Company buy every 3, 4 Yars total new Hardware and sell the old for Tax savings.)

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

So are in AUS any benefit in Tax Savings when you Rent?

Either way you are paying rent, either to yourself if you buy a place, or renting from a landlord.
If you bought the office under the company name then it's an asset and that's different.

[EEVblog]

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.

And for sure there will be maintenance and upkeep costs which come with owning a building. All things considered renting may be cheaper.

You pay the exact same strata "outgoings" cost whether you own it or rent it.

Ultimately a commercial building is a tool used for the business so there should be a positive ROI at some point.

Not only that, but you can do anything you want with it and no one can boot you out.
For example, the lawyers who rented my old lab spend a lot of money doing the place up with a new meeting room and other things, and they only got a 6 month lease with a 6 month option. It's already been 6 months, so I can boot them out next May and I get a free renovation 

[EEVblog]

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. And for sure there will be maintenance and upkeep costs which come with owning a building. All things considered renting may be cheaper.

Ultimately a commercial building is a tool used for the business so there should be a positive ROI at some point.

Although he doesn't own the building, but an office inside that building. Presumably some of that $5k per year is going towards building maintenance costs (at least exterior and shared areas), which you pay either way.

Yes, part of your "strata" cost goes into a building maintenance fund. You pay this whether you own or rent.
One of the benefits of owning commercial realestate is that the tenant pays 100% of the outgoings. Because I own my 50sqm lab, I never have to pay a cent toward that again, it's 100% income (assuming it's continually rented). This is why they are so popular in self managed super funds. Good parks like mine have only a few percent vacancy rate, maybe a bit over 5% in not so good times.

[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.

[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