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.