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Rent or buy our first shop?8/10
My partner and I have done a lot of headscratching. We need more space than the backyard garage, so do we buy a building or rent a property?
Amount of cash or cash flow usually decides that.
If you can swing the financing, a land purchase in the Bay Area is a good investment.
Rent. Statistics aren't on your side for starting a business. Not trying to be a dick, but most fail.
It took me thirteen years to get my own building. Right now it was a good decision. Time will tell though. I don't trust this economy and I'm squeamish about what the next few years will bring with my overhead being as high as it is.
If you do buy or build, build up a good amount of capital to weather the storms then start hammering the principle on the note. I amortized for 20 years, borrowed for ten with a balloon, and am working towards a six year payoff of the note. I'm hoping it doesn't go to hell before it's paid off, but if the principle is paid way down I can get creative with the financing and survive. Hopefully.
Definitely rent. It's a no-brainer. The goal of your business is to generate as much cash and profit as possible. You can't do that if you have your cash tied up in a building. With your short time in business banks will want a minimum of 30% down which could easily be 100's of thousands of dollars. You need to use that money for marketing and scaling your business and building your brand.
When you get to the point where you have several million in profits set aside then you can think about getting into the real estate game. Then you can buy a large multi-tenant building using smart leverage and have your tenants provide you with positive cash flow each month and get your space for free paid for by their rent.
We'll be scaling into a 40k sq.ft building in the next year or so, and we'll lease it. It's a $3 million dollar building that will be $5.00/sf NNN annually. That's a 6 % cap rate to the landlord. You will have a hard time getting a commercial note at that rate.
If we bought the building we'd have to put $600-900k down. Leasing we put the $18k first months rent and $18k security deposit down. By leasing we get the right to use the same $3MM building for only $36k out of pocket. Can I invest the 600k-900k down payment back into the business and get a return more than the 6% cap rate the landlord is getting, and a few points a year in appreciation? You better believe it!
Think the same way when you purchase machinery. If it's equipment that makes and saves us money we'll buy it outright. If it's equipment that doesn't (air compressor, dust collectors, forklifts etc) we'll lease finance them and put the cash into more productive areas.
I would think rent or lease while you are starting your business then after a few years and you have good profits and money saved up then build or buy a building. I would keep the build separate from the business though. Put it in your personal name if you can and let the business pay you rent. This way if you ever sell the business down the road you still own the building and the new owners keep paying you rent. If you are just starting out you won't need the 3 million dollar building that Jerry spoke of in the last post. Once you get to that point selling and paying off your first building is no problem.
I agree with the above. I moved out of the rural country shop in my backyard after 7 years to a 5,000 s/f lease and a few employees. We outgrew that after about 7 years (+/- 10% a year growth) and bought a 9,000 s/f building in a highly desirable industrial park. My local history suggested a 10% annual increase in value of that building, meaning in 7 years, it would be worth twice what we paid. This was my retirement plan, to build equity with the building and business. Then, even if the business went bad, I still had the building.
This was all done with bank financing, making it all viable and not artificially valued. Of course, things changed in 2008 when our leader asked for "300 billion tonight or tomorrow morning".
The building was held in a separate S Corp from the business, making it easier to give it back to the bank at a huge loss. The business helped collaterize the building mortgage, so we had to shed equipment also. All in all a terrible experience, but survivable. Be aware or what a severe reversal can do. But do not live your life worrying about what might happen.