Is now the right time to buy a building for my business? What's the formula for figuring out interest vs inflation?
My home based business needs a commercial space. It's very rare that a building the size I need pops up in my area. Something just came up that costs $700k for 2000 sq/ft. What I don't understand is how to figure out what the costs/savings will be if I wait to buy. I assume the local market will soften over the next year or 2. So I might be able to get a better price. However interest rates will probably be higher. But then you get inflation which means debt is worth less in the future, right? However, waiting to move into a commercial space means opportunity cost of my business. We can't expand inventory/product line as we are out of space. So how do I figure out if I should buy now or later? What is the formula?
[{"id": "ia3n7bc", "text": "Is a shed or something similar cheaper, assuming you have a back yard.", "replies": [{"id": "iaoe1sv", "text": "Nope. Plus I want my house back from my employees. I'd like to poop with out everyone knowing.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ia3nolt", "text": "Strictly speaking about the commercial real estate portion,  its probably better to wait, assuming cap rates will rise and prices will fall.   The reason is your payment will be the same but the price of the property will be lower.  Once you do buy, eventually the property will rise in value, your payment will be fixed, and if interest rates fall enough you can refinance and lower your payment.  But if you buy and the property falls in value, you're in trouble in terms of refinance and the resale value. \n\n&amp;#x200B;\n\nHowever, the specifics of your business and the rent you pay, or the specific benefits to the space may dictate otherwise.  If you're planning to own more than 15 years I don't think it matters either way.  If you plan to sell in 5-10 you may get into trouble.", "replies": [], "depth": 1}, {"id": "ia3q0fh", "text": "Rent a larger space to figure out your optimal business size then buy according to that size. Also how much are you producing per square foot? Will that number increase with a larger space?(less office space per production space) How much in sales is your business missing out on because of its limited capacity? Will the increase in production more than cover the additional cost of the building? Could that debt be better used to expand your business by buying more production equipment? If your business is successfully producing and selling goods I wouldn\u2019t worry about inflation.", "replies": [], "depth": 1}, {"id": "ia3r3uo", "text": "Look at replacement cost. If the building/land value is below the purchase price, rethink what your doing and wait.", "replies": [], "depth": 1}, {"id": "ia3rdsn", "text": "You basically need to think about how long you would be in the space and discount the cost of leasing versus a purchase and sale with debt service over the same duration of time and compare which will cost less over that time period.", "replies": [{"id": "ia7ud2p", "text": "Can you expand? I always assumed buying is better than leasing because it's the same payments but you're not gaining equity. I assume we have at least another 5-7 years of being a business if things started to go south (if Amazon figures out how to do what we do which I don't see happening until robots get better at packing, shipping and sorting very tiny items). By not growing we are losing potential market share to competitors.\n\nCan you help me do that math on this?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ia3ulna", "text": "How profitable is this home based business now? You're talking about both a fixed asset and working capital increase at the same time.", "replies": [{"id": "ia5dawm", "text": "This is the most important question.\n\nIf the purchase will hamper your business due the financial constraints of the purchase, or if it will limit growth due to size then don't do it. \n\nAlso, will a recession affect your business because we could be entering one. You want cash now just in case.", "replies": [{"id": "ia7u1ed", "text": "We don't think our business will be hampered by the building. It's hard to know how recession proof we are. We're in the hobby space but we are also B2B in an industry that has seen year over year growth. It has to crater at some point. I would have assumed it would have happened by now but I haven't seen it yet.", "replies": [{"id": "ia7vejc", "text": "We are in the early stages of a potential recession. Hopefully business continues to go so well. \n\nThe conservative play is to wait and see. \n\nThere is also the opportunity cost of buying the building. Can the capital for purchase be better off in growing your business? If not, then plan to purchase in the future. \n\nIt is better to purchase a building when you can't come up with a better use for generated cash.", "replies": [{"id": "iaodsnz", "text": "The problem is we have no more space for growth. This excess capital is not being used in anyway. Thus why we need a building.", "replies": [{"id": "iaoht9x", "text": "Do you think the new space will cover your growth for at least the next 5 years? If yes, then it seems like a good choice. If not, then considering if it will affect your ability to get a larger place in the future. Also, the capital outlays for moving offices including build outs. Also, you can rent it if you move out, just be sure to see what the rental.market is like in your area. \n\nIt is probably good to put the new property in a separate llc. Just adding that in there in case you weren't aware.", "replies": [{"id": "ib24vfq", "text": "separate LLC: I spoke to a lawyer about this. They said this will cost $1-2.5K. Is this something I should just do myself or pay them to do it?", "replies": [{"id": "ib25k0m", "text": "I would say set it up yourself. Watch a YouTube video. I haven't done it but I heard it was easy and $160.00. That's price is from a few years ago. \n\nConfirm with mortgage broker about LLC purchase before setting it up.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ia7trdq", "text": "Great question. It's kicking enough off in profit that we can buy this building and add at least one staff member. For the past 2 years we've had enough extra to afford a building of this size. We did get a massive bump due to the pandemic. I am concerned that it was going to drop once everyone got out of the house but it hasn't happened yet. Well, it's about a 1% drop so far this year where as we were growing 30-50% each year. We're now 4x over where we were 3 years ago.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ia463tc", "text": "Congrats on the growing business.  I remember going from a home based biz to my first 1000sq/ft warehouse.  It was incredibly exciting and a little scary.\n\nMy suggestion for you, rent a commercial space and get a feel for what it's like before  you go out and buy a building.  Get your business to make as much money as possible, and once you have that formula down, consider getting into being a property owner.  \n\nWhatever you do, good luck and enjoy the ride!", "replies": [], "depth": 1}, {"id": "ia47i8z", "text": "The entire real-estate market is at peak bubble right now. Hold on until spring and buy when it corrects.", "replies": [], "depth": 1}, {"id": "ia4qtay", "text": "Another issue to consider, are you sure that much space will work for you long term?  Plus IDK what you do but sometimes you can have one of those rolled metal buildings put on existing land for FAR less money.", "replies": [], "depth": 1}, {"id": "ia4rkqg", "text": "It depends you are an owner user which is totally different then buying it as an investment. Figure out how you\u2019d fund it whether traditional financing or SBA loan and see how that compares to leasing. Then think about how long your business can stay in that space at your current growth rate. If it\u2019ll be able to stay in the space for a long enough period of time it\u2019s worth buying. The market is a bit over priced but if you hold long enough the market will recover and you only realize loses when you sell anyway. \n\nThe other side to figure out is how much is your business loses and what\u2019s to be gained by moving into the space that gain may be larger then paying a little too much for a building.", "replies": [], "depth": 1}, {"id": "ia5afh9", "text": "Buy the building. The extra increment of money you might make by waiting and timing the real estate market well is outweighed by the loss of not being able to expand your business. \n\nWhen the cost of your space is heavily based on the interest rate of the loan you use to buy it, then interest rate considerations outweigh inflation in deciding whether to buy it. You'd much much rather have interest rates at 3% and inflation at 3% than interest rates at 6% and inflation at 6%, if the price of the property is the same either way and the interest rate is fixed.", "replies": [], "depth": 1}]