Replies

1. 
   Lilshaver | Apr 04, 2003 08:55am | #1

   After renting for a number of years I built my own building. I mean, I built it, with some hired help, some friends, and several necessary sub-contractors. Prior to renting, I worked out of my house, but I finally outgrew that.

   The advantages to me are:

   1. I dislike paying rent.

   2. I had the money to build then, the stock market hadn't quite peaked, but was close. I pulled out the money in time. (Perhaps this wasn't the best use of my money, but I also hate owing the bank anything.)

   3. It's my place. Designed and built by me, it speaks well of my abilities. I tell new clients to look for the very cool looking building. And I tell them that its design reflects my aesthetic.

   4. When I get tired of working, I plan on renting the building. I think it will help provide a nice income.

   The disadvantages:

   1. The usual. I'm tied to one place. Expansion is difficult.

   2. My location is not the best store location. But it was a lot that I could afford and it is zoned to light industry.

   3. Building was a lot of work, both physical and mental. However, a trip to Greece fixed me right up! (the sea is so blue, the sun so warm......)

1. 
   crt2cu2 | Apr 04, 2003 10:00pm | #3

   Jeff, Thanks for the reply. I envy your trip to Greece!

   What I was wondering about though are those dreaded business related things:

   Buying vs Renting comparisons Questions

   1. Are there distinct tax benefits?

   2. Can costs of either building new or renovating old building be deducted?

   3. Can the building and business be sold profitably for retirement for example? Does the IRS take a chunk out of you when you sell?

   4. If you buy and thus own a building do the zoning and building inspectors hound you? Or even worse does OSHA drop in at unexpected times?

   5. What about insurance costs?

   Where I am going with all this is timely. I have been looking at old decrepit buildings in my town with the notion of expanding my shop to include a much needed showroom space. The old buildings can be bought relatively cheaply but require massive amounts of repairs. I am just trying to ascertain if this expansion is cost effective. I have a very limited amount of capital to undertake such an endeavor but maybe some sweat equity would pay off?

1. 
   Lilshaver | Apr 05, 2003 03:29am | #5

   Well, I'm probably the last person on earth that you should listen to regarding either business or general financial advice. But.....

   1. the insurance in my structure is not nearly as much as that of my general liability insurance. Talk to your commercial insurance agent.

   2. When one sells a commercial building (one that was owned as a business) one must pay capital gains tax. on the other hand, probably all of your expenses related to the building are deductions. Talk to your accountant.

   3. If you buy cheap and do the renovation yourself, you will probably be able to sell at a profit (ie. for more than what you paid), but only if the market will bear it. If these old buildings are in an area where no-one wants a building, then they might stay worthless. You can't make a silk purse out of a sow's ear. On the other hand, perhaps your efforts will ignite the resurgence of your area and you'll make a mint. Talk to a good commercial real estate analyist. Pay for the time.

   4. Zoning may hound you. When dealing with commercial buildings there are different rules than with homes. For instance, you will most likely not be able to do your own mechanical or electrical work. You will need to hire licensed contractors. You will also need an architect and engineers (structural, mechanical, and electrical) to draw plans for you and give them their licensed stamps. Do not underestimate what all this will cost you. You can beat some of the system if you have contacts in those professions, but not all of it. Talk to the city building permit people. They will tell you of all the regulations. (That won't cost anything.) (Be nice.)

   OSHA will only bother you if you have employees. ( I think)

   Lastly, go to your local library and ask the (always) friendly librarians for some books that will guide you. Librarians are the gods gift to fools (like me).

1. 
   crt2cu2 | Apr 05, 2003 09:43am | #6

   Jeff,

   Yes I am in the thick of exactly what you have suggested. In fact, I may even be ahead of you having done some market surveys and historical tax credit research. My desk and even my workbench is piled with cost benefit analyses, grant applications, business start up kits and etc. But you know, it all boils down to risk-taking. Many will give advice, library research suggests many options, and unfortunately (to coin the old economic adage) "The Market Has No Conscience". I could fill this post with all the business books I have read and the people I have talked to. And further, I am no fool whilst I continue to seek wisdom (I do have three masters degrees).

   The dilemma is (business related)that I live in an unusual town in an unusual state and have an unusual idea; relative to this area. Thus, I am trying to sort out multitudes of market and costing data that may not necessarily apply locally. You mentioned 'be nice' I really think I have been. At least people stll greet me with a smile. But this is what has occurred: the insurance people state that they can not give me a quote "because the market is too volatile". The power company can not give me utility estimates "because of deregulation and company stock shortfalls", the bank can not shoot me a number "because of poor local economic confidence". Local codes and zoning guys seem to "always be out of the office". And finally, it seems that even fellow tradesmen (the licensed guys you mentioned)will not supply me with the estimates I need to determine if such a building renovation endeavor is reasonable. Meanwhile, a cool old building falls into ruin because of this silly system seemingly set up against folks with the grit to make a difference. And, my potential partner in this venture is getting cold feet. Rant finished forgive me.

   I will keep on plugging and I see now more than before the realities of business. sawick

1. 
   WorkshopJon | Apr 05, 2003 02:27pm | #7

   sawick,

   In your last post you stated

   "I live in an unusual town in an unusual state and have an unusual idea; relative to this area. Thus, I am trying to sort out multitudes of market and costing data that may not necessarily apply locally."

   Also noticed you entered no profile info. This reply applies to all, but entering in a little profile info (at least about your local [left coast, midwest, etc....] can be very helpful when it comes to advice, as things are done very differently, and cultures vary tremendously depending on where you live. I'm not saying we need to know everything about you, but every little bit helps to shape a response. Some of us may have been there, but hard to know if you don't know where there is.

   Jon

   Jon

   Edited 4/5/2003 7:28:07 AM ET by WorkshopJon

2. 
   LostSouth | Aug 11, 2003 07:22am | #9

   Don't construe this as professional advice, but rather a teaser for which you should explore further.  However, that being said, these are a couple of areas I get paid good money (or at least my employer) to talk with people about.

   1. Are there distinct tax benefits?

   Yes and no.  You can deduct your entire rental payment for tax purposes (to the extent you have taxable income and even then there are carry forward rules for losses).  If you own, you can deduct the cost of your building over 39 years (less for equipment) and the cost of finance charges you incur annually.  You cannot deduct the cost of land as it is considered an appreciating asset.  When you sell the building, your gain in the building will be taxable (at a lower taxable gains rate).  However, your gain will be the amount you sell the building for minus what it costs you to build plus depreciation (39 year) you took on it.

   2. Can costs of either building new or renovating old building be deducted?

   Works the same either way.

   3. Can the building and business be sold profitably for retirement for example? Does the IRS take a chunk out of you when you sell?

   Whether or not it can be sold profitably depends upon your location.   The old real estate axiom:  location, location, location still applies.  I would also recommend that it is a general purpose building that a lot of other businesses can use.  In other words don't make it specialized.  Another interesting retirement feature of real estate is that rather than current income, such as dividends from stock, the taxability of it is deferred until you actually sell it.  Oh, and from above, you can always do a 1031 exchange for an investment property and defer the gain even longer.

   4. If you buy and thus own a building do the zoning and building inspectors hound you? Or even worse does OSHA drop in at unexpected times?

   I believe this would be the same in either case, but this is out of my range.

   5. What about insurance costs?

   You will incur insurance costs whether you rent or own.  In a typical rental situation you carry your own liability and workers comp insurance and then the landlord insures the structure which he passes along to you.  Typically a large landlord would have a much   lower cost of insurance than you can obtain yourself as they are able to bring a greater volume of business.

   Where I am going with all this is timely. I have been looking at old decrepit buildings in my town with the notion of expanding my shop to include a much needed showroom space. The old buildings can be bought relatively cheaply but require massive amounts of repairs. I am just trying to ascertain if this expansion is cost effective. I have a very limited amount of capital to undertake such an endeavor but maybe some sweat equity would pay off?

   Sweat equity is good.  Limited access to capital is bad.  A developer typically looks to earn something around an 12-15% return on a small industrial building (investment grade buildings are much less).  I typically advise my clients to own core properties that they know they are going to be in for a long time.  If your use is unpredictable, you need to expand, you need to contract, you want to quit, in other words you need flexibility, it is typically better to lease.  Real Estate markets go in cycles and typically if business is going bad, its going bad for everyone and they don't want your real estate either.

   Are you confused yet?  Sorry, for not being very direct, but there are just a lot of variables that going into making the decision.

1. 
   crt2cu2 | Aug 16, 2003 07:55am | #12

   Lostsouth,

   Thanks alot for your thoughtful reply. I have chosen to pass (for now) on the purchase of a shop, at least the major expansion scope in which I was considering. This decision comes with some angst and conflict because of the personal difficulty separating business decisions from the realities of economics in my locale. Here in Montana only a select few regions are booming (remember that Montana has lots of miles between markets) and of course same regions are replete with better workman with better connections than I. Therefore, there is a slim chance that I could carve out a market share in a distant area. Overhead costs would be too high and risk too great for my little shop. I guess I will just scale back and focus on the bottom line for now.

   Namaste',

   sawick

2. 
   SgianDubh | Apr 04, 2003 09:56am | #2

   I rent. I can leave the country, and my debts, behind me any time I really get the urge, ha, ha. Can anyone see a lump in my cheek where my tongue resides? Slainte.

   Website    The poster formerly known as Sgian Dubh.

1. 
   crt2cu2 | Apr 04, 2003 10:02pm | #4

   Richard you character <G>.

   If you leave the country you must promise to continue postings on this forum. Where would we all be without your rapacious wit?

   namaste'

   sawick

3. 
   migraine | Apr 25, 2003 07:00pm | #8

   Ok, here's my side.

   I live on 2 1/2 acres in So Calif and 7 years ago I built a 1300 sq ft shop.  The total cost was $8,000.  I did all the work myself with a little help from some friends.  Three years later I added 675 sq ft to one end and it cost about $8000 for labor and materials.  Most of the work was done by others.  I have since added about $4000 to the shop in improvements.  That brings it to a total of $20,000 for 1975 sq ft.  I have been able to depreciate the shop on my taxes over the last 7 years and has help quite a bit.  I paid $86,000 for the property, anothe $50,00 in remodeling and other improvements, plus the $20,000 in the shop.  That brings the total property cost to About $175,000 and we will be putting the property up for sale within the next month.  The real estate agent says we should get over $400,000 for the property and he estimates the shop is worth over $40,000+. 

   One of the best things is in the previous years  prior to my own shop, I had paid over $40,000 for threee years of shop rent.  Since I built, I paid none, except for construction costs.  I was also able to survive the last resession because my home mortage was on $1000 a monthe and I had no shop overhead.  My other shops closed because they were up to their eyeballs in dept.  This also gave me money to buy additional tools since I was not paying shop rent somewhere else.

   Talk to you CPA about how it will effect you.  

   By the way, the view is breath taking, I see my family all the time,and my commute from home to the shop is 10 seconds and that is not even enough time for the coffee to get cold.  The biggest mistake I made was not putting a bathroom in the shop.  That means more trips up to the house and still get yelled at for tracking saw dust into the house.  She's right, why can't I remember to blow myself off before I come in the front door?

4. 
   migraine | Aug 12, 2003 06:09pm | #10

   Well, here's my outlook on this.  I had an industrial building that I rented for 3 years and it cost me about $30-40,000 for that time.  When I moved on our 2 1/2 acre property, I built a 1975sq ft shop that cost about $20,000 and an additional $7,000 in improvements to build.  Most of the work was done by myself and the help of some friends( They all finally paid back, or most of it,  the free labor I gave them in the past)  Now the house closes escrow this week and I figure the $27,000 improvement  has brought back at least $50-60,000 ($23-30,000 equity).  That means for the past 8 years I paid nothing in shop rent and all the money I saved went to buying more tools.  Also, having a shop on your property can help with your tax situation, if you use it for business.  It was a great asset when the depression hit out here and many shops were closing down.

   Spent ALOT more time at home and really got to see the last two kids grow from diapers to 3rd and 6th grade.  Can't do that as easily when your shop is somewhere else.

   Talk to your friends.  Building a shop is easier than it seems.  Just alot of planning.  If you don't have the answers, then ask.  Small-medium shops don't cost that much to have a architect/draftsman to do the plans.  I drew mine and the only drawing experience I had was from high school 12 years earlier, plus $300 to the structural engineer for the structural calculations.  Only two corrections by the county during plan check.  Oh yeah, If you do this, buy a framing gun, your elbows/wrists will thank you.

   Now, were off to Washington next week for phase two of our lives.  Got the fishing poles ready...  

1. 
   crt2cu2 | Aug 16, 2003 08:04am | #13

   migraine,

   Sounds like you are basking in the beauty of a sellers market. Unfortunately it is not the case where I live. There are currently 15 major industrial type buildings on the market in my town. All require at least $100,000 worth of input to meet code and/or to get minimally operational (productively speaking) not to mention the simple costs of purchase. That kind of expense is out of my league since the recent local economic downturn seems to have directly effected my sales in both commission and retail markets. As much as I hate to say it, I would be smart to look at the market slump and respond by minimizing rather than maximizing right now. Maybe consumer confidence will improve after the wars are finished?

   Namaste',

   sawick

5. 
   adair | Aug 13, 2003 01:14pm | #11

   Good Day

   By reading between the lines....you've answered your question.

   Your comments are very postive towards ownership, as it should.I'm 58 years young and have bought and sold 15 properties, and always made major money on the sales. $156,000.00 into the property and expecting to get $400,000.00 out of the property......sounds good to me.

   Remember your Real Estate agent is wanting to sell "your property" quickly, therefore, setting a price for sale. Make sure it's a win win situation for you.

   Good luck

1. 
   crt2cu2 | Aug 16, 2003 08:16am | #14

   Terry,

   I have usually made money on both shop and simple real estate sales before as well (or at least my ex-wife has). However, now I live in a section of Montana where economic booms are nearby but just too far away for me to access without a huge outlay of advertising cash. I could buy a local building for maybe $30k, put $50k into it and only get a return of $30k. As they say, the real estate market goes in cycles yet i just can't afford to ride such a cycle out. Such is the curse of living hand to mouth on meager product sales. I have long known that i suck at the marketing and business aspects of wood working. But I just can't seem to get all the business angles aligned, especially at any one time.

   On a good note, I have beeen working on a cabin up in the mountains (labor and materials) which at least gives incredible sensory satisfaction if not direct profit incentive. In Montana I guess that is our version of the "view tax".

   Namaste',

   sawick

1. 
   adair | Aug 16, 2003 01:43pm | #15

   Sawick

   Just got your message, it's tuff getting the question across in such a short space....other factors involved.......been there done that...on my third marriage.....do things until you get them right...I'm now married to the right person.

   I still believe in......"you build it and they will come"....market or no market, a good product always sells, along with the right deal.

   The property I own now sat for 5 years vacant, and no one wanted it. We bought it and did our thing.....now people have offered to buy it for an amount beyound the market value. We've decided to stay put and give my Wood Carving Studio a chance to grow, plus we are tried of moving.

   Take care, and good luck