Need a Bigger Shop ... Lease or Purchase?

There are good reasons to buy the space you need instead of leasing ó if you're ready to take the plunge. December 27, 2010

Can anyone share their personal experiences with making the big step from garage shop to larger leased shop space? I have officially outgrown my 600 sq ft garage shop. After recently purchasing a new sliding table saw, jointer/planer and larger bandsaw my productivity is way up but now I have hit the big hard wall of no room! I am looking at leasing a 1500-2000 sq ft space in the next few months. I have been in business for about six years and do mainly built-ins and custom furniture with no employees.

This is a scary proposition to me. An added $1,500 a month in overhead is not very welcome but in order to make more money I guess I need more space. In the Midwest were I am located the economy seems to be doing fine, I have not noticed any real downturn and the phone is ringing a lot more now than ever before. I just wondered if anyone had do's and don'ts when it comes to leasing a space and I would love to hear personal accounts of the garage to larger shop transition. Is there anything I should be on the lookout for when dealing with a potential new landlord?

Forum Responses
(Cabinetmaking Forum)
From contributor D:
Try to find a shop with adequate electrical service. As you grow you'll need 3 phase power and probably at least a 200 amp service. If you find a spot you like that doesn't have that, try to negotiate with the landlord to upgrade it for you. You don't want to put thousands of your dollars into upgrading someone else's building. If you're planning on doing any finishing in the building, check on fire regulations and insurance, as well as whether your neighbors would have an issue with fumes, etc. It's better to find out first than get shut down after you've moved in and started working.

From contributor K:
I am assuming you purchased your new equipment and do not have a lease. If you do, I wouldn't think about a larger shop until you have paid that off. Adding $1500/mo. for a lease on top of leased equipment can quickly spiral out of control if you experience a shortfall. You would be better off renting a storage container for $50-$100/mo. for the extra room and getting that lease paid. Short-term sacrifice, long-term gain.

For $1500 a month, you could have a 20 year commercial mortgage of $175K at 6.5%, and from a quick search, this would buy you a property and building in Des Moines with anywhere from 3200-18000sf. This does not include looking for those properties that are bankrupt or people looking to get out. You could sublet what sq ft you don't need, and have that pay your mortgage, and then some. Plus, in the end, you own it and it will become part of your retirement when you sell it at the end. At the end of the journey, you want to have assets to retire on, not a lifetime of leases with nothing to show for it. Think about it this way. After six years in business, would you rent your machinery?

From the original questioner:

I appreciate that angle. The machinery is not leased. The $1,500 is on the high side of the total I would have wrapped up in a leased space, I am guessing $800 in rent plus $200 in utilities so maybe it would be closer to $1100 or so. I think I would feel a bit more comfortable in leasing for a few years and seeing how that expansion helps me, I am relatively young at 37 and I think the next logical step after growing in a leased space for a few years would be to buy a building larger than I need, lease out part and let my business mature to whatever level I want.

From contributor H:
What's your immediate need? Work space or assembled goods storage/staging? If it's assembled goods storage I'd look at purchasing a 20-24' enclosed trailer. Also look at your work flow. Itís a bad time to be biting off a long term lease, the payments keep coming whether youíre busy or not. It might be a great time to buy an existing property, leases are money thrown away.

From contributor K:
I understand your unease in doing this but I would also strongly urge you to at least look into it. You may surprise yourself what you can get in this market. The fact that you did not finance the equipment you purchased is a good sign. But you didn't because it didn't make sense to lease it right? Think about what a lease for a few years will cost you to see if it works for you - literally tens of thousands of dollars. Alternately, buy a place with room for 1-2 tenants aside from your space, and when you do, you will not spend a dime while you see if it works for you, plus you will have built in expansion room. Just do 1-2 years leases for the tenants.

Consider that you've made it past the five year mark (in which 90% of business fail - and of which two of the years have been through the current recession), and you didn't finance your recent machinery purchases. If you have $10-$20K set aside, this can absolutely work for you. So the question you want to ask yourself is, do I want to put out $20-$30K over the next two-three years, and have nothing to show for it, or alternatively, spend the same money, but have an asset to show for it. Not to mention one that can make you money.

From contributor M:
If you do purchase, donít forget to factor all the expenses in: mortgage, property tax, insurance, maintenance and repairs, etc. Donít get me wrong, I think a purchase is the way to go, but the other costs can sneak up on you if you are not prepared for them. As contributor K suggests, a space that allows room for growth and will currently allow you to lease out to others is a great way to manage the other costs.

From contributor Y:
I went from a home shop to a ratty old building with cheap rent and high heat bills, then to a bigger ratty building with more space and higher yet heat bills, then to a new building leased with option to buy. In the option was a provision to count part of my lease payments as a reduced price. I was leasing 4000' in an 8,000' building. Soon needed more space and took over the rest of the building. Soon needed more space and added 6000', soon needed more space and added 10,000' plus and loading docks. Risky business but I survived. It would have been better form the start had I planned for all the expansion. I'm more or less retired now; the building is paid for and brings in about $7000 a month.

From the original questioner:
Does anyone else have firsthand experience with moving to a rented or leased space? What about sharing a shop space with another established woodworker?

From the original questioner:
Long story short is I would love to add on to my current building but due to the location of the building I can't. I can't go in any direction, plus we really need to use our garage as a garage again. Over the last six years I have upgraded the electrical service and put in a walk-in door so we have not had to invest too much into the space. Right now my current need is:

1. A halfway proper spray area.

2. Material storage area.

3. More mock up/assembly space.

My bread and butter are residential built-ins but my end goal is to design and build more of my own furniture pieces so I need space to house several projects that are underway that I can pull out here and there and work on. I also need a small office area away from the house. The three year old and one year old can make it very difficult to concentrate on putting together estimates and designs. It has been great having my shop so close to home, especially with my kids being so young but I don't feel like I have any way of expanding to my full potential with the amount of space I have to work with.