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Cost – Is it the most important factor in buying?

Real Estate Sales Representative with Century 21 Miller Real Estate Ltd. 4793863

July 12, 2017 09:55 AM

Finding Your Ideal Commercial/Industrial Building - Part IV

Welcome back! Here we discuss cost and its impact on your choice:

Assuming you either had the funds or could get reasonable financing terms – and a good return, would you invest it in a business you controlled?

We all know how little we get on money parked in the bank plus we are even taxed on the meagre interest it earns! Now take that same money and invest it in a product or service that you believe in, directly control, and that enjoys business tax deductions – now we’re talking!

Additionally, real estate over time tends to appreciate in value. So you potentially have the best of both worlds: An operation to earn profits plus the traditional long-term gain in the property value itself.

Aside from the purchase price, some other types of costs:

Fixed Costs: Usually related to the type of facility, its location and size; for example overhead (admin.), heating and insurance. They influence the product cost and resultant profits.

Variable Costs: Cost per unit: It is multiplied by the units made and so increasing directly with the production volume. For example, the materials used in production and the direct labour involved.

Step Costs: Changes in the unit cost based on production volumes. A combination of fixed and variable costs: Fixed up to a certain limit and then changing to a new value. For example, if production volume exceeds a certain upper limit, costs can significantly increase as the company may need to source and buy additional machinery, buy / lease extra warehousing space, authorize needed overtime and/or new hires along with their associated risks/issues.

(Cost of) Increasing Profits / Revenues: To grow its bottom line, an operation can increase sales volumes (e.g. through marketing efforts & promoting its good name), increase the selling price, offering complimentary goods and/or services, or launching new more profitable products or services within the same facility. Revenue analysis combined with cost analysis helps a company determine the best course of action, while keeping costs at a minimum. For example, comparing the use of testimonial marketing to gain greater and faster market share versus product/service add-ons.

Returning to the original question – is the property & building price tag itself the most important factor?

Whether you are talking about property, a car, a phone or any other purchase the conversation always seems to revolve around the cost. But is this really the most important factor when you are purchasing a big-ticket item? We would suggest that not only is it not the most important factor, it isn’t even in the top 3. Here are some other key factors to consider:

ROI – Yes the cost of purchasing or building a new facility is large but, as the old saying goes, you have to spend money to make money. More specifically, if you need a building in order to sell your product or service then the only real question is, “What is the Return on Investment for any specific choice you may make about that building”. To make it even simpler, if an acceptable profit is there, the actual cost of the facility is a relatively minor consideration.

Compromises – Unless you are going to build a facility that exactly meets your current requirements it is highly unlikely you will find a perfect match to your needs. This means you will have to decide what is essential, what is preferable, and, what is a ‘nice to have’. All of these things need to be considered in relation to the cost in order to determine if you can live with the compromise. For instance, everything else is perfect but there is no current or possible railway connection. Can you live with this and come up with a work around or do you need to keep looking. Also, if it is perfect now, will it still be perfect 10 years down the road? Will you need to expand the facility and is that even possible?

Future Usage – Businesses are like plants in a garden. They either grow or die. There is no third choice (shrinking or lack of growth is just a slow form of dying unless it is turned around and starts growing again). You need to take care of the plants, water them, fertilize them, and make sure there is room to grow. Businesses, and the facilities that support them, are the same as the flowers which, in this context, means if they do not have room to grow then harsh measures will be required to keep them alive. This could include trimming, splitting or even transplanting to a different location. As you are designing your new garden (facility) you need to consider what you will need in the future and plan ahead for that growth and attendant requirements. Otherwise you will become restricted..

And all of this brings us back to – the actual, final, total cost of the facility.

Cost –For instance, cost is not just the purchase of the property. It also includes financing, associated land transfer taxes & fees, land/site developmental requirements, building and/or renovation costs for this site and how they compare with alternative sites. When you add all these costs together is this still the property you want and does the cost still make sense? How does this compare to alternatives? Most importantly, how do each of the potential options compare on the three points made earlier (ROI, Compromises, & Future Usage)?

So, in answer to the question we started with – No, cost is not the most important factor. An understanding of all the factors involved and judicious preplanning of possible future requirements and options can help ensure fewer issues and lower costs in the long run as your business grows and prospers.