First I would just like to say high to everyone on the site, and thank Steve for a great book im only half way through but have found myself on the net searching for properties all day.
My question to who ever might like to answer: Regarding a commercial property I have found asking price $65k without neg as yet presuming $60k purchase price, weekly rent currently $125pw
going on borrowing 70% 10yr interest only loan im working this out to be a 13.75% positive cash flow am I right?I work out a yeild of 10.83% based on rent of $6,500pa and purchase price of $60,000. Your cashflow will depend on the interest rate, loan duration etc. Hopefully the property has a secure lease in place, is located well, and the current rent is at or below the market rate. Also it would be good if the rent reviews are annual or at least bi-annual. Generally with commercial leases the tenant pays all the outgoings so hopefully this is the case for your potential purchase. To borrow 70% ($42,000) on a 15 year P&I loan @ 8% interest rate you will pay $4,816.44pa giving you $1,683.56pa ($32.38pw)cashflow (plus the capital component of your P&I loan). Your deposit was $18,000 (plus closing costs) giving a cash return of about 9.35% on your deposit funds, while the tenant pays off your loan over the ensuing 15 years. At least this is how it works here in NZ, and I assume it’s not that different in Australia. If you don’t go ahead with the purchase I would be keen to have a look at it, and would be prepared to pay a modest finders fee if I were to proceed. Make sure your lawyer looks at the lease and the title, and do your normal due diligence with regard to having the building inspected etc. Assuming everything checks out favourably I suggest you go in with a low offer, say $45,000 – you can always raise it if you have to. Best wishes, Julian.
Hi IWFFNP,
Obviously this is in a small town as $ 65,000 generally doesn’t buy much.
When you say ‘commercial property’ what do you mean by that ?
A shop ? An office ? An industrial property ?
Assuming it is a shop, is it located within the shopping centre, small as this may be.
How many shops are there close together (as in “a shopping centre”) and how many are empty ?
If you were to lose your tenant are you confident that other prospects would be readily available ?
How does the rent compare with what other tenants pay for a similar sized shop ?
In country towns (and certainly in smaller type towns), without having seen the location, I would expect a return of around 12% + at least.
Sometimes one may even get a return of as much as 15%.(Assuming one can be confident that, because of the location, one can always reasonably expect to find another tenant) a retail shop is a good type of investment because there are less likely to be problems with tenants not paying the rent as the shop tenant has a business to protect.
Pisces133
Make sure you check there are no additional costs relating to this commercial property for you as compared with residential property, as I understand it there can be operating costs or body corp costs with commercial property, this can kill the deal.
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