Hey guys,
My family was thinking about investing in a commercial property near the CBD in Melbourne. The property has 3 shops with 3 existing tenants there already so we can have the option of sub-dividing the property if we go ahead and purchase it.
Information that I have been given already include the total current income for the property as a whole and the reason the previous owner is selling.
My question (a simple exercise to all) is what further questions would you ask the real estate agent to complete your due diligence.
The questions I’ve thought up already are:
1. How long has each lease got until they expire
2. How much space does each business occupy individually?
3. What is the going-in capitalization rate (for calculating the value of the property based on a 5 year pro-forma)Thanks for your help
Martin
Hey Martin,
A couple of Quick Qs I would ask.
Do the Tennants leases have personal Guarantees not just a $2 company as guarantor.
Are outgoings paid by tennant or owner?
Does the complex have good solid business flow and parking
Hope this helps
LukeLuke Taylor | Hope Property Investing
http://hopepropertyinvesting.com
Email MeProperty Support,Strategist and Buyers Agent
Also Martin,
Just be careful only asking the agent for yr due diligence.-Go all over and even to the owner if legal.Luke Taylor | Hope Property Investing
http://hopepropertyinvesting.com
Email MeProperty Support,Strategist and Buyers Agent
thanks for your help Luke
regarding your question regarding whether tenant leases are guaranteed personally or by company, if the business structure is a company, there’s no way we can check. The existing businesses are fairly well established already in any case except for perhaps one (a small chicken take away joint)
Martin
personal guarantees do not gaurd you against tennant bankruptcy. Bank guarantees are more valuable in a lease because the bank guarantees your rental payments should the tennant default.
Another question I might ask is if the lease is subject to yearly increases. The norm is a few percent above cpi. Also, if the tennant is late in paying rent, is there a penalty? Overall, I would be looking for a strong lease written in favour of the landlord.
kind regards
XeniaSelling your house or investment property? I buy real estate for cash! Please email me at angelo.xenia at optusnet.com.au or ring me on 0412 437 582 to discuss.
Martin,
I wouldn’t ask the Seller’s representative anything…my experience has been that you won’t get a response that you can legally rely upon, and if you read the extremely fine print, you’ll find that anything that the Seller or his representatives says, they are not bound by it.
As you’ve said, it’s your Due Diligence, don’t sit back and be spoonfed by the person trying to extract the maximum amount of cash from you.
1. Read the lease. Make sure it’s an official signed off copy with all subsequent amendments and details…you wouldn’t be the first to be handed not a full and true copy.
2. Read the lease again..and again…and again. The tenant will know it backwards, you will need to as well. Make sure you know exactly what it contains and what your rights and responsibilities are within it as Lessor.
3. Check titles office, and local councils.
4. Do your usual structural checks
5. Be careful of warrants and memorandums and caveats placed on the title. All valuers state that their valuation is subject to a clear title.
6. Do your cashflow projections based on what is signed off on the lease.
7. Decide if you want to proceed.Good luck with it all.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Hi Martin,
Part of doing your due diligence is obtaining a copy of the lease and all variations and assignments. A lease needs to be studied and if you are unsure, ask someone who knows eg lawyer.The lease will tell you what the lessee is responsible for and what the lessor is responsible for, rent, term, reviews if any, guarantees if any, penalty clauses, default rates etc etc.
The space occupied should be one of your interim questions to the agent. You will then need to confirm this, generally via a registered valuation.
This information allows you to determine income capitalisation rates. It also allows you to determine the current rental as a dollar rate per square metre for comparison to market rates per square metre. this way you shouldn’t pay over the top.
Cheers
JeffThank you Jeff and Dazzling for your help. I really do appreciate it.
I will let you know of how this progresses. Once I get further details, I’ll post up an excel spreadsheet via a URL with my findings / calculations to determine the maximum amount we should be paying for the property.
Martin
Ok guys,
I’ve done my research and just to let you guys know that we are going to pass on the property. The return just didn’t do it for us, even though everything else such as the lease was fine. The agent emphasises that the seller wanted at least 1.5m for the property. Although we had the finance, the returns weren’t there given the risks involved.
Attached is my analysis. Have a look and tell me what you think and if I had made a mistake, please let me know. = )
http://members.ozemail.com.au/~mhchu/investing/InvestmentAnalysis.xls
Martin
Hi Martin,
Just looked at your spreadsheet and a couple of things stood out. The rental rate per square metre would probably rise to at least $180 per square metre on market review (First one in 2 years) My initial thoughts were $180 per sq metre was very low for CBD but this isn’t quite CBD is it? I take it that it is not a high street location either. A couple of years ago I looked at a suburban shopping plaza/village out of Brisbane and the rents were $300 per square metre – that was real high.The other thing was the building area was 497 sq metres in total, what was the land area?
Cheers
JeffHey Jeff,
For further information, the actual place for the property is in Brunswick East and 497m2 was the total land area as it is located in a shopping strip. Although there is close transport, the amount of customers for these tenants would not really compare with those at Lygon Street.
Martin
PS
For those that are going through the spreadsheet, the interest repayments have been accidentally calculated on a monthly basis rather than a yearly basis.
ok dudes and dudettes,
I’ve corrected the excel spreadsheet and uploaded it to the net. Again, if any of you find any errors, please let me know
Martin
Martin,
As stated privately, the return is too low – the Sellers are asking way too much at 1.5 MM. Try more like $ 800 K. Else, move on to the next one.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Martin
Try using the Insert/Function properties in your Excel spreadsheet for NPV and IRR formulae.
Cheers
JeffMartin,
Did you post a link to the revised spreadsheet in another reply or did you update the file pointing to the original link. Further what is CF (minus Capital)?
Cheers
Rodg
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