I have the opportunity to purchase some commerical property that at initial glance gives approx. 38% Return on Investment. But – there’s a but…
It’s a small town where about a third of the population is aboriginal. There are a lot of problems with alcohol & drugs and so an abonormally high level of physical abuse, car theft, and all the stuff that goes along with it.
What I’m concerned about is recurring damage to the property. For instance, if they were to smash a couple of plate glass windows every Friday night – or rip an air conditioner out of a wall – or drives a car through a wall to get themselves a new TV – who pays? Me as the property owner, or the commercial tenant?
Although the return is great, the rent wouldn’t cover a regular “attack” like this.
Oh – and if it’s the landlord that pays – how likely am I to get/keep landlord insurance if such things continue to happen on a regular basis?
Also, I will be buying it together with a friend – going halves so to speak. However he needs time to gather his deposit. If I place a minimum deposit for both of us, how likely am I to get that back should the deal not go ahead for some reason?
On another note, can anyone that owns commerical property suggest some things to take note of during due dilgence?
Thanks for reading…
Allan.
One thing that quickly comes to mind is if the area is as bad as you say, what business owners are going to rent your premises? There may be a negative return on this deal.
As for who pays for damage, this is negotiated between the owner and the tenant. In such an area, I would not touch the property unless the owner was to pay AND put bars on the windows, alarms in the premises and possibly surveillance cameras around the site.
Good luck with it.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThank you for the reply… Tenancy is not a worry from what I understand (but of course I need to check this). They have been there long term. I think from reading your reply, I may not have described my concerns correctly. I’m concerned that once *we* own the property, we might find ourselves paying for constant repairs. I have yet to talk with locals working in the other commercial properties, to see if it’s as bad as it sounds.
Unless you meant that as a tenant you wouldn’t rent the place unless those things were in place?
So you’re saying a new lease can be drawn up to state damage is the responsibility of the commercial tenant or their insurance company? Is that common practice, or would I likely get a bad reaction from them if I asked them to sign such a lease? [angry2]
Allan.
It is pretty common place. In one of my retail premises, I am responsible for everything except the floors, walls and ceilings.
In another my family has, the landlord maintains the property but charges much higher rent.
I was referring to as a tenant if it was a bad area.
Just check the current leases to see who is responsible and if the tenants are long term and seem happy, it sounds like a great deal.
Good luck with it.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksHeya Big Al,
I’d be wanting satisfactory answers to the following two questions before going any further with your due diligence process ;
1. What has been the capital gain of the prop, compounded annually over the past 10 years ??
2. What are you expecting the capital gain of the prop, compounded annually over the next 10 years to be ??
What are you hoping to extract out of the purchase, CG, cashflow or both ??
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
You should make sure that you can get finance for the deal and what sort of LVR is available.
What has been the capital gain of the prop, compounded annually over the past 10 years ??…
2. What are you expecting the capital gain of the prop, compounded annually over the next 10 years to be ??LOL – probably nil – in both cases. I’m not even considering it, actually. [cap]
What are you hoping to extract out of the purchase, CG, cashflow or both ??Cashflow only, in this case. : )
Allan.
Originally posted by APerry:You should make sure that you can get finance for the deal and what sort of LVR is available.
Yep, I was just doing some calculations on that actually. After adding all the extra fees, LVR is about 86 to 89% – depending on a couple of things. For instance:
* Building Inspection Fee
* Land Titles Office Fee
* Conveyancing Fee
* Pest Inspection Fee
* Property Valuation FeeSince the property is one building, but contains four separate shops, will these kinds of fees be multiplied by four?
I’m getting a headache! [blink]
Allan.
Sounds a bit strange…
Are you saying that you are managing to borrow 86 to 89% of the purchase price ?
You are usually struggling to get 80% lvr for a commercial property.
Can you explain what you mean by your 86 to 89% ??kp
No, not at all – I *am* trying to find out if it is possible though. Here’s some example figures:
I have $22,000 for a deposit.
Partner in deal thinks he can equal this, given a few weeks.(If a 30-day contract was signed, we would also be able to add a little more to the deposit amount in that time.)
Anyway… Say both our deposits together equal $44,000 – well, this happens to be 20% of the property purchase price of $220,000. So before I count closing costs, we are at 80% LVR – just where we want to be.
Then I used an online calculator to get an estimate of closing costs, like:
Property Stamp Duty
Loan Stamp Duty
Mortgage Insurance
Land Titles Office Fee
Building Inspection Fee
Pest Inspection Fee
Conveyancing Fee
Property Valuation Fee
Loan Application Fee(I also included $3,500 we would need to set up a trust.)
Since we would need to pay these after the contract is finalised (in 30 days from signing), I subtracted it back from our current available deposit/s, (so I knew these would be safely covered when needed).
And… our LVR is now up to 89%.
So I’m stuck – I haven’t even gone to view the property, or considered approaching a mortgage broker because it sounds like we cannot get a commerical loan at 89% LVR. [glum2]
Yes/no/opinions all welcome!
Allan.
I would say NO unless you want to pay mega-interest. Also, things seem way too tight. Just regarding the Trust, it needs to be set up BEFORE a contract is signed or Stamp Duty will apply again.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksAllan,
Finance is possible, you would probably have to get a private lender involved though, to get the LVR down for the primary lender. I have a client who is in this situation currently, they are paying 22% for the private money portion.
Regards
AlistairThanks all!
I would ask the vendor/vendor’s agent to show you the rental history case file. This should give you comprehensive information on all tenant dealings, including damage claims, complaints, tenant turn over, late payments etc.
Check the contracts held with the tenants to see how much longer they are valid for, and under what conditions. This will let you know how long you can definitely expect to continue receiving the current rental return, as well as any liabilities you as owner may be under if damage is done to the property.
You could also ring an insurance agency and ask for a quote – they should be able to tell you whether they would or wouldn’t insure that area.
It’s a small town where about a third of the population is aboriginal. There are a lot of problems with alcohol & drugs and so an abonormally high level of physical abuse, car theft, and all the stuff that goes along with it.Has the property had previous damage, or are you jumping to conclusions based on your perception of what the area is like?
My PPOR is in an area deemed by insurance agencies as being ‘high risk’, yet I have never had any problems in living here for 5 years. I do pay a higher insurance premium, but it is a popular place to live and doesn’t worry anyone. Businesses don’t seem to have any problem either.
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