[blink]we are doing all our background work on our first Commercial Property Deal. It is an industrial property being sold for $350,000 with annual rent of $36,000. Therefore rental return of over 10%. As I go through the stats it comes back as a 57% cash on cash return.
That seems too good to be true doesn’t it? I must be missing some big cost.
After reading Anita’s First Commercial deal and all the associated answers there was one bit I didn’t understand. When they say, “the outgoings are covered in the rent”, does that mean that I wouldn’t get the $36,000 pa as clear rent?
The agent stated in an email that the tenant pays all the V.O water rates, council rates, land tax management fees, fire service, insurance} = $10,000 approx GSTincl. What does V.O stand for?I have factored in the higher interest rate and higher deposit. The tenant still has another 2 years on the lease with a 3 year option with CPI rent reviews annually.
I have only used Settlement Agents in the past for Residential purchases. Should I use a lawyer this time as it is a new area to me or is a Settlement Agent fine? The best quote I have had from a lawyer is $1289 settlement fees.
Thanks
Deb & BradHi Deb and Brad,
V.O. stands for variable outgoings. These are as you have listed them, CR / WR / LT / Ins etc.
Most competent agents quote the nett rent figures. I’d be surprised if the $36K rent quoted is gross rental. That would be quite mis-leading. (As was quoted in that other thread…the vendor there was trying to do some dodgy lease back, incorporating the V.O.’s with the ‘gross rent”…don’t touch deals like this, your nett rental figure will go down over the years.
The rent should be quoted as $ xx,xxx nett plus GST plus all V.O.
By the way, what’s the escalation rate in the reviews ??
Good luck Deb and Brad…happy days as a Lessor.
Hi Dazzler,
thanks for your valuable input.
I will clarify with the agent whether he has quoted net or gross rent.
The rent review are yearly CPI. So I guess that would make it about 3.5% currently. Is that what you mean by escalation rate? Should it be more than that?
The agent was also saying that an application has gone to the council to have the land converted from lease hold to free hold. The agent told us if we put an offer in to make it subject to free hold. I believe the vendor will have to pay about $20,000 if the council agree to make it free hold.
Over East do you use Settlement Agents or Lawyers for the settlement of properties? Would there be any benefit gained from using a Lawyer over a Settlement Agent?
This is the first time we have looked at Commercial Property and it seems too good to be true.Thanks
Deb & Brad[confused2]
Need help. I am still working on this deal. Agent said the $36,000 rent is net and on top of the V.Os. I am using Steve’s Buyer Beware Financial Analysis template to check the stats. I have just noticed that the funded costs don’t get added to the principal amount being borrowed from the bank. I have added them now and the cashflow goes from $12,000 to $10,000. We are also reading a book by Martin Roth & Chris Lang called “How Investing in Commercial Property Really Works.”
It is quite helpful as is this forum.
Is anyone else using that template at the moment? If so did you add your funded costs to the principal?Thanks
DebWhat’s the dirt worth as a %age of the 350K ??
What is the Lessee’s future intent ??
Could you successfully Lease it again quickly if needed ??
The land is in the industrial area near a mining town. How would I find out what the ‘dirt is worth in an industrial area’?
The buildings are 25 yrs old.
The lessee’s mew manager said he wants to be there for another 20 yrs. They service the mines which are booming and should be for the next 20 years plus.
We should be able to lease it again if needed because the mining business here is booming.
My partner said if we are to pay the full asking price we should include in the offer that we would like a new tenancy agreement with them for 10 years. What do others think???
They won’t show me the lease until I put in an offer but said I can include in the offer that the lease must be acceptable to me.
We will wait and talk to the bank tomorrow about finances before putting in an offer.
I am relying on capital growth from an IP in West Perth. Been told units have gone up heaps over the past 12 months there.
[cap]
DebHi deb,
OK, alarm bells are now starting to ring very loudly for me at this stage.
I don’t want to seem like a wet blanket, but a property like the one you are looking at is usually split up into three separate components.
1. Land value
2. Improvements value
3. Lease valueGiven that the 25 yr old sheds are worth about $ 500 in total, what you are paying for is the land and the lease. It’s a tad scary when you have no idea what the land is worth and the vendor is playing peek-a-boo with you w.r.t. the Lease.
You must make an offer on the property where you are buying the Lease and you have no idea what the Lease actually says ??
May I suggest that the agent is treating you with a hint of contempt at this stage. They may have picked up this isn’t your 15th industrial deal.
Reading between the lines it appears the Vendor has pitched the deal at 10% nett to attract all comers and see what the net trawls in.
Looking at worst case scenarios now, if the land is worth say 80K (who knows in a mining town what it’s worth…this is where your research pays off handsomely) and they pull the pin in 2 years, you’ll be left with a place worth about 81K and a debt of 350K.
I implore you to do far more thorough research on the terms and proper due diligence of the property. Not showing you the Lease is a farce.
hi debbrad
Sorry but how can you buy a property with a lease and you haven’t seen the lease.
example clause 3 says that they land owner payes for the relocation of the tennant to any where in Australia at the land owner cost.
Clause 4 the land owner payes the tenannt for any fixture fitted by the tennant at the current market price.
Clause 5 The tennant get the last 6 months free rent to find other accomodation.
These are not uncommon clauses.
I just had a lease to coles that had the builder was liable to 500k cost if the construction was not completed on time and the da was being sold with this lease in place and I wouldn’t buy a dog kennel if it was leased with out, not only looking at the lease but getting a copy and if you don’t understand it getting a solicitor to look at it.
so for this seller not wanting you to see it on face value theres a rat and you need to find the rat either get rid of it or it will come out to bite you.
I would go to your lender and get them to do the valuation with and without the lease.
They will give you the land valuehere to help
If you want to get involved in some of the projects I’m involved in email to [email protected]Thanks Dazzling & Gross Realization.
This is such a big learning curve for me. I was being sucked in by the rental return without looking at the whole picture. I am used to residential and being able to find out every last detail on the property myself from the Valuer General’s Office.
I will let the agent know I will need to see the lease before the bank will discuss loans. Then I will get the bank to do their usual valuation and see what happens. All this prior to putting in an offer if it looks good. Plus I will get a lawyer to look at the lease. Will let you know how it goes.Thanks
DebHello Deb
I was interested to read through all the posts re your potential deal. I was looking at a commercial property around the same price in a mining town in the NT some months ago which was being sold by the owner – no agent. The returns looked great. The guy wanted to retire but he was evasive about details that I questioned him on and so I rang the mining company and the town shire and got some interesting information which lead to loads more questions. The main thing that turned me against the property was that it was on indigenous land that was leased to the mining company and the lease was due for renewal – so that meant that I would not own the land and I was not sure how long the lease would continue with the mining company.
Dianne Mitchell
I think you might be onto something Dianne.
I told the agent I had been advised to see the lease prior to making an offer. I said both the bank and my lawyer would like to see it. Now I will wait and see if he posts it to me.
I also got the historical sales data for this lot and the first recorded purchase was in 1992 for about $75,000. No further change of hands since then. So for it to be recorded with the VGO does that mean that the land must have been purchased and therefore not Crown Land? The VGO wouldn’t record just lease and shed sales would it??
I will keep you all up to date with how I go.
Debjust another note of caution steves forte is not commercial property, but residential i know he appear to have done some coomrecial deals just a warning that you need to really pull apart a commerical deal much more so than a residential one, i for one as yet have not done a commercial deal so am not speaking from direct experience
when the going gets weird the weird turn pro
I now have the lease (which doesn’t appear too complex).
sometimes I hate living in a small town. The only commercial loans person has been away the past 2 weeks. Armed with the lease and the past sales data I will get the bank involved next.
Thank you all for your advice along the way.Deb
Hi Deb,
I live in VIC and my bank manager is in NSW about 1200km. Dont let a small town stop you!Mat
Hell Deb & All,
Deb, this may be pushing the issue with them, seens it took so long to get the lease. Try and obtain the 2004 – 2005 Valuation Rate & Charge Notice, which is issued by the local council.
This should also contain information such as Site Value & Capital Improved value.
Which in your case be a good indication.
But I agree with Dazzling, definate trigger signs here, despite the impressive returns.
Have you verified the returns?Cheers & goodluck
I should rename this thread 22%cash on cash return. The commercial bank loan officer informed me today that a commercial loan with Commonwealth Bank is at 8.7% for 5 year fixed interest only. That really throws a spanner in the works for me. Instead of this deal returning more than $10,000 p.a. it would be a return of just over $3,000. Our other loans are with them so it was going to be easier to continue with them.
All the costs associated with purchasing commercial property seem to be more than double that of residential property e.g.bank loan estab fee $2000, valuation fee $770, electrial inspection $550, settlement fee $1250. But once it is purchased it would be a nice steady little income for the time of the lease. I got the previous 55 sales for the same area the property is in. But it is impossible to draw any real comparisons without knowing more details about their leases and improvements.
I found out from one of the Valuers at the Valuer General’s Office that they record on their sales data the sale of improvements & leases even if the property is still Crown Land. I thought that was interesting. I always thought you would only see data once the land was sold to a private buyer.
I will try and improve the deal by checking out other loan agencies, try to get a longer lease with the tenant.$8.22 per day before tax….
Take another look at the deal Deb, one event re: the property will chew that up in no time at all.
The best interest rate I can get from a lender over East is 7.9%. That is only if when the property is valued it is actually worth the $350,000. I came across an interesting quote from a lending institution.
“unlike residential financing where the Borrower must qualify for the mortgage product; Commercial financing differs whereby the Property must qualify (not the borrower).”
For the $10,000 of my own cash going into the deal I could put it in a term deposit and get $550 back in 12 months. The cashflow with the new interest rate would be $6547 per year, $136/week. But I know what you mean Dazzling. If one of the airconditioning units needed replacing that would probably cost $10,000. I can see the main problem with Commercial deals is you have to be prepared to pay the $770 valuation prior to placing an offer.
I think it has come time for me to admit defeat on this deal. It has been a huge learning curve and that has to be good.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
