Hi All
Just want to run some figures by you all to see what your thoughts are. I was on another thread and got some good advice from Michael are Mortgage Hunter re having to pay 30% deposit on commercial deals. Below are the figures of the property
These 3 shops are 3 of 16 attached brick shops which make up this small suburban Shopping Centre. Other tenants include, newsagent, take away, bet, hairdresser, doctors surgery and drapery. Rent : $31,050p a + gst Outgoings : Council Rates, Water Rates & Insurance total = $6284 approx Price $215,000 (no gst applies as it is being sold as a going concern) All information contained herein is gathered from sources we believe to be reliable, however we cannot guarantee its accuracy and interested persons should rely on their own enquiries.
The problem I have is the figures are good but we really don’t want to tie up that much money on one property. Any thoughts would be greatly appreciated.
Delboy
Hi Delboy
I posted some info which may be helpful on your other stream…. check it out and get back if you have more Qs… happy to help if I can.
Freed@last
Hello all
As I am leaning towards buying a commercial property as my next IP I am also trying to educate myself in this area.
In the ad. that delboy posted it states that no GST applies as it’s being sold as a going concern.
I thought at first that it meant that you are buying the business(es) as well and that this is really meant for people looking to run the business rather than investors. In that case though I would have expected them to tell you what the business is. ?? [blush2]
Can anyone tell me what that means please.
Thanks
ElkaDelboy,
Seriously, if 30% of 215K (amounting to 64K) is too much money for you to tie up in a commercial property deal, then I believe you are playing the wrong game. I’d suggest finding another hobby.
Elkam,
A going concern is when you buy premises that have a sitting tenant and are operating it as a going concern. NO GST is payable by the purchaser in this case. You are not purchasing the tenant’s business. You still need to know quite a bit about what they do, and how robust they are, but you are buying the dirt and the building only, just like with a house.
Elkam
With comments like that I would suggest YOU take up another hobby such as answering peoples queries with a bit more tact. We are asking for advice not what hobby to take up. And you are a moderator? Maybe you just got of bed on the wrong side this morning, or maybe not????????
Everyone has got to start somewhere and we are starting to look at commercial. So although we have the money we really don’t want it all tied up in one deal.
Thanks anyway
Delboy
Rather than a question of tying too much money up in one deal, it seems to me to be an issue of whether your return justifies it. Assuming 10000 for closing costs, the amount required is approx $75,000. Assume 9% interest rate (should be able to get it cheaper eg IMB last time I looked was about 7.5%)
If you pay the outgoings net rent approx $24766 less interest 13500=11266 or a return of 15% on your 75K
If the tenants pay the outgoings $31050-13500=$17550 or a return of 23% on your 75K
Looks pretty interesting to investigate further. Follow Dazzling’s advice about looking at the soundness of the tenants.
Do the leases increase the rent annually
Hi crj,
IMB’sbase rate at the moment is 7.75%, not bad but far from the best rate around. Delboy, at the level of borrowing you are looking at, probably ongoing fees would be as important as interest rate, but for your info about the best you would do on rate is 7.45%.
Regards
AlistairThanks Guys
Some sound advice there. Just one more quick one. Assuming we do buy it and put down the 30% needed. Can this 30% then be used to secure a deposit on another place or will they not lend like that on commercial?
Cheers
Delboy
Hello Delboy
crj is right. It looks like it’s worth investingating further.
The things I would be looking at are:-
Are all 3 shops let to the one tenant.
What sort of business is it.
How long have they been there and how long is the lease/renewal options/ rental increases in lease/who is resposible for repairs. etc.I would also:-
Spend time in there to see if it’s a thriving shopping centre or pretty quiet.
Maybe ring another agent in the area and inquire about renting a shop in the centre. The point is to find out if there is regular turnover of shops or not. My concern would be that in a “bad” shopping area if the current tenant leaves you may be stuck with empty premises for a long time.
I would be also interested to see if there was a chance to split the 3 shops out onto seperate titles and how expensive this would be and whether this woulds add value. You may at some stage want to sell one to get some funds. This would not work well naturally if all three are rented out to the one tenant.
Just some of my thoughts.
Hope this helps [smiling]
ElkaHi Delboy,
Looks to me like a good deal on the numbers – ie if it all stucks up to scrutiny, ie the tenants are right, leases ok (or readily improvable) and the general economic environment in the suburb in question is such that the risk of vacancies can be mitigated I would not hesitate. From what you’re indicating the outgoings are the responsibility of the tenants – that would seem to mean that the property offers a very healthy return on investment (return on purchase price & closing costs of 13.8% and a very healthy cash-on-cash return).
As I said – if it all stucks up in practice (ie after appropriate due diligence), personally I would go for a deal like this. Not often that you can just ‘buy’ a positive cash-flow like that these days (ie without having to manage a number of problems to manage it into positive cash-flow territory).
And no, you can’t commit your 30% deposit a second time. On commercial properties, all other things being equal, banks will always be looking for at least 30% of equity across all your investments – but there are always other creative financing solutions to explore.
And what does Steve say? Money follows management.
What is the going return on investment for commercial properties in the area? Have you checked with a local real estate agent or other contacts what the average return is? ie if it happened to be somewhere between 8-10% (in Perth metro areas at present anything around 7% would be considered good), you’d be able to achieve a profit straight away without lifting a finger and then reinvest your profits in further investments.
Just a few thoughts – and to demonstrate that I put my money where my mouth is – I purchased a commercial property in Kalgoorlie recently for $206.5k with a rental income of then $18,200 pa, which I have since increased to $23,400 pa. I’m happy with that return and it’s less than what you’d be looking at in your potential deal.
Good luck and do your due diligence!
Mat
Hi Mat,
Can I ask whether you have been able to get your commercial property revalued and pull some money out of the deal now that you have been able to up the yield?
Thanks,
Craig.Hi, I’ve reading with interest the mix of comments from relatively new investors & a couple of obviously seasoned property investors.
It’s difficult to get banks to lend on commercial properties. I have 2 small blocks of suburban shops,fully tenanted & only a couple of banks would look at them. The mitigating circumstance would be if the borrower has a secure job or ongoing income to service the loan. The interest rate I’m on is 7.5%[used to be 7.25%] on a business loan. I paid an arm & a leg in refinancing fees to get this deal & I’m pleased with the 7.25% variable loan interest only. The reason is that I could only get a private loan at !0% interest.
This is too many words, I guess. The bottom line is I would think that you’d not be able to redraw the 30% equity to use for other investments unless you can show other sources of income.
The more experienced people are right. You need higher LVR. By the way, my commercial properties are geared only 55% & the bank refuses to lend me any more!
Hope this helps.
Kum YinIncidentally, commercial property yield is fantastic if you have enough funds to go into it. 12-14% nett [Harder to find that now. I’ll sell mine at 6%!!]
Shop for your finance. There are now lenders for commercial property that will do LVRs better than 70%. The other bummer about commercial is that lenders would reassess the loan every couple of years. There are now lenders who won’t do the review. Finally, it is often hard to get interest only on commercial properties. A couple of lenders are now offereing interest only for the first five years before reverting to P&I.
One I know of is http://www.resi.com.au
Hi everyone,
We're looking at a potentially good commercial property deal at present. We're new to commercial investing, but one thing we know we need to do is to checkout the property's history. We have a fair idea of what this means, but would really appreciate someone spelling out just what they do – ie: what specific information do you seek and where do you go to get it?
All advice gratefully received.
Carlin
Check whether the selling agent is also the managing agent or whether it is self managed. Get a rental history from the mng agent (going back as far as they will provide – most should give you 2-3 years sometimes more).
Find out who manages adjoining buildings and speak to those agents as well to confirm vacancy rates, incentives offered etc.
Have a good drive around the area to see how high vacancy rates actually are – count them, quantify it (m2), agent might give you an idea of demand/take up rates, see what new commercial projects/under construction/planned is coming on the market ie check out your competition (refer to council/re agents).Thanks Scott no mates. With excellent advice like that you must have plenty of mates.
We're on to it! If you think of anything else, please let me know. We've a small window of opportunity here but it won't last long.
cheers, and happy Chrismas,
Carlin
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