I am considering a commercial venture. Approximately spending around $200K ex GST and purchase costs.
What are the traps?
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Originally posted by DNL:I am considering a commercial venture. Approximately spending around $200K ex GST and purchase costs. What are the traps? [blink]
Hi DNL
I can’t believe no one’s answered you on this yet?
Try this:
~ Click “Forum Boards” “Search” in top LHS of this site’s home page to look for all posts on “Commercial”
~ Do a similar search on the excellent http://www.somersoft.com.au forum boardGOOD QUALITY commercial is hard to get into. Scrappy /average commercial is relatively easy to get into, so beware. The banks are wary of the risks, which is why they demand at least 70% LVR (you need 30% deposit, so I hope you’ve got lots of cash or equity) [cigar][cigar][biggrin]
I’m getting into land sub-divisions these days, which are classified as “Commercial”. They’re handled by the bank’s “Commercial” division (instead of the more familiar “Residential Property” division). This is where you’ll quickly learn all about the different algorithms they apply to commercial deals (same jargon, different mathematical constructs):
~ DSR: Debt Servicibility Ratio
~ LVR: Loan Value Ratio etc)Stick to good quality commercial deals only. I put an offer on a quality brick building in a major WA regional centre/town; the tenant was a department of the WA government, the vendor was another department of the WA government
The lease still had 8 years to run, with the very strong likelihood that they’d renew at the end. The tenant had to pay all outgoings etc.
The “vendor” department put it up for sale through an eminent local RE agency office. Frankly, I suspect the RE agent bought it himself, and/or with a mate’s/family member’s Family Trust. The agent had to make it appear legitimate. He presented 5 offers from 5 different mugs like me to the vendor. My offer?
~ 100% of asking price
~ Subject to finance
~ 60 day settlement.
I lost. The winning bidder got it by offering:
~ Cash Unconditional
~ 100% of asking price
~ 30 day settlementAs I said, I remain suspicious of what went on behind the scenes. The moral? If you latch onto a “top shelf” commercial deal, be prepared to mix it with the “big boys” and put your cheque on the table immediately (cash UNCONDITIONAL).
Cheers
GregYou can get 80% on Commercial if it is a strong deal. I would also advise trying to secure funds against residential security as the interest rates for Commercial Finance are often 1% or more than that for residential security.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Hi DNL,
Such a simple post, but you could write a book trying to answer it (and indeed there are books on the ins and outs of commercial property)!
Property (with the possible exception of vacant land) exists to be a home – either for a person (residential) or business (commercial).
Both residential and commerical property markets are established, however the residential market is more regulated with the existence of tenancy laws and regulations to protect the interests of tenants and (to a lesser degree) landlords. In commercial property the rights and obligations are usally enforced in the Magistrates Court.
Another differece is the loan market. The residential property market has many players who are willing to lend on LVRs of 80+%. Commercial property loans usually:
* Are restricted to 70% lends
* Have bigger establishment fees
* Are generally only last for up to 10 years; and
* Attract a higher interest rateBoiling it all down though… assessing the quality of the tenant (i.e. the person for residential or the business for commercial) is needed to determine how regular and reliable your income stream will be.
Anyway, that’s a start… hopefully others will build on the discussion from here (and don’t forget to search the archives too).
Regards,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Gentlemen – thanks. I was starting to think it was a daft question.
Firstly Greg – mate, thank you for that insight. We are well position financially to take on board a commercial loan, and in fact, my discussions with the bank have been held, and an amount approved in principle to allow us to enter the negotiation phase.
Robert – cheers…and thanks. Our bank actually suggested using our equity for the deal. That way we save that 1% plus another .5% due to the relationship we have established. I was concerned that they wouldn’t allow the concept to proceed as I did not want to use my own cash to fund the 30%. But this is now not an issue.
Steve – I imagine that you receive compliments and thanks everyday. But let me say your book “0 to 135 properties in 3.5 years” strengthened my resolve.
We were on the cusp of settling a deal to buy another residential property. We did our sums, crunched the numbers and it came out negative – we have always been comfortable with making a loss and gaining some tax relief so the deal was looking so good. Go figure!
Although the deal would take our residential portfolio to near $2m, I still couldn’t see my bank balance growing. Steve, your writings finally convinced me that I just wasn’t prepared to take the loss now to enjoy the gain in 10 or 20 years. My cash flow was about to be stopped dead in the water if we proceeded. Loans were approved, valuations had been paid for and your book was the best $29-95 ever spent. It stopped us from buying.
I had already said to my wife that I was going to try and buy a positively geared property as making money was better than incurring a loss! So while travelling, I bought your book in the airport bookshop, and proceeded to consume it over two days. I came home fired up! Knowing and telling my wife that we would make a huge financial mistake by buying another NG property. We already own three properties – one positive, and another soon to become positive and one negative.
The commercial property is being looked at to accommodate a family member’s business – a cousin who is as close as a brother. We are doing our due diligence right now and I can place that property in a neutral to slightly positive geared situation. Obviously – we then have a vested interested in the business’ well being. I have been mentoring my cousin for two years and also know the full ins and out of his business.
I actually don’t see the aspect of purchase as the risk. It’s a good property, albeit in a commercial complex with a body corporate. My main risk is the business’ on-going profitability and to a degree the hidden politics of the BC. Location wise, the property is in Darwin, but centrally located to the logistics infrastructure of airport, railway and shipping port.
My learning curve has been steep over the past few weeks, but it is exciting and exhilarating.
Our wives are the moderators, our grounded strengths in fact! To improve our due diligence, I also have my most trusted lifelong friend undertaking the initial inspection of the property; SHE is a Senior Project Manager for a commercial property development firm located in the NT and I know we will get matter of fact advice from an impartial, yet experienced professional whom I trust implicitly.
Gents – thanks again. I was wondering why my question was languishing in the e-byss and thought is was all too hard. I will check my other post about family trusts and some accounting advice now.
cheers and enjoy the reason for the season!
sincerely
DavidGreg – just another question for you.
You indicate that you offered the asking for your commercial property.
The property I am looking at has been on the market for three months. On initial enquiry, the vendor as agreed to a 90 days settlement – but as yet, I haven’t offered an amount until the initial inspections are done.
My question is: Is it a standard practice to offer full amount for commercial properties?
I would imagine it is just the same as any other transaction, you make an offer and the negotiation begins.
I think I’ll just offer well below asking and see what the reaction is. No better way to learn is there?
cheers[biggrin]
Originally posted by DNL:Greg – Just another question for you. You indicate that you offered the asking for your commercial property. The property I am looking at has been on the market for three months. On initial enquiry, the vendor has agreed to a 90 days settlement – but as yet, I haven’t offered an amount until the initial inspections are done.
My question is: Is it a standard practice to offer full amount for commercial properties? I would imagine it is just the same as any other transaction, you make an offer and the negotiation begins. I think I’ll just offer well below asking and see what the reaction is. No better way to learn is there? cheers[biggrin]David
Go for it!! I have 2 examples, and so far have only given you one of them. In the final analysis, you have to make your own call, and if it’s been on the market 3 months, I’d be very tempted to start low too.
Example 1: I already gave you this one (in the reply above) re WA Govt being both the vendor and tenant. It was a set up, I’m sure.[buz2]
Example 2: A mate had a 12 acre block of land 10 kms from our regional town’s CBD. He put it on the market. The prospective buyer offered full price but put a lot of “subject to” clauses in the offer which tipped my mate off to the fact that his property was in the process of being rezoned, and could be sub-divided. If the “buyer” had simply put in a cash unconditional contract, with no “subject to” clauses, my mate would have been none the wiser. As it was, he pulled it off the market and is sub-dividing it himself. [cigar][biggrin][biggrin]
Example 3: MY JV partner and I had an arm wrestle with another competing vendor on a sub-dividable 60 acre block, when the vendor and both bidders knew it was sub-dividable. We offered 100% of asking, cash unconditional, 60 day settlement. Our competitor also offered 100% of asking, cash unconditional, 120 day settlement. We won on the terms only, but it was a very close call.[cigar][cigar][buz2][biggrin][biggrin]
Your call, mate, but I think I’d be starting low with what you’ve told us so far.
Cheers
GregGreg – cheers
Yep – I suppose I had already decided to offer low. I’ve got nothing to lose and it can only work!!
regards and thanks for those other examples.
David
Originally posted by DNL:Greg – cheers Yep – I suppose I had already decided to offer low. I’ve got nothing to lose and it can only work!! Regards and thanks for those other examples. David
Hi David
You said the vendor was happy to allow a 90 day settlement. If he “locks in” on price, try negotiating on terms (early access to set up/operate the business before settlement etc etc etc etc)
Check the net /Google search for books on negotiating RE deals (Peter Spann’s “$10 Million Property Portfolio in 10 Years” has an excellent chapter on negotiating deals).
If you come across some GREAT books with street smart, practical tips guaranteed to work, please pay back forumites by posting your findings here, okay? It’s all about co-mentoring. I’m particularly keen to learn how experienced sub-dividers go about building up their “land bank” for their future projects.
I’m still learning heaps about this game myself. There are a lot of subtleities /twists and turns / risks with various approaches.
Cheers
GregGreg – thanks.
Any tips or resources I find, I’ll certainly post here. Maybe there should be a commercial forum. The principles are the same, it’s just the tenant is a different entity.
The first thing I have noticed is how the real estate agents don’t consider you as a serious buyer. I realise they need to filter the time wasters, but it is somewhat frustrating when dealing from interstate. The agent on this property has been slow, only picking up a tad when I asked for an inspection by an associate.
I had the same thing when I bought our current home. We were cashed up ready to buy and let the agents know. Of the six or so agents we contacted, only one came back to us. We ended up buying our home on a chance find while looking at another agent’s listing. Once we were in the house we signed within 20 minutes and with an agent we hadn’t contacted previously.
We know what we want….we always have the finance approved prior to negotiating which allows us to sign once we have found the gem!! I suppose this is part of my operating procedure that I like to know that when I am negotiating, I am fully aware of any boundries or contraints.
cheers
David[biggrin]Not sure whether your property is retail or industrial but both are hot at the moment, particularly indutrial. The agent probably doesn’t need to be keen on you. It is not uncommon to lob in very low offers as some of these proprties are on the market for ages. I spent years negotiating to buy out my next door neighbour. But the market was not so good then.
You should be able to find a positive CF commercial relatively easily. The main risk is economic, as it can remain untenanted for a long period in a downturn and is often specific to a tennant type. On the positive side, leases are also long.
If you cannot buy a property, you can try renting on a short term lease, I did that for a few years. Although it eats into your cashflow it leaves you with more working capital which is what people often underbudget in startup. It is wasteful specifying a property to your needs then having to do it again but you also remain more flexible. If you can keep your costs down (specify) at lowest possible budget this is often useful. Building a industrial site can be very profitable but you need to have >1M capital to play this game on a small scale. It also helps to have building expertise or associates with this. Everything seems to go over budget so have enough working capital.
Obiwan
Thanks. One of the my considerations is to rent premises prior to a purchase. As you say, the reality is the impact on cash flow.
I’d love to get involved with a commercial development one day…but this is a long way off. In fact, I only said to a mate tonight the money is in developing, owning and gaining profits through a mix of sales and continuing rents.
Cheers and thanks for that input.
David.
The trap is vacancy. Office properties are extremely cyclical. If the property goes vacant the landlord must pay all expenses out of hi or her pocket and can in some cases be forced to default. Retail properties are considerably more secure. Even with an eight year lease, a tenant can become insolvent and default
Hi guys
Compliments of the season to you all.
I wish to share some numbers to hear your comments on a commercial property deal I wish to purchase/make.200sqm Showroom/warehouse price $149k
Council Rates $975pa
Water Rates $905pa
Strata Fees $440paCondition of property: Structurally Sound brick and Mortar, aircon, Rear Access Roller Door, separate lunchroom and amenities, secured rear yard , plus security alarm
Light due dillegence conducted:
place been empty since April, spoke to last tenant asked why he left?
Reply he was being charged too much rent compared to everyone else in complex (ie)$1300 per month
I spoke to three other tenants of the complex (one the president of the body corporate) and enquired about the owner and what type of rents I could expect to pay “if I was the tenant” or if I was the “owner” of the unit etc.They all said rents are currently $1000 per month for those who dont own their own unit.
My offer is on the grounds of:
Terms:
1: 180 day settlement commencing from date of Sales Agreement
2: Deposit of $1000 to secure the deal
3: Price of $120 000
4: Early access to clean/renovate premises prior to settlement
5: I am also to be permitted to actively seek and secure at own expense a tenant. If tenant is found and wishes to take occupancy prior to settlement date then the owner to agree for me to arrange interim tri-party sub-lease with tenant in which case I will only to be liable to owner for all outgoings of Rates, Electricity and Water bills from date of occupancy by tenant and for me to retain lease income obtained from the occupant (if any) received prior to settlement.
6: In the unlikely event that my financing for the property is not be approved, the lease agreement (if applicable) with the tenant to be written such that it can either continue under the original owner or the original owner retains the right to cancel the tenant’s lease agreement.
I base my figure on the rental ‘worse case of $900 per month.
To me the math against my ofer is not correct and possibly I am offering too high for the property? I am looking to try and POS Cashflow the deal
Thus $13120 annual out goings
Percieved income $10800
Deposit 30% $36000
Closing costs $10 000
Loan Amount I/O $84000
I/O repayments $6720 per annumRates water Strata Fees $2320 per annum
Thus leaves me with $1000 +CF per annum
My COC return is 46000/10800=23% percieved
Any ideas how I could massage this deal would be greatly welcomed.
Cheers
MilzyI might have missed something, Milzy, but I thought this thread was supposed to be helping to solve a problem for DNL.
If you have your own question why don’t you post it as your own question rather than tag it on the bottom of someone elses? You might get more help.
It seems like there are people toying with getting into commercial property without first having done their homework, and without having developed a general understanding of how commercial property works.
Commercial property is not residential property and it operates to a different set of rules to residential, as per Steve’s comments earlier.
Rules regarding residential property generally treat tenants as imbecilic morons incapable of standing on their own feet without help (not that they usually are) and landlords as merciless money grabbers that would do anything to stomp on the rights of their tenants (not that most would) whereas the rules for commercial property generaly treat both parties as equals. This is a significant but often overlooked difference.
My experience as a commercial property owner (NZ based) is that tenants usually pay for all the outgoings ie rates, insurance, R&M and the landlord pays for structural repairs, therefore it is quite easy to work out one’s return on investment. That said, if you as landlord sign a lease where you pay all costs associated with the property then it is assumed you have gone into the agreement with your eyes open. Returns, expressed as yeilds or cap rates, are measured nett of all costs.
Unless there is residential property as security, or unless an investor has a significant history banks will take into account the lease when determining the amount they will lend, and therefore a property that is untenanted will be unlikely to secure the same degree of financing as one with, say, a six year lease in place. Rights of renewal mean nothing to banks (and nor should they to investors) as they only favour the tenant – giving them the right, but not the obligation to renew the lease. In looking at a lease you want the most frequent rent reviews but the least RORs.
Location is of primary importance with a commercial property, particularly with retail or office space, and a vital consideration is the likelyhood of tenanting the property – at the same or better rates – should the current tenant vacate at the end of the lease.
Best wishes to those of you entering the exciting arena of commercial property. Like any business it is important to do your homework first.
Julian
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