Hi! I have recently come across a commercial property out in the country that is positively geared ie asking price 40k and returning $105 per week + outgoings. Lease is for another 2 years. I am just starting out…have never purchased real estate before and would like some advice on whether i actually have to drive out (its pretty far) to inspect this property or are there other means of being able to assess the property? (if u know what i mean?. i know this sounds silly but any advice please? [rolleyesanim]
hi AnnaB,
the returns on paper sound good ~13.5%. although commercial does offer these fantastic returns, you also have to keep in mind that it is harder to rent out should a vaccancy occur after 2 years. Is it the type of property that would appeal to various retail stores (if its retail) or do many structural changes have to be made by a new tennant? does it have addequate road frontage etc. I recently had a retail commercial property that was untennanted for 4 months and that was on a busy main road corner in a city of 1.2 millon (Adelaide). so get some feel for how difficult it would be to re-let. it may be worth speaking to the current tennant in person to see how their business is going and what they think they may be doing in the future, are they happy to stay on? can do this over the phone but I always think its a good idea to visit them. I have also found it helpful to ring commercial agents in the area to get an idea of how easy it is to rent out certain properties and how long it usually takes.as part of the due diligence, it may be a good idea to have someone look at the lease because unlike residential leases, commercial leases are sometimes not regulated, the landlord and tennant could agree to any terms. mostly they are in the favour of the landlord, but have someone experienced with leases have a look at it.
I would also get a building inspection done to ensure the building itself is sound.
although I personally have never purchased a property I have never seen, I know many people that have as long as all the due diligence steps are done either by yourself or someone else.
all the best
Thanx for your advice Dr X. Like you said the biggest risk is whether or not the property will let out if the current tenant should close or move his business, and thats what Im trying to weigh I guess. Its actually a buchers shop and the only one in town so Im thinking it may be safe, although as you said its probably best to talk to the owner (which I havent been able to get a hold of!) Cheers [smiling]
Hi AnnaB
I guess the magic question is ” why is the owner selling ? “
If the owner is the butcher, it’s a worry.
If not, has the owner offered the property to the butcher ? If not, why not ?
Is the butcher willing to enter into a long lease like 5 x 5 ? If not, why not ?
Is there a supermarket in town ? Has it improved lately ? Is the butcher near retirement age ? Health ? Travel plans ? Ask him if he owns any other properties in town. Through LPI search the town or NSW & see what other real estate he owns and when he bought it. Some unscrupulous business people try to sell while they are still the tenant because the property is worth much more with a stable tenant in it. Beware – If the butcher leaves and there is no replacement tenant, the value of the property drops immediately because it is not income producing.
Do your homework, hope it’s a goodie.
cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Gee whiz, we are all a tad gun shy with advice to Anna.
2 year lease – wow – that’s 4 x 6 month leases all strung together…if you were buying a house people would be falling over themselves.
The butcher may be in the prime of his business life too – and too keen on expanding his businesses in other shops around differing towns to bother with the lowly 13% returns of comm. props.
Many business people concentrate on their businesses as a priority, and rents are simply another of their ‘cost of business’ items. The last thing they want to be is a property investor, ties up too much valuable capital that can be better employed with their skill set in their business.
We’ve just experienced this with our latest purchase, with a national hiring company as tenant passing up their “First Right of Refusal” to buy the place, as enshrined in their lease with the Lessor. The reason ?? They’d far rather spend the money on business capital than the dirt on which they conduct their business. That doesn’t mean owning the dirt isn’t a good business also – just different business focus’.
Anna – hook in and do your thorough due diligence and see what rolls out the other end.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
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