Could anyone give me their opinion on this commercial deal as I have not invested in commercial before and wonder what questions I should be asking. It’s a 2 storey factory unit with good exposure, 128sqm in a block of 6 units. Approx 8 mths old and is $169,000 + gst. It is leased for 5 yrs at $250pw increasing with CPI but outgoings of $47pw are included in this figure. I read on the forum that if the tenant isn’t registered for GST, the the owner has to pay it. Can someone clarify this for me. Would greatly appreciate it. Plus do you think this is a reasonable deal?
[blink]Thanks Anita
Sounds promising to me.
In addition your depreciation should be strong too.
Remember to check the lease.
Is the property in a locations where there is demand for a new tenant if you need one?
Does tenant pay the strata fee?
Remeber to factor in the higher interest rate and the higher deposit requirement.
Cheers
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
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0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
On the GST question, if there is a five year rental guarantee in place then the agent is responsible to ensure that the tennant is GST regristered.
I would also ask for a personal guarantee as the out goings are covered in the 245.00 actually I personally think that a 128s/m property should be higher that this.
resiwealth
Thanks for you advise guys. I will be speaking to the agent tomorrow. I agree I think the rent should be higher as does the R/E agent but he said “try getting higher rents in the current market”. But because there is a long lease in place I think this may benefit me getting the loan. Plus I won’t have to worry about it. I am sure it is in a capital growth area so if I sell in say 3 yrs still with a lease in place I should have made at lease $20 – $30,000 or perhaps more. Am I on the right track? I am a new mentoree so I am grateful for your good advice.
Regards
AnitaHi Anita,
A few things I’d check before proceeding ;
1. If there is a 5 yr lease in place, the CIP should be sold as a “going concern”, and hence the asking price should be 169K only…no GST applicable.
2. The rent appears to be 7.7% gross, increasing at CPI. I’d be very wary of what your nett rent is going to be, now and in 5 yrs time. You say the outgoings are currently $ 47 p.w. I’d be asking exactly what you get for this…CR / WR / LT / Ins / Strata fees etc. For $ 2,444 p.a I don’t think you’ll get all of those paid for. Strata fees are the big unknown, but I reckon they’d come close to that figure just by themselves. Over the years, I think those outgoings will accelerate way faster than CPI, and hence I think you’ll find your nett rent will decline.
If I had to have a stab in the dark, I estimate your nett rent in Yr 1 would be about 5.0% nett, and suspect this would decrease over the years, which would be very unattractive to potential suitors in Yr 3 or 4 if your intention is to unload.
3. The dropping in nett yield will really affect your cap. gains as your land component is minimal. The value of little CIP’s with no land component are heavily tied to the nett yield they can command.
4. Who really ‘runs the show’ in the strata group. Will you be a minor or major player in the group ??
5. Given it’s only 8 months old, your depreciation should be high, but then you are paying for it in the asking price, and you’ll need to start a sinking fund. The Govt doesn’t allow you to claim depreciation for nothing. They do it ‘cos they recognise it’s costing you money in the long run to replace / repair the asset. If your intention is to sell it in Yr 3 or 4, claiming the depreciation has no great impact.
6. Finally, no I don’t think it’s a reasonable deal. I believe the nett rent should be a tad higher and should trend up, not down over the due and punctual performance of the Lease.
Good luck with your endeavours. Negotitate your sox off.
pyschic
I believe commercial property is a great way to invest,the only downside would be capital growth is not achieved the same way as residential so LOTS or research is needed!!!!!peter
Thanks for the feedback and for your support. You have given me lots of questions to ask and food for thought. I will keep you informed.
Kind Regards
Anita[mellow]1. If there is a 5 yr lease in place, the CIP should be sold as a “going concern”, and hence the asking price should be 169K only…no GST applicable.
[/quote]
Dazzling,
Can you expand on the above please?
Why is GST not applicable for a “Going Concern”?R
Harley
Hi Guys
I met the agent today and had a look thru the property and it is better than I thought. It has a roller door so you can drive in.It has an office, toilet shwr and sink all together and nicely tiled. A kitchenette plus another room sectioned off from the main factory area (which would be aprox 64sqm). Then there is a mezzanine level upstairs which has 2 rooms with windows and a 3rd room could be created by enclosing the large area at the top of the stairs. The agent tells me that it could be lived in also as the owner planned to do this but his plans changed.
He showed me all the outgoings which include rates, insurance, strata fees and total $47pw.
The tenant has public liability ins. and pays for excess water etc.
The agent has given me a copy of the lease agreement with consent by the owner. The rent is $250pw (combination of rent and o/goings) linked to the CPI every 12mths. A market value review will be made every 3 yrs. Leaase is for 5 yrs with 5 yr option.
The owner wasn’t registered for GSt but is now. I am not. Still trying to get my head around this bit as the agent has confirmed that if I buy as a “going concern” then I do not pay the GST. The tax dept says the price should be inclusive of GST and if I am registered I can claim back, if I am not, I can’t. I find the advice I’ve been getting confusing and conflicting. Can anyone help clarify this stumbling block.
Thanks in anticipation
Anita [blush2]Harley,
Dont quote me here re: the gst,
But it is my understanding, if you buy a commercial property vacant or without lease, then the purchase price will attract GST.
So if you go commercial definately better to be tennanted.
Why pay GST when you dont have too
Cheers
Anita,
Think my above will answer your question re gst too
Why did they change plans re living on premises? Chances are it may have not been approved by council or strata, just my guess.
Anita another thing I would like into also, is what kind of phase power is in the work shop?
Is the work shop specially fitted or has multi purpose?
Always good to keep the options open if tennant moves out
Cheers and good luck.
[blush2] should really proof read before I post there
Sorry about the errors there.
Feel like adding a bit more Anita.
I am about to purchase a commercial property same price tag as yours.
However returning $ 500.00 a week.
But this may vary on location, you may get better capital growth in your location than mine
Keep searching and good luck.
Auzzie (used spell checker this time ) [biggrin]
AussieLad
now thats a great deal
your about to purchase a CP for about $169,000 and your getting back $500/week, $26,000 a year…..15% return??????
Wow now thats good for these times…..
there’s a lotta people out there getting 2 -5 %
how did you do it????Hi Aussielad
Yeah, thanks for your comments. Your deal sounds much better than mine!! Is it an old building and on the outskirts of town. The one I am looking at has new development going on around it and is only 8mths old. I am looking at the capital growth as I expect the costs to break even. But I was thinking about the borrowing capacity with the bank. Am I on the right track here? I figure that in afew months I’d be able to borrow against the equity. Yes I will check with the local council about the living accomm. I did read that the zoning is about to be changed there from light industrial to business. An I will check the power phase too.Back to the drawing board
AnitaHi Everyone,
I will try & clear up the GST question for you. When buying a commercial property with a lease, the lease can be seen as carrying on a business in that you are the landlord deriving a “business” type income. There is no GST on businesses being sold as a going concern however, in order to continue the business of deriving rent you require all the tools (in this case the property) which then makes the property GST exempt.
With regards to the GST on the rent, it doesn’t matter whether your tenant is registered or not. GST will be charged by the landlord to the tenant if the landlord is registered. You as landlord will need to be registered only when you receive in excess of $50,000pa.
So in your circumstances Anita, you will be deriving $13,000pa (given you have no other commercial properties) which is below the $50,000 & are entitled to a GST exemption on purchase so save yourself the headaches of a BAS & don’t register.
Hope this helps. Oh & by the way, make sure you investigate the property properly as this return is low compared to the commercial properties I have also.
Courage is not acting without fear but acting despite your fear.
Hb & Anitia,
I have mad a boo boo with my figures there, ( I blame it on my shift work sorry
).Was looking at figures for something else.
The CP I was referring to, I was out by $ 100,000 opps.
Price is $ 269,000 @ $ 26,000 rent a year, still positive by approx $ 7,000 a year.
Had to post back here to clarify my err there.
Anita how you going with it ?
Cheers all
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