Hey I have searched the forums and am either missing the information or maybe its a little over my head.
Im looking at a Commercial deal(my first) and I think its a good deal, i just want to go into it with full knowledge.
My questions:
Outgoings…. Tenant pays most outgoings on a commercial deal seems to said alot, but can someone define what these actual outgoings are? E.G in residential property in QLD landlord pays water, council rates etc etc. Is this diffferent in Commercial?Typical LVR on a CP is still around 70%? As this property is in a regional town with a low population(less than 3000) will the banks scrutinize this more heavily and reduce my potential LVR? What is the best LVR available?
If a CP is slightly negatively geared, does it still work the same as residential as far as the ATO is concerned?
finally, a '5x5year' lease, Does this mean that the tenant has a 5 year lease with the option of extending for a further 5 years and that the rent would be locked in for that entire period?
The deal is located in regional QLD, 2 smallish shopfronts on a block with potential for development, estimated purchase price is set at around $220k and rent is a touch over $310/week. Good scope for capital gain due to growth in the area and increases in rent in the short term. Would people consider this a good deal? or are there better deals in commercial available?
The figures i am running is a 30% deposit of $66k
rental ROI at asking price is 7.33%
Older shops with very low depreciation(if any).
Stamp Duty $6,500
Am I missing anything?Thanks in advance,
Mick
patriotsoldier wrote:Hey I have searched the forums and am either missing the information or maybe its a little over my head.Im looking at a Commercial deal(my first) and I think its a good deal, i just want to go into it with full knowledge.
My questions:
Outgoings…. Tenant pays most outgoings on a commercial deal seems to said alot, but can someone define what these actual outgoings are? E.G in residential property in QLD landlord pays water, council rates etc etc. Is this diffferent in Commercial?There are a couple of different types of commercial leases which then affects what outgoings are recoverable from the tenant: Net – all outgoings (but not items of a capital nature) ie insurance, land tax, rates, water usage & service charges, management fees, maintenance etc, semi-gross – certain outgoings are recoverable ie water usage, maintenance of a/c & service charges and some defined outgoings (eg land tax over a base year) and thirdly Gross: only water usage can be recovered (however the tenant is responsible for maintenance of services eg a/c, providing annual certification for fire/electrical etc)
patriotsoldier wrote:Typical LVR on a CP is still around 70%? As this property is in a regional town with a low population(less than 3000) will the banks scrutinize this more heavily and reduce my potential LVR? What is the best LVR available?You may find that LVR is closer to 60% unless securitised against residential property.
patriotsoldier wrote:If a CP is slightly negatively geared, does it still work the same as residential as far as the ATO is concerned?Yes, but it will pay to confirm when the building was constructed (& engage a QS) as different rules have been enacted with regards to depreciation eg accelarated depreciation, increased rate of depreciation and no depreciation on structure before certain dates.
patriotsoldier wrote:finally, a '5x5year' lease, Does this mean that the tenant has a 5 year lease with the option of extending for a further 5 years and that the rent would be locked in for that entire period?5×5 means 2 five year lease terms. The rent will be adjusted according to the method stated in the lease eg: no adjustment for 3 years, annually to CPI, fixed %, combination of any of the above, market rent review, ratchet ie greater of 2 different review mechanisms. The commencement rent (of the first term) and any rent reviews during that term are certain eg $10,000 with 3% annual increases. The exercise of the option (for the second term) is at the discretion of the tenant. There may be a predetermined rent noted in the lease or there may be a fixed increase or a market (agreed) commencement rent for the new term – note that market rent can go down.
patriotsoldier wrote:The deal is located in regional QLD, 2 smallish shopfronts on a block with potential for development, estimated purchase price is set at around $220k and rent is a touch over $310/week. Good scope for capital gain due to growth in the area and increases in rent in the short term. Would people consider this a good deal? or are there better deals in commercial available?These shops will come under the Retail Leases Act Qld. So do some reading up on the RLA (Qld), there has been some recent caselaw regarding ratchet clauses, so check out the websites of some of the larger legal practices which specialise in retail lease law.
patriotsoldier wrote:The figures i am running is a 30% deposit of $66k
rental ROI at asking price is 7.33%
Older shops with very low depreciation(if any).
Stamp Duty $6,500
Am I missing anything?Thanks in advance,
Mick
Before jumping in with both feet, get a solicitor who specialises in retail property to review the lease and bring you up to speed about the ins and outs of the lease – it is a specialist area and your run of the mill family solicitor won't be of much use (not that they couldn't do it but probably see fewer leases of this nature than a specialist).
You will need to satisfy yourself about how long it will take to find a replacement tenant if they vacate, other uses (if there are restrictions on use).
As Scott says – look at the lease. Don't generalise on commercial leases particularly of small shops beacause you have any of the following:
a. tenant pays all outgoings
b. landlord pays all outgoings
c. tenant pays some outgoings
d. tenant pays a %age of the increase in outgoings from a base dateYour capital growth depends on your ability to increase rents and to relet if a shop falls vacant.
I wouldn't be interested at 7.33%
Bear in mind your bank is likely tro want a P & I loan and the term will be short eg 10 years. So this will put pressure on your cashflow
Thanks so much for the replies!
More than a little helpful. I just got off the phone to the bank and I can confirm that it is a 60% LVR and the best(well cheapest) way would be to secure it against another property for achieve about a 1.6% discount in rates.Might pass this one in, but thanks again, ill certainly be referring to this thread again in the future!
Cheers,
Mick
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