Commercial props - our stories [Archive] - Somersoft Property Investment Forums

Dazzling

07-10-2005, 08:11 PM

Like most people, we were having trouble finding +CF deals scurrying and fossiking (sp ??) around the residential stock. We were also pretty fed up with the constant whinging at the drop of a hat of our tenants over very minor details that took both time and money to rectify...to their satisfaction.

The penny eventually dropped that perhaps we were fossiking in the wrong chestnut pile, and our efforts may have be rewarded more by trying something new. We remembered receiving a "tip" from my wife's uncle, who was heavily into CIP's. His only brief comment was 'Once you've finished mucking around with houses - have a look at commercial'.

We didn't really think much of it at the time and dismissed it as 'something somebody else does', we'll stick to what we know and feel comfortable with.

It took about 18 months of inaction before a combination of whinging tenants / massive negative cashflows from the RIP's and that irking little voice of my wife's uncle in my ear that finally pushed us over the edge and out of our 'comfort zone' - what a scary place that is - but so exhilirating.

We furiously starting researching deals that were +CF, but really we didn't know where to start. These were some of the things we found ;

The financing was completely different
It was more expensive
The bank wouldn't lend as much against it
The agents were different
Everything that was a negative feature in RIP's was suddenly a sought after feature that you paid more for
Different terminology (NLA, nett rent, Lessor, 90 day bank bills etc)

We were literally floundering as most of our techniques for RIP acquisitions didn't work.

Despite all of the 'Oh my gawd's', and 'I don't feel comfortable' moments, we forged ahead regardless, expanding our comfort zone and narrowing our search down.

We eventually decided to have a crack at a place that unbeknowst to us, had been up for auction about 4 months previously and been passed in. We innocently rocked up and found the agent talking a different language. We were both trying to seem non-chalant as if this was perfectly normal, but he instantly cottoned on that we were newbies at this (the three little girls hovering around our knees sort of gave it away too).

The biggest thing that made us uncomfortable was that the vendor was one of Perth's biggest developers...a real sharp cookie who always made buku money off his deals...we were on the other end so we knew we were the patsies being bled. It also had bugger all land component, which we knew was important for future CG, but we just wanted to forge ahead and get the first deal under the belt and cop all the lessons in one hit.

On the positive side, we were encouraged with the 10 year lease, which read like a dream. Coming from a residential background, we couldn't believe tenants would actually agree to all of the onerous conditions placed upon them...and they had to fork out for absolutely everything. The developer had distilled down and cherry picked the best of all the leases he had ever come across in 30 years of investing into this one document. We saw a term that has remained with us ever since "At the Lessee's sole cost and responsibility to the Lessor's satisfaction." What a fantastic term and what a breathe of fresh air compared with RIP's.

We decided to go ahead and the deal looked something like this ;

Capital

1. Purchase Price $ 1.350 MM
2. Acquistion Costs $ 0.08 MM (95% of this was stamp duty on title)
3. Loan Amount $ 1.430 MM
4. Bank Valuation $ 1.350 MM
5. Land value - bugger all

Income

1. Nett rent of $ 120 K p.a. & GST (escalating $ 5 K p.a.)
2. Outgoings of $ 15 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 135 K p.a.

We were nearly duped on the deposit for this. The vendor's agent wanted $ 30K. Upon offering $ 5K, he said it would have to be $ 30K, such that if we had any problems - the vendor could hire a top flight lawyer and sue us with our money...that didn't go down too well...and we had to muster all our experience from previous deals to fend that one off. In the end he backed off with his ridiculous insistence.

There was some issues at settlement that were resolved eventually. They mainly centred around the tenant not getting on with the vendor. Once we took over, all problems seemed to disappear...I still find it amazing how a change of personality and "feelings" massively affects straight forward business transactions. I guess we are all humans who enjoy being treated with dignity.

It doesn't set the world on fire by any stretch, but we cut our teeth on it, and it provided much learning in terms of setting us down a new path. We vowed never to go back to RIP's after the purchase, and that philosophy has served us well.

Cheers,

Dazzling

"No point having a cake if you can't eat it."

Dazzling

07-10-2005, 08:13 PM

and....

Thought I’d share with everyone some things our group went through purchasing our latest acquisition…on a more detailed financial level. It was the ‘top of the heap’ that we eventually pursued after sifting through 17 props that were on our research hitlist. The 17 were culled from an original list of over 400. Here we go ;

Capital

1. Purchase Price $ 2.270 MM
2. Acquistion Costs $ 0.12 MM (95% of this was stamp duty on title)
3. Loan Amount $ 2.390 MM
4. Bank Valuation $ 2.410 MM (that was a nice surprise – 20K equity on day one)
5. Land value $ 2.100 MM (this was the biggest attraction for us – 92.5% land)

Income

1. Nett rent of $ 147 K p.a. & GST (going up to $ 158 K p.a. in Dec)
2. Outgoings of $ 35 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 182 K p.a. ($ 3,500 p.w. now, going to $ 3,700 p.w.)

We initially had trouble convincing our Lender that we were good for the risk. Like many people on this forum, the Lender was only personally experienced with average residential properties and couldn’t see the potential of the property.

I decided to break the property down into something that was within his frame of reference. Below is pretty much what I wrote to him, after which the loan was approved by the supposedly more intelligent people over in Sydney who made the final decision.

“Consider the property as a street with 10 houses in it. Each house is worth $ 227 K, sitting on a block of land worth $ 210 K. The house itself is only worth $ 17 K, yet it is currently rented at $ 350 p.w., with a rent rise scheduled for each house to $ 370 p.w. in December.”

The vendor was a 65 yr old business owner who had owned the property since 1964. He paid $ 16 K for it back in 1964. In comparison, I have no idea what a house was worth back then.

The whole property has averaged about 12.9% p.a. since 1964. On receipt of the sale proceeds, the vendor said this was his “fishing money” – I took that to mean his retirement fund.

We are hoping to hold the place for a similar amount of time, the numbers get a tad scary when you project them out...to about $ 349 MM. Obviously inflation eats into the buying power of this, but it's still substantial. Who knows what will happen over that time frame.

The vendors real estate agent was 67 years old, and had actually sold the property to him back in 1964 !!! Talk about long business arrangements. Both men are reasonably comfortable - if you know what I mean.

The interesting bit for me was that both these gentlemen cannot drive a computer and hence the property was not marketed ‘online’. I found this a bit unusual, but realised not everyone is part of the computer age. These two gents obviously have no calling for it.

Instead, it was a little 2 line non-descript ad in the local rag. I noticed it one day and summarily dismissed it, but then chased it harder about a month later. I was pretty luke warm on the whole deal as I didn’t have all the details at the time, and frankly they were in no rush to give them to me – different time zone I reckon...I now know what it was like to do business in the 60's !!

Anyway, another couple of months passed by and I chased it again, fully realising the potential of the place. The deal was done over the phone and fax between the vendor and myself over the course of 2 hours….but what a harrowing 2 hours.

Negotiating with these wily ol' men is an experience everyone should go through for their own education - definitely not something that should be palmed off to a buyers agent - too valuable to pass up.

One of the nice side benefits of the deal was the vendor and I became close enough after the deal was done, that I felt comfortable enough to approach and ask him if he’d consider being my mentor for the next stage of growth of our group. I think he was a bit chuffed being asked - I'm about 10 years younger than his son. Being an ex-president of the Masters Builders Assoc., I have a lot to learn from him.

Anyway, that’s the story for number 11. Hopefully someone is able to glean something from it. I'd love to hear other people's detailed stories of their property acquistions.

Roll on Number 12….after a little breather I think….might go get me some cruise ship pamphlets in the meantime.

Postscript :

Just completed signing up new leases with two big national tenants where we managed to lift the nett rent to $ 174 K p.a. & GST & all outgoings for the first year. A 4x2 lease for both of them on a 4% escalation clause. The block of dirt with a few rusty ol' sheds is now +CF in yr 1 and going to get stronger cashflows as the yrs tick by. We've got to the stage where it is now set and forget.....now for next door !!!!

Cheers,

Dazzling

"No point having a cake if you can't eat it."

kissfan

08-10-2005, 09:03 AM

Hi Dazzling.

Great post, very informative.

You mention "your group". Just wondering how many in the group and is it an even split among all members, and what happens if someone wants out.

Regards
Marty

Patosan

08-10-2005, 12:14 PM

G'day Dazzling,

Magnificent read !
Very imformative and has created a thirst to learn more ... thank you.
Any further info / experiences would be appreciated by all me thinks.

Patosan

08-10-2005, 01:12 PM

G'day Dazzling,

Could you list out your basic criteria when searching for a commercial purchase ?

I've heard mention that commercial should return a min of 20% and that this area of property investment carries higher returns but also higher risk. What guiding words do you have for those of us that are yet to venture there ?

We initially had trouble convincing our Lender that we were good for the risk. Like many people on this forum, the Lender was only personally experienced with average residential properties and couldn’t see the potential of the propertyIn the 2nd post, latest acquistion, you implied the lender hadn't initially shown expertise in dealing with commercial. Do you use a mix of commercial and residential lenders or was this a one off ?

I too am curious about your refering to your "group" when in the 1st purchase you had the kids with you and I thought you were buying alone.

Dazzling

08-10-2005, 04:15 PM

You mention "your group". Just wondering how many in the group and is it an even split among all members, and what happens if someone wants out.

Sorry, it gets a bit confusing I know.

We started out just buying in our personal names, but very quickly switched to all of this nonsense with trusts and companies as trustees, etc etc....dancing to the tune of all the lawyers and accountants...such that we can be protected from all the lawyers and accountants....if that makes sense.

The "group" referred to is just all of the poxy $ 2 holding companies and dodgy bros. trusts that have grown like mushrooms. I keep being advised by all and sundry that I must dis-associate myself from them and keep thinking of them as a "group" and not attached to the wife and I....it doesn't work.

There's only 2 in our group, the wife and I. Given that, obviously it's not an even split...if you know what I mean. ;)

What happens if someone wants out....oh dear this is worse case nightmare stuff....ummm, I guess I get thrown out of the house and start sleeping on the streets. :eek:

Cheers,

Dazzling "No point having a cake if you can't eat it."

asdf

08-10-2005, 06:57 PM

Hi Dazzling,

Thanks for the great posts. Truly inspirational stuff. How did you manage to get a loan at the same valuation? How do you get away with not throwing in at least 30% of your own equity into the deal? Do the banks lend at gross realisation or have you x-collaterised? I found our one and only CP nearly killed all our equity. I know what you mean though by set and forget. Great stuff. Keep up the great stories. How about No. 2 to 10. Are they all IIP and CPs too?

Keen to learn more.

ASDF

Stewie

11-10-2005, 04:20 PM

Dazzling, great stuff! Further to ASDF's post, can you provide more info on the 'trusts and companies' bit please. I presume you have created a limited company with you and your wife as the shareholders? If so, what are the costs of doing this and what are the benefits to you - is it purely asset protection and what are the tax implications, eg company tax versus personal income tax etc etc?

Keep supplying the info!!

oc1

10-07-2006, 01:23 AM

Daz

Whatever happened to this thread???

Cheers

Oscar :)

handyandy

10-07-2006, 09:14 AM

And what were the answers to asdf questions?

JenD

10-07-2006, 11:13 AM

What a fantastic thread! Please tell us more Dazzling, wonderful stuff! Thanks Oc1 for bumping this one back up!

Cheers,
Jen

landlubber

12-07-2006, 08:36 PM

I, for one, would like to LOTS hear more from Dazz.

Further, since we have "coffee shops" etc ...why not a separate forum section for commercial / industrial IPs. If you don't like it , gees, don't go there !!!

I've got a "belly full" of residential IPs and now we are considering our first move to commercial/industrial. Reading books , this seems to be a logical progression for those of us serious about "property" as our future.

Somebody ...can we have a separate forum section ??

LL

grossreal

12-07-2006, 09:18 PM

hi all
I am interested in what has got up dazzlings nose have read his posts for some time I am wondering what was posted as I don't see anything in the post so far that I can read here.
"Given that my opinion and threads are causing so much angst to your forum community" maybe I have missed the post can you dazzling or someone show me where it is.
so I can have a read.

rexilla99

13-07-2006, 01:49 AM

I like his posts, it taught me alot and we need more members like Dazzling to tell there stories. But I think I have missed something as well.

landlubber

13-07-2006, 08:22 AM

Yeah ..me too.

Come clean here ...who or what got up Dazz's nostrils ?

Dazz...talk to us ...I see we can't send you an email ? Let's learn !!

LL

Bricks & Mortar

13-07-2006, 02:52 PM

I'm for re-establishing the full post as well,

We see people talk shop about shares, IP's, General info, etc. etc.

Perhaps Commercial investing isn't the par for the forum, :eek:
but it does hold a place as an investment discussion worthy of reading and absorbing.
We can learn from others who invest in commercial and perhaps use some of the principles or disregard them.

It's 'one persons' view and will be "read" as such.

Please restore the post or redirect those of us interested to where we can read about such matters.

Thanks for the post thus far Dazzling, hope all your news will soon "front before our eyes"

grossreal

13-07-2006, 03:42 PM

hi all
just to clarify I do have both resi and comm property so I am not advocating either but would like to hear, what was the problem.
different people have different investments and thats good but for dazzling to serve off a volly as I have read something has gone to the cutting room floor and just wondering what that something was.
I do remember a certain member took it upon them selves to cut one of my posts for a reason unto them selves and cut a post and I was told that I should repost as no record of the post is kept.
as it turned out the person did require new glasses as they had read incorrectly and may have had there own axe to grind.
having said that I would like to hear from the proverbial horses mouth what was in this post and was there similar sharp scissor cutting involved.
oh and for those who do remember the hedge fund post no I didn't in the end get involved in it and it was over subscribed.
and thats snipper I haven't heard of since.

Ruby

13-07-2006, 06:35 PM

:mad: Not Just Houses

I'm for re-establishing the full post as well,

We see people talk shop about shares, IP's, General info, etc. etc.

Perhaps Commercial investing isn't the par for the forum,
but it does hold a place as an investment discussion worthy of reading and absorbing.
We can learn from others who invest in commercial and perhaps use some of the principles or disregard them.

It's 'one persons' view and will be "read" as such.

Please restore the post or redirect those of us interested to where we can read about such matters.

Thanks for the post thus far Dazzling, hope all your news will soon "front before our eyes"

I’m not sure why such an old thread is dredging up so many emotions. If any posts were removed or edited it would have been because of personal attacks etc. Certainly not because it was a discussion about commercial property.

We welcome any discussions on property investment……commercial or residential. In fact, we welcome discussion about anything (within reason of course). :)

Dazzling is an important member of this forum and the issues of last year are no doubt long forgotten. I know I can’t remember what happened.

If you are wanting to keep track of what Daz has been up to and what he’s been saying of late, his posts are easily searchable.

http://www.somersoft.com/forums/member.php?u=5276

Just click on Find all posts by Dazzling.

From what I remember he’s working OS at the moment, and I’m sure he’ll contribute to this thread when he gets a chance.

Ruby :)

Patosan

14-07-2006, 01:43 AM

I remember some of the threads where Dazz got on the wrong side of a few members.
Though I must say since then he has been a wonderful contributor here and I also vote to forget last year.

Bricks & Mortar

14-07-2006, 02:19 PM

thanks Ruby for the clarification!

I'll search as suggested and might find more info regarding Commercial Properties

saucy gibbon

14-07-2006, 02:47 PM

regarding the content of this discussion I find it odd that nowhere that I can find does it mention the term "cap rate".

if you are considering commercial property do not assume that its just like resi only bigger.

Trogdor

17-07-2006, 11:50 PM

Quick question regarding obtaining financing on commercial properties...

What sort of LVRs are available to private investors, and at what interest rates?

Is LMI available or is this concept/product exclusive to residential properties?

How is the GST registration handled?

Do you purchase commercial properties in your own name, or via a company? I would assume a company would be bad (as CGT discount would be lost) - so do you need to personally register for GST???

JoannaK

18-07-2006, 09:25 AM

Hi Trogdor,

generally you'll get around a 70% lvr on commercial, and interest rates will be slightly higher than a resi loan, and of a lower term if you're borrowing directly against the commercial property in question. Of course, you can use your resi properties as security and possibly get resi rates and resi terms...

GST is just like any other purchase. You will recieve a tax invoice on settlement and you will lodge your BAS at the end of the month and get a refund (less any GST you've collected along the way).

18-07-2006, 09:31 AM

Income

1. Nett rent of $ 120 K p.a. & GST (escalating $ 5 K p.a.)
2. Outgoings of $ 15 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 135 K p.a.

Am I reading this correctly? After all expenses and tax you have $120,000 in the pocket each year?

So this is completely cash flow positive???

RJ

JoannaK

18-07-2006, 09:35 AM

RJ, generally commercial is cash flow positive, and the tenants pay the outgoings...that's an up side, but there are downsides as well..

handyandy

18-07-2006, 10:35 AM

Am I reading this correctly? After all expenses and tax you have $120,000 in the pocket each year?

So this is completely cash flow positive???

RJ

RJ

Dazz mentions gross, out of that $120k there is still service costs to be met.

On my calculations at a 70% lend that is a cost of $70k pa. This does not take into account the other 30% of the investment cost which may also be borrowed through other means. If 100% financed then the interest cost are just over $100k. Either case still leaving a positive cash flow of at least $20k+.

Cheers

Trogdor

18-07-2006, 11:27 AM

Thanks!!! Awesome guys... A few more questions...

I assume stamp duty is the same (on the non-GST value of the property?)

Land tax is also the same?

Would the tenant pay land tax as part of their outgoings or is this usually the responsibility of the owner?

Dazzling

18-07-2006, 11:30 AM

Am I reading this correctly? After all expenses and tax you have $120,000 in the pocket each year?

So this is completely cash flow positive???

RJ

Hello all,

Sorry for the lack of response. Been wrapping things up overseas....had the leaving party and now firmly entrenched back here in the Land of Oz.

Don't want to drag up stuff from the past...re what my dummy spit was about. For those who remember, it was a mere tiff. Things seem to have calmed down. A nice Mod might even consider deleting it, and the subsequent post quoting it, to get the thread back on an even learning keel.

To answer your questions, all of our non-ressy stuff is +CF, no matter what your definition. Our definition is borrow 106% of the funds and the nett rent has to be more than all costs - all up, everything included.

As posted re: the first prop we bought, yes, it's +CF. Bought it for 1.35 and borrowed 1.43. We have never put an ounce of attention into this property, either time or cost wise.

Interest cost per annum is 104K p.a. As of three weeks ago, the nett rent after all property costs has escalated to 130K p.a., so it's putting 26K p.a. or $ 500 per week into our pocket.

It goes a small part of the way to paying for our woefully negative cashflow residential holdings.

saucy gibbon

18-07-2006, 11:35 AM

In some states Land Tax is recoverable, in other states it is not.

If you are considering commercial proerty you cannot simply look at the passing yield and make a decision. You must look at a time frame of at least 5 years, I'd be looking at 10 years and do a cashflow analysis. I wouldn't worry too much about IRR calcs as they only mean something of you have a basis to compare to, but you must know what your cashflow will look like, when the leases expire and what sort of incentive is required to re-lease. Could you live with the building if you had to give away 6 months rent free for 50% of it ?

And as I stated before, know what the cap rates are. For instance, a commercial building in Sydney just sold at an initial yield of just above 5%, and a cap rate of 5.75%.

Trogdor

18-07-2006, 02:22 PM

I have to say this is the best thread on here for a long time.. Mostly cause I am learning so much...

So, for the sake of example, say there is a commercial property for sale for $250,000, GST exclusive.

I have done a web search which says that some lenders will lend up to 75% for commercial property (by the way - is this right or wrong??)

So does this mean the upfront costs will be:

0.25 x 250,000 = $62,500
Stamp Duty = $10,660 (I assume this is the same as for a 250K residential property).
GST??? - Would one need to also pay 1/11 of the 250K upfront for GST?? I am not sure of how this works?? Does this mean extra $22,727???

Total = $95,887 ???

Is this correct? This seems very, very high capital outlay to acquire a 250K property...

Have I missed something, or are there any tips or tricks I am not aware of?

Thanks a million :) :) :)

saucy gibbon

18-07-2006, 03:18 PM

I don't think gst applies because the building is a going concern.

Trogdor

18-07-2006, 03:33 PM

I don't think gst applies because the building is a going concern.

I thought that it was only GST exempt if the purchaser of the building was also the purchaser of the business (which is a going concern) as well..

I could very well be completely wrong!!

Dazzling

18-07-2006, 04:05 PM

It's only GST exempt if the tenant in the building is conducting a business that is staying. The "going concern" bit is the dirt and the box that the tenant is using at the time. No GST payable.

By buying the prop with a tenant in it, you are not buying the business of the tenant.

If you buy the place with the seller moving his business out, and giving you vacant possession, then GST is payable and claimable back later on.

Our strategy now involves buying dodgy buildings with dodgy tenants, no GST payable...kicking them out....this is not as easy as it sounds, tarting them up and installing doozy tenants.

saucy gibbon

18-07-2006, 04:22 PM

I guess you are flicking them if their lease is up and they do not excercise an option, or are you flicking them through non payment of rent ?

At this stage of the market are you tarting up the building, getting a good couple of tenants and then flicking the building ?

Depending upon the area there's lots of money to be made. And as a great man once said (kinda) "when the tide goes out we will see who has been swimming without any pants".

Trogdor

18-07-2006, 04:29 PM

Dazzling

18-07-2006, 04:52 PM

So if you buy a building with a tenant who remains in place, does this mean that no GST is payable?

Correct...tick option (b) on the GST standard exemption form.

Dazzling

18-07-2006, 05:03 PM

Saucy,

"Flicking" usually occurs when there is absolutely no paperwork in place at all. After sitting down and having a chat with them, usually they refuse to enter into a solid, written up Lease for any number of reasons, the most common one being they are illiterate and they cannot read what the agreement says.

Other reasons may be they have a residential mindset when it comes to renting, and do not wish to legally bound by all of the onerous conditions placed upon them by the Lease. Others take the view that a carton of beer slung here and there, and some fix up jobs for my vehicle etc substitute for rental payments.

I've had fibreglass guys promise to build me a boat instead of paying rent, marble cutters install a kitchen for free, furniture wholesalers try and build me a lounge and dining suite, all in the attempt of not signing a Lease and not paying rent and outgoings. All have failed and all have been kicked out.

In fact, of the 10 industrial tenants we have inherited, we've only kept 2....and they are an absolute joy. Look after the place as if it was their own, improve it at their will, pay for absolutely everything and have established businesses that are thriving and expect to be there for a very long time.

In terms of tarting up the places, that's costly and time consuming, just as renovating residential places is. We now try and leave all the reno's to the tenants - simply hand them the raw dump and let them at it. They pay for it all and tart it up just as they wish for their business purposes.....less whinging on their part that way.

Anyway, good luck anyone considering venturing into these waters. Come in, the water's fine !!!! :)

saucy gibbon

18-07-2006, 05:23 PM

Ok, most of my comments relate to Office buildings, I haven't dealt with industrial for some time.

As for doing my own, it doesn't fit my investment profile at the moment. I just don't have the time to make it work. Perhaps in 10 yrs time when I eventually pull the pin then this can be my work.

lizzie

18-07-2006, 10:13 PM

great to hear from you daz - sorry if i've offended you in my naive past

XBenX

19-07-2006, 10:14 AM

IMHO The biggest factor you need to take into consideration with commercial properties is vacancy.

Ensure your reserves (cash or otherwise) can pay rent for a considerable period of vacancy.

Depending on the type of property, location, economic climate average vacancy rates of 10%+ are not unheard of.

grossreal

19-07-2006, 03:12 PM

Trogdor

19-07-2006, 04:43 PM

hi dazzling
good to see you are back on terra firma.
comm has got its advantages and if you get very good tennants then the vacancy rate can be lower then resi.
( mine has been about three time less vacancy, why because its not been vacant on a 5 x 5 plus they want to sign another 5 x 5) not sure how you got over the 70% that normal comm lending max's out at there are very few that will lend over 70% of purchase,
you can get higher as you refinance along the way.
my tennant pays for every thing and in the lease contract they have to total refurb upon vacation inside and out, hence they want another 5 x 5 the refurb cost is a very bitter pill to swollow but i'm happy.
in the time Ive had it its payed the loan( + plus)( they equity is over the money in).
comm does cost more money down and you don't get as high a lend but it is a good form of land banking and cash flow earner.
there are some very good small comm to look at.
If starting out look for the 250 to 300k factory units say in the 200sq mtr size they rent well and are easy to find tennants.
My .002

Sorry for the direct question - do you own any factory units in the 250 - 300k range?

What sort of yeild should one expect?
Any depreciation (what levels)?
How much capital growth have you seen? (across all commercial sectors in your portfolio)?
How easy is any capital growth recognised by the banks for the purposes of re-valuation and extra borrowings (for next place)?

Also - I have done some searches for commercial property finance - 7.99% seems to be the rate the websites say. Is this too high, or the norm?

Also - would you mind if I PMed you in the future to ask more questions based on your experiences, grossreal?

Thanks mate!

grossreal

19-07-2006, 05:05 PM

Bricks & Mortar

19-07-2006, 06:41 PM

hi Trogdor
no I don't but I have a couple in my groups who do
and will give the returns.
pm me if you want or email me @ ultraclean@hotmail.com I will try to answer your question.
I will post here the answers to your question in a couple of days if thats ok just running a soup.

Grossneal,

Posting the answers on the site, would be great,
It will be beneficial to all!
Trogdor, myself and I'm sure a lot more formites are interested in this topic.
We have several IP's but commercial have always been put to the background with the thought of "vacancy" signs or "to let signs" as I drive to work. Sure these signs are no longer in the same postions, but I have seen a factory vacancy sign up for almost a year. This probably isn't the norm, but unfortunately has sort of put me of investigating any further.

A mixture might be beneficial to a portfolio. The research certainly is beneficial even if we dont act on it.

Perhaps you and colleges with similar experience could elaborate on the pitfalls as well as the benefits if you get some spare time.

Welcome back Dazz
I hope the rest of the tread can be restored, without the unwanted bits, so I can begin to learn some more about commercials

Trogdor

19-07-2006, 06:57 PM

grossreal

19-07-2006, 07:23 PM

hi all
no problems will give an actual unit price and returns just give me a day or so.
I can post 263 wardel rd dulwich hill but most will already know its figures my others are all very low start points as they are out of developments so the number are a bit squif as the don't have a high start point.
a quick answer but will give true values later
What sort of yeild should one expect between 8 to 11%?
Any depreciation (what levels) if new same as resi but older one the tennant does the refurb to there specs?
How much capital growth have you seen? (across all commercial sectors in your portfolio) mine does have a high growth because of the squif but normally comm price is governed by the rental return?
How easy is any capital growth recognised by the banks for the purposes of re-valuation and extra borrowings (for next place) usually 70% I revalue each 3 years as I have a built in 6% or cpi which ever is higher?
hope this helps ask any question you wish here to help

19-07-2006, 08:05 PM

so it's putting 26K p.a. or $ 500 per week into our pocket.

Oh my lord! :eek: Goodbye residential hello commercial - Joanna, I hope youre ready for a lot of commercial based questions tomorrow.

As I say ....

PUT ME IN COACH!

RJ

19-07-2006, 08:08 PM

Sorry, got abit excited there.

Dazz, any chance you could post up a photo of roughly what the property looks like? Is it a large shed or a shopfront or what?

RJ

Trogdor

19-07-2006, 09:09 PM

You are an excitable fellow, Ramone!

19-07-2006, 09:15 PM

You are an excitable fellow, Ramone!

I am arent I? :p

Johnny "Cashflow Positive" Ramone

FrankGrimes

19-07-2006, 09:42 PM

Sounds great to me if everybody else is happy!!

I bookmarked this (now sold) as the type of thing which I would be interested in researching further (price range, yield, melbourne location):

http://www.commercialrealestate.com.au/107239

Its still very very early days in learning about this sort of thing....

Id be interested in hearing comments when you all get a chance.

Cheers! :)

I don't know alot about commercial but the yield is fairly low.. What would be the advantages in investing in a small piece of commercial real estate vs LPT's or a LPT fund? I read in API that the good returns are only available in the 800k + range (especially in Sydney).

- Both have 70% gearing
- Similar interest rates, around 8-9%
- Both return 7-10% in yield, with some capital gains
- LPT is far more flexible, you can sell units as you please
- LPT has alot less tenant risk (spread between tenants)
- Commercial property has value add potential, but far more risks involved
- You can negotiate the price on a property, not a LPT/Fund

What am I missing? I can't see the advantage in investing in something like this vs a fund/direct LPT? It just seems like alot of hassle for no gain, unless you can afford the expensive range. But you are still at the mercy of the tenant.

Look forward to your thoughts.

Grimey

Trogdor

19-07-2006, 09:53 PM

I don't know alot about commercial but the yield is fairly low.. What would be the advantages in investing in a small piece of commercial real estate vs LPT's or a LPT fund? I read in API that the good returns are only available in the 800k + range (especially in Sydney).

- Both have 70% gearing
- Similar interest rates, around 8-9%
- Both return 7-10% in yield, with some capital gains
- LPT is far more flexible, you can sell units as you please
- LPT has alot less tenant risk (spread between tenants)
- Commercial property has value add potential, but far more risks involved
- You can negotiate the price on a property, not a LPT/Fund

What am I missing? I can't see the advantage in investing in something like this vs a fund/direct LPT? It just seems like alot of hassle for no gain, unless you can afford the expensive range. But you are still at the mercy of the tenant.

Look forward to your thoughts.

Grimey

Grimey, I have been thinking about this a lot recently.

I have come to the conclusion that you are not missing much. Except for 2 things (imho).

Firstly, and most importantly, the risk of margin calls on LPTs with 70% margin (imagine having $1M with $700K margin loan - you just wouldnt put yourself in this precarious position).

Secondly (and probably not that relavant for "youngsters"/small fry like us), is the ability to add value with direct commercial property. This is probably a theoretical point only at this stage!!

As I mentioned before I have about 72K or something in the UBS wholesale property fund which is a great performing fund, and have been trying to compare my learnings of direct commerical property with this...!! It has 70% LVR, 0.8% MER, which allows the UBS folks to select what they percieve to be the best LPTs, and a great performance history, etc

What do you think Grimey?

By the way, how is your move preparations going? I only have 3.5 more weeks left in australia! Exciting....

sue78

19-07-2006, 10:21 PM

Would it be a PI loan or IO loan?

I saw a property for $425k returning $42k pa. If I sold my IPs and used the profit to buy that cash, I could retire on $42k a year :)

geoffw

19-07-2006, 10:29 PM

PUT ME IN COACH!
RJBefore you get too excited...

A few understandings I have about commercial property (which may of may not be right- but at least I'll start the discussion rolling)

.The higher the yield, the higher the risk (you will get less rent for the same shop for Joe's local hardware than you will for Bunnings)
.The higher risk may well equate to higher vacancy. So a yield of 9% may, in the long term, earn you 5%.
.Vacancies CAN be much longer term. If you don't have the right property, and the right tenant, you could lose a lot
.Capital growth will depend on the tenants and the rent. If you can raise the standard of the tenant, you could increase the capital growth. CG is NOT independent of rent.

I would suggest that somebody who does not have a lot of experience in residential should not get into commercial until they get at least some experience of resi. And even then, perhaps not.

saucy gibbon

20-07-2006, 10:12 AM

Geoff has hit it pretty much on the head.

Commercial, industrial and retail property are not valued like residential property. The cap rate reflects the risk, the lower the cap rate the lower the risk. To value a commercial/industrial/retail property you need to take the net operating income for the property and divide it by the cap rate. The only way to assess the cap rate is know what recent sales for similar properties have been and that will tell you what the market is willing to pay.

And if you are talking about industrial property then use the term industrial. Industrial properties have different cap rates, different types of tenants, different outgoings and different lease terms than commercial.

While I am involved in commercial and retail properties on a professional level I do not invest in these properties on a personal level. They do not suit my investment profile at this point in time. I commend those that have made money from these investments, however I fully agree with Geoff's comments that these types of properties are not for everyone. As I stated before, they are NOT just like resi only bigger or more expensive.

APerry

20-07-2006, 10:37 AM

Hi All,

I have a fair bit of experience working with commercial investors and developers so i thought I would put my two bobs worth in. While it is true that the there is sometimes greater vacancy risk in commercial property, this is not always the case. The riskiest properties are the smaller ones, with small tennants and short leases. If you purchase a prime property with a strong tennant and long lease there is often very little vacancy risk. Same if you purchase the right kind of property in the right area. The skills involved are not that different from those required to be a successful residential investor, you just need a bit more money.

Another factor which is significant for larger investors is that it is easier to protect yourself, in terms of liability to lenders and servicability is easier to meet if you are rent relient, if you invest in commercial. If there is a quality tennant and reasonable length lease most commercial lenders will basically asset lend, with no directors guarrentees required (non recourse finance) generally they will only do this up to 65% LVR, but it is possible to go higher. This allows commercial investors to quarrentine each property in terms of liability and also means that they do not have to disclose this debt if applying for additional loans.

If you also take into account that management is easier and yields far higher, it makes a compelling case to invest in commercial over residential property, if you have the resourses to invest in quality commercial property.

Regards
Alistair

grossreal

20-07-2006, 10:53 AM

hi all
I agree that comm is not for everyone and does have a risk factor that is not the same as resi.
but to find good comm property you look for property that is what you class as a high grade just like resi and you use the same mind set tools that you do for resi.
so value adding,
can you add another storey.
is there requirement in the area for this type of leasing.
are you going to get a tennant on a 5 x 5 with cpi or 5% increase.
these are all things that your must already have in your mindset of investing.
as for the smaller investments more risky well I must disagree but all to there own.
direct investing against LPT it depends on your risk profil and if you are looking at value adding and the area that you are investing in.
it all comes down to.
1. your skill at picking property( and that comm or resi)
2. your research of that area
3. your time and have you got that time to look into this area of investing.
4. and your skill at negotiating as you are not only going to negotiate on price but also on rental or lease terms.
and geoff is right it is not a first timers investment choice from my view but should be look at for a more seasoned investor.
my .002

saucy gibbon

20-07-2006, 11:09 AM

FrankGrimes

20-07-2006, 11:13 AM

Firstly, and most importantly, the risk of margin calls on LPTs with 70% margin (imagine having $1M with $700K margin loan - you just wouldnt put yourself in this precarious position).

Stick to 65% and make sure you have a LOC available if a margin call arises. BT still allow 10% buffer, so really the loan is 80%. Margin loans are a lot more flexible in other ways, no bank approvals, can capitalise interest..

Secondly (and probably not that relavant for "youngsters"/small fry like us), is the ability to add value with direct commercial property. This is probably a theoretical point only at this stage!!

Yep this the only advantage I can see. But this also involves a lot of effort! I try to keep things simple.

As I mentioned before I have about 72K or something in the UBS wholesale property fund which is a great performing fund, and have been trying to compare my learnings of direct commerical property with this...!! It has 70% LVR, 0.8% MER, which allows the UBS folks to select what they percieve to be the best LPTs, and a great performance history, etc

I’m with Vanguard, but damn wish I wasn’t! I’ve just been looking at the UBS stats and that is some impressive performance. Am I reading it correctly 18% over 5 years, with 0.8% MER AND no buy/sell spread? That’s incredible (I really hate buy/sell spreads). Bugger direct commercial with returns like that in my opinion.

I think commercial has a lot of potential in the higher price ranges, such as 1M + (as Dazzling has proved) but I’d still have to be convinced I’d be better off investing directly in commercial when I can rely on a professional to do it.

By the way, how is your move preparations going? I only have 3.5 more weeks left in australia! Exciting....

Getting there, I moved home with my parents for a while to get plenty of money together. The other ½ is getting her HPC (health professionals council?) complete and she will start looking for work after that.

Dazzling

20-07-2006, 02:09 PM

A Commercial properties value is completely dependant upon cap rate which reflects the passing yield.

We haven't found that to be the case at all. It's often quoted as common knowledge, and I believed it as well before venturing forth.

The elderly Greek chap who owns a bucketful of vacant land next door to our factory has seen the same capital appreciation on his dirt as us, despite us being able to lift the nett rent and improve the tenant quality and length of Lease. The value of the underlying dirt is independent of what is sitting on it - if anything. It also, if bought wisely, is the major value component of the prop, just as it is with wisely purchased ressy props.

Con's gross yield is 0%, his nett yield is negative after outgoings are factored in, he doesn't have a cap. rate and yet is still receiving marvellous growth (far more than on his house he reckons). He bought the dirt for $ 4 / sqm back in 1978 and it's now valued at $ 170 / sqm. That's 14.3% compounded per annum over the last 28 years.

I wish my parents were as wise to invest in a 0% yielder such as that way back then.

XBenX

20-07-2006, 03:00 PM

If you purchase a prime property with a strong tennant and long lease there is often very little vacancy risk.

Tell that to the lucky folks that purchased Westpac branches with a solid blue chip tenant...

NigelW

20-07-2006, 03:19 PM

Stick to 65% and make sure you have a LOC available if a margin call arises. BT still allow 10% buffer, so really the loan is 80%.

That's not right FG. Buffer is not the same. You don't get growth on your buffer! :rolleyes: 70% is 70%.

FrankGrimes

20-07-2006, 03:42 PM

deleted.. Don't worry

saucy gibbon

20-07-2006, 05:09 PM

Daz,

If I had a block of land appreciating in value like that and all it cost me was rats and taxes and the occasional week wacking I'd be fairly stoked as well.

However, I can assure you that apart from strategic decisions regarding competition, every acquisition from the $5m block of land through to $500m shopping centres, the price has been based upon NOI (current or projected) and cap rate.

Dazzling

20-07-2006, 05:57 PM

Hi Dazzling,

Thanks for the great posts. Truly inspirational stuff. I know what you mean though by set and forget. Great stuff. Keep up the great stories. How about No. 2 to 10. Are they all IIP and CPs too?

Keen to learn more.

ASDF

Hi ASDF, I wrote about our penultimate purchase a while ago and couldn't find it. I stumbled across it just now and so find below my ramblings for our second industrial foray ;

When we purchased the prop, it had been on the internet listing boards for 8 months. It was ugly and it was nasty. It also wasn't cheap. The rental yield was 6.9% gross, and taking out all prop expenses liable to the owners, that brought the nett yield down to 4.5%. Compared to the cost of funds - 7.3%, it was a negative CF prop and obviously investors were sailing over the top of it - dismissing it as a dud. Hell, we did too initially.

Of course, none of that info was actually listed on the internet add - it simply said "wonderful development potential with some holding income" accompanied by a picture of a rusty ol' truck leaning on one axle up against some very dated 60's sheds.....hmmmm, real attractive !!!!

But after some DD, and some head scratching about how we could turn it all around, we took the plunge. Our Banker thought we were nuts. I remember him saying "you're braver than what I am taking on something like this"....perhaps he was right initally. But then, he was just our Banker on only 150K p.a. Risk vs return - right ??

After 11 full months of owning this ugly duckling, paying literally all of the holding costs and putting up with the following ;

1. Verbally fighting with illiterate tenants.
2. Physically kicking out other dregs who refused to pay any rent whatsoever.
3. Having shed walls purposefully vandalised with trucks and forklifts.
4. Having 2 pallets of asbestos illegally dumped at the back of the block.
5. Cleaning up 83 tonnes - yes - 83 tonnes of other people's garbage.
6. Spending lots of hours weeding and tidying the place up.
7. Advertising and negotiating our little sox off

The "ugly duckling" property has now, together with our marketing and negotiating skills attracted a "beautiful swan" Lessee who has committed in writing to a 15 year Lease over the property, starting at a rental yield of 10.25% nett. At the end of the first 5 year term the rent will be 12.4% nett.

So, the property is now cashflow positive, on the same cap. rate it's now worth about 400K more than when we bought it last year, and although we worked our butt off during our time off normal paid work, it now should look after us for the next 15 years hassle free.

Of course, if we wanted to get rid of it now, the price would be so high....with everything now done a nice cruisy fat cheque nett of all property expenses lobbing into your bank account for the next 15 years.....you'd probably think it was a rip off. Maybe so, but then after all of the hard yards we've put in, and the likely growth on the large land component (89% of the value) over the next 15 years, the thought of selling it and handing a plum gift to some passive investor just doesn't appeal.

Bottom line is, the property is nothing like it was compared to when we bought it, the daggy tenants have been booted out, a professional outfit has moved in, and none of the above could ever have been "seen" trolling RE.com or any of the other internet sites.

There's oodles of opportunities out there similar to our ugly duckling - 'cos lots of people love living in and working in pigstys.

What I can guarantee is that none of these opportunites similar to our "beautiful swan" are sitting there on the internet shelf just waiting to be plucked off. They are all still there mind you, but it requires a bit of elbow grease and negotiation before you can actually "see" them.

The Lessee has applied for a License from the council to turn it into a state of the art recycling depot. The License has been approved but is pending on the Lessee being forced to spend ± 150K doing up our property. He needs to completely re-bitumenise the full 7000sqm, install sewerage and drainage, install brand new sheds at his cost and submit traffic flow diagrams and revamp the front sheds into a modern office, all at his expense, before the License is granted. The contractors are there this morning (Perth Friday am) laying the bitumen as we speak. Works should be finished by the end of May, all the while he's paying us nett rent.

Leasing the place for 15 years though, he'll get his money's worth out of the improvements, I'm sure.

You don't normally get that type of assistance from a tenant in the residential sector....one of the many reasons we stopped buying houses over 2 years ago.

NigelW

20-07-2006, 07:55 PM

Daz

You're a deadset legend! Well done.

Cheers
N.

FrankGrimes

20-07-2006, 09:09 PM

Amazing stuff. You have a whole lot of guts, and has paid off. I could never do something like that.

JoannaK

21-07-2006, 09:22 AM

I could never do something like that.

Of course you can, if you have the right attitude, vision and knowledge.

APerry

21-07-2006, 10:30 AM

Tell that to the lucky folks that purchased Westpac branches with a solid blue chip tenant...

Hi Ben,

Westpac would certainly be classed as a blue chip tennant, did they break leases or just not renew them? I did mention long leases. Also if the properties are in blue chip locations it wouldn't have been overly difficult to find another tennant.

I'm not trying to change your mind if commercial investing is not for you, just giving my opinion, if you don't aggree thats fine.

Regards
Alistair

XBenX

21-07-2006, 02:12 PM

I didnt say its not for me, no need to change my mind...

I just want people to understand the differences in the commercial market, and even then I am only generalising. The only market I have experience with is Sydney M5 corridor properties.

I was just recounting a story of some unlucky folk who lost a lot of money on the assumption that prime properties, strong tenants and long leases will have low vacancies.

The Westpac branches were on long leases, but when a lease term expires and the option is not taken you are left looking for a tenant.

The properties were bank branches, it is fair to assume that these were blue chip locations, and were not isolated cases - it happened to many many people (it would have been useful to find the article as a reference but I have not been able to find it)

Any reasonable person would have made the same assumptions as you stated (I would have done the same thing) - the lesson to learn is that this is not always the case!

APerry

21-07-2006, 02:31 PM

Fair enough. There is risk in any investment, I just think the risks involved in commercial property are often overrated.

grossreal

21-07-2006, 02:45 PM

hi XBenX
just a side line 263 wadell rd was a commonwealth bank built by them and when they closed down food association bought and then me.
and I had a tennant in 7 days this is not advice and each to there own.
ex banks are usually blue chip and they are also usually 3 brick wide construction so are very strong and I did get chubb to quote to remove there safes and it was 110k each to pay them and they got the safes for free,
so I left them there as storage and the tennant uses them.
ex banks are very good from my view so the westpac sites, or the tabs are usually in areas that require tennants and are for me very good places to have a look at.
if people have lost money holding those assets they have not been marketing correctly.
my .002

Dazzling

21-07-2006, 05:09 PM

Dazz, any chance you could post up a photo of roughly what the property looks like?

Not very good at all this hi-tech wizardry.....where's a PA when you need one ??

alexlee

21-07-2006, 09:29 PM

Westpac would certainly be classed as a blue chip tennant, did they break leases or just not renew them? I did mention long leases. Also if the properties are in blue chip locations it wouldn't have been overly difficult to find another tennant.

Just as an example, the ANZ branch in Chatswood, Sydney (corner of Victoria Ave and Albert St) closed down years ago, and the place just never managed to hold onto a tenant. It's been all sorts of shops over the years. The Maccas next door closed as well, and it's been vacant for a while.

This is RIGHT on one of the busiest corners of Chatswood, right next to a major shopping centre (Chatswood chase).
Alex

XBenX

24-07-2006, 05:49 PM

Didnt mean to put a negative slant on things.

Just hoping people will question assumptions, weigh up the risk factors and take action accordingly.

alpina

28-07-2006, 10:49 AM

firstly, let me say that this is a great thread :)

for those looking at commercial properties near the city, how do terraces with commercial zoning / usages compare with other types of commercial properties. my thinking is that a terrace with both residential and commercial zoning should benefit from the capital gains that is often slower in other commercial properties? i've notice that quite a few terrraces are utilised like this for head offices/galleries/showrooms, etc.

in respect to commercial properties, i do not own any (though i hope to one day) but i have done many deals for lessees. if you have a largish property / development be prepared to compromise if your dealing with a high profile lessee. expect to shell out for fitout, extended rent free periods with fitout periods, gross rentals (not so bad as it will factor in the outgoings to a certain extent), company guarantees only and quite a number of other conditions. on a plus side, you will secure a long lease, a high profile tenant that will add value to your property as well as attract other good tenants who will want to be close to the high profile one that you have secured :). in many instances, the lessee will dictate or issue the lease and if things go wrong, alway remember if your dealing with a large organisation, chances are their pockets are very deep :) having said all this, when it all comes together it works wonderfully for all parties concerned.

cheers,

julie