The Bottom Line (how to assess it)

[pjb89]

G'day all,

I don't think that I have seen a specific post in the last few months regarding how to assess 'the bottom' line' when comparing IP's to determine the most suitable investment.

I appreciate that there may be slight differences is ratios used depending on whether you are chasing cap growth or pos cashflow etc, however, one would assume that the fundamental 'yardstick' would be the same.

By this I mean do you look at the IRR, NPV at Yr1 or Yr5 or Yr10 for arguments sake? What other ratios etc are used and what are their benefits for this newbie?



Cheers Peter

[Sim]

Hi all, I have split this thread and moved the rest of the posts to this thread:

http://www.somersoft.com/forums/showthread.php?postid=1062#post1062

... because they were all talking about software that people use to assess the bottom line.

I feel that pjb89's original question went un-answered, and I think it is interesting enough to revisit.

What criteria do people use to measure up a property. If you are using software, what set of numbers do you look for as an indication to buy and how are they measured ?

Actual discussion on software should be in that other thread. Let's just talk numbers here !

[bundy1964]

First you have to decide if yield is more important than capital gain.

Next if you want someplace that is new with maximum depreciation benifits or preloved with minimal depreciation.

Then there is maintainence costs now and in the future, new places can be a money pit to keep looking new for high rent districts.

In my case I choose to buy places with an 8 to 10% net yield ( tenant pays all outgoings ) and treat any capital gains as a bonus. Anything that is returning over 10% net on commercial buildings in Adelaide has a problem either it needs a lot of work to maintain it or it's in a pig of a location or both.

Both times I have chosen preloved places, 1 with minimal to do for years to come and 1 that will need some updating in the future. Neither place has significant depreciation in it at present. Places with good depreciation are having yields of around 6% net which in my current position is too low to be worth my buying.

My bottom line is it mist be income +ive, be in a good location and be low maintainence. Capital gains are a bonus.

If your in a high tax bracket capital gain can replace income as the main driving factor, depreciation is important. Income is a bonus.

Of course if interest rates change or you have an extended vacancy your +ively geared property can soon turn into a -ive one :(

bundy

[Sim]

How long have you been investing in commercial real estate in Adelaide bundy ? Reason I ask is that I have seens yields drop off significantly in the last 24 months... and yields of less than 10% for commercial properties (other than the bluest of blue chips) are generally considered to be rather poor investments. Many people I know aim for closer to 20% for commercial property - and then only if there is room for improvement !

Just curious as to what your experiences have been - obviously the location will have a bearing, inner city and close suburban commercial will generally have lower yields.

[bundy1964]

Will have to get back to you on that one Sim wrote a book then stuffed it up and lost it :eek: I may not even get online tomorrow unless I get bad withdrawals and log on when I get home tomorrow night.

bundy

[Sim]

Looking forward to it !

PS. long posts should be written in Notepad or similar - and saved to your harddrive as backup while composing. Then copy-and-paste into your post when you are done - a real shame to lose it all when you have put so much effort into composing it.

[Jas]

Originally posted by Sim
Looking forward to it !

PS. long posts should be written in Notepad or similar

Not notepad, if you're going to go to all that trouble, use something with an autosave!

Jas

[Sim]

CTRL-S is a wonderful thing and quick too !

I really really hate autosave - especially for those occasions when you accidently hit CTRL-A while typing (which has the effect of deleting everything on the page) - only to have the autosave make the change permanent before you get a chance to undo.

PS. my text editor of choice is Textpad. http://www.textpad.com/

[bundy1964]

Originally posted by Sim
How long have you been investing in commercial real estate in Adelaide bundy ? Reason I ask is that I have seens yields drop off significantly in the last 24 months... and yields of less than 10% for commercial properties (other than the bluest of blue chips) are generally considered to be rather poor investments. Many people I know aim for closer to 20% for commercial property - and then only if there is room for improvement !

Just curious as to what your experiences have been - obviously the location will have a bearing, inner city and close suburban commercial will generally have lower yields.

Hi Sim
My first experiance in com's was in the mid 80's using a trust setup under pro management with little hands on control by the investors. There was a range of properties in most states and of course the manager sold the ones that performed well to lend money to one of the members to start dreamworld. Naturaly he was behind in his loan payments and the trust was heavily geared itself and we all know what happened to interest rates :mad: of course the manager managed to get his fees. I sold out to a funds manager in the mid/late 90's for a small profit. If the was ever 20% profit the manager lost it on lemons. Of course we all know how dreamworld is doing now :rolleyes:

Through the 90's I did look at the local com's and houses.....fear of debt kept me looking and not buying. Returns were a bit higher than 10% but nothing to write home about.

In 2001 I was cashed up with little hope of finding a job so I bit the bullet and looked harder and invested in an office/retail unit on Melbourne St North Adelaide. Return was 8% net with all settlement costs included, 8.5% on purchase price. Cap gains have been 100% over the last 4 years.

That and some shares was enough to live off and keep investing to improve my bottom line.

I then meet some loan brokers and got greedy, used some of my equiety to buy an office on Glen Osmond Rd that was returning 10% net on purchase price. Lease and sale is now a sticking point and best option may be a sale back to the vendor :o Returns on the cash I used would of been 20%.

I would like to transfer and probably increase my loan for another shop in Melbourne St if they arnt too greedy on price. 10% net return would be nice :D but 8% net is more realistic :(

New investments are returning 6% net or worse.

Display homes may be going around 8% net with the standard SA 5 year lease......I am looking into it more to see if things dont go well with the shop.

Factories may bring in 12% but the risks are higher and loans are harder to get. Too risky for me.

If you buy an empty reno's delight you might get higher returns if and when you find a tenant. Not in my plans at the moment.

Way out in the sticks you may find higher returns and high risks to go with them.

I like the main rd locations close to the cbd and around 100 sq meters in size, give or take 20. Not break the bank stuff....I look at how long I can hold on if things go sour. Caution can be a good thing in com's.

Enough book writing for tonight lol.

bundy

[Sim]

Cool - thanks for that bundy !

I understand where you are coming from now... 8% in North Adelaide is certainly what I would call respectable - blue chip area !

Glen Osmond and Greenhill Roads have been up and down for a while now - many many vacancies and many short term leases (I've worked for companies which hopped between offices in those areas fairly regularly). Massive oversupply - although I'm not sure what has happened in the last 2 years or so, I haven't followed that market segment.

I looked at display homes - found an agency advertising a whole heap down south at around 10% yield, but when I did some research, they were way overpriced in an area which was being heavily built up to possible oversupply status. Didn't like the sums.

I have looked into retail strips - still a couple out there at around 10%+ yield, one in particular I've looked at around 6km south of the CBD - quite nice, good location, but numbers still not good enough to cover the finance problems and the risks - especially since there would be little chance to add value with that particular block. Price around $800K.

Admittedly, I have seen prices go up of late - or more the point, yields go down.

I haven't actually bought any commercial - so all of my information is not based on experience - only from looking at property and talking to commercial property agents about stuff.

[bundy1964]

Hi Sim

The office hopping has been cut back a lot now that 5 years is the minimum lease term. Most of the new lease laws seem to be aimed at Westfield and there ways of doing business.

Given the current state of Glen Osmond Rd retreat may be the best form of attack ;) and if posiable switch the loan over to a property with a better future.

bundy