My Commercial Story

For the benifit of budding Commercial Investors....

Due to the residential market peaking, I decided to buy my first Commercial property. I was after positive cash flow and looked to Brisbane to find it.
Late 2003 I purchased an Office/Warehouse: (280 sqm) for 470,000 with as an ongoing concern with a 3 year lease (extended at my request).
Return - 9.2% + outgoings paid by tenant
Location - 3k north of Brisbane CBD ;)

Thought I would self manage. Applied for an ABN and registered for GST. Looking good! until rent was due...Here began 12 months of suffering...Phoning tenant, chasing late rent, broken promises etc... I ended up getting about 2/3 of the rent due to me. Finally my legal advise, late 2004, was to ask the tenant to leave and it wouldn't be worth persuing the arrears due to:
1. Two dollar company
2. no director garantees
3. no bank garantee
4. they were going down

They left. :mad: :mad: :mad:

I still had a lot of faith in the property. All I needed was a new tenant. It took 6 mths to find a new tenant. The offer was signed @ 46,000 gross and with some more frustration was converted to a lease 2 months later (complications made it take longer than the usual 14 days). :rolleyes:

The tenants are now settled in.
The property is being professionally managed by an agent. :D

The Botton Line:

I am now inducted, I'm no longer a commercial novice, I've suffered a lot, I've learned a lot, the only way is up!

Major lessons:

1. Get a bank garantee or a Directors garantee. ( I prefer the cash) :cool:

2. Personaly I believe managment by an agent is the way to go. :eek:

3. Don't consider an offer to lease as a garantee that a lease will be drawn. Try to make offers non binding for you so you can look at other offers if a better deal comes along at the same time.

4. Make sure you can handle a 12mth vacancy. Mine took 7 months :(

5. Open list with a couple of agents, when looking for new tenants, if the property is vacated. Gives you much more exposure. ;)

The upside:

The property is now worth @ $ 570,000 :D :D

Happy Commercial Investing.

Cheers
MJK :)
 
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I've found all most all companies our business deals with now want a directors garantee, which basically means if the company doesn't pay up they will come after the individual and any asset they have.

The lease we signed was very complex, the landlord gets heaps of rights and we get to pay rent.

I'll vote for get someone to manage it and get a good lease drawn up.

Cheers
quoll
 
MJK, thanks for sharing the info ...

Just curious as to how much residential real estate investing (ie- years/ number of properties, etc... ) you had done prior to jumping into the commercial game.

Also, what resources did you use to learn about commercial property investing. Perhaps there is a Jan Somers equivalent for commercial property investing ??? :D

I cannot tell you how many times I hear that investing in commercial property should only be approached after some significant experience in residential property investing.
 
LearningMan said:
many times I hear that investing in commercial property should only be approached after some significant experience in residential property investing.

Maybe thats the problem :eek: Maybe the rules are so different that its a liability to understand Res RE first.


Thanks for sharing.

T.
 
Learning Man,

I bought my first resi IP in 1994. I didn't get serious about realestate until 1999 when I read that I actually could buy more than one property. Since then I bought houses up until 2003. I consider myself on top of most aspects of residential investing.
For me it was important to do the residential investing first because,

1. I developed proffesional trust with my financiers, brokers etc...
2. Developed sufficient equity to borrow against and to provide cash for emergency stituations.

Re books - there are no good ones!

I learned from my Broker about the financing side , my buyers advocate about the area and property quality and the forum for bits and pieces in between.

MJK :D
 
Great MJK ! Thanks for answering my questions.

I agree about the financing part. With 3 IP's I am still learning about financing ! Just when I think I have figured it all out ... BAM !... there is something new. :D
 
welcome to the pointy end

Great to hear someone else is thinking outside the (residential) square. Commercial/Industrial property is an effective hedge when the residential market is flat.
Property value based on cap. rate is just one of the benefits you will find. Building writeoff goes back further with commercial too.
Get a good accountant and enjoy.

zed
 
Hi MJK,

Just a question from a newbie. When you were looking for a PM for your prop, did they give you the option of just sourcing the Lessee and signing them up, or did they insist on the full management thing.

Cheers,

Dazzling

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

It is quite accepted for the agent to do only leasing without management expectation. Leasing costs are generally between 10 and 15% of first year rent.

MJK :)
 
MJK said:
Zed,

What do you mean by "property value based on cap rate" ?

MJK :)

There are different valuation methodologies that can be used to determine market value of commercial property, including the capitalisation approach.
This approach capitalises the nett imputed rental likely to be achieved by the property, if offered for lease with the existing improvements in place, less an allowances for letting up, marketing and associated costs.
The valuer determines the appropriate 'cap' rate by comparison with similar properties and the property value is determined from this rate.

Hope this helps, I'm sure there are valuers on this forum that could explain it better.

zed
 
Hi mjk
Enjoyed your CL story.

I am about to venture into this area as the warehouse my business has been occupying I now want to rent out.

One question is what do youpay as ongoing management fees?

Cheers
 
Enough time has elapsed so I will finish this saga off.

The commercial property in Brisbane was sold late last year. I was eventually offered $715k privately (no agents). I considerered this amount above market expectation and enough compensation to exit the investment. The gross gain was $255K over 3 years

I loved the Unit but believe the exit of this particular investment a happy ending allowing me to move on from a time consuming enterprise into more passive investments. I would do it all again, and possibly will, though I'd be much more savvy to all the little things the next time.

I learned heaps.

MJK:D
 
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