Buy for $85k, rent for $230 a week. Just do it???

C

charlieandkath

Stumbled across this the other day. Prime main street location. Nothing to do as far as Renos. Only trouble is - it is in a small regional town of population less than 4000.

I sort of feel as though I should just buy it. It would help our situation atm and would be a very affordable step in our property investing career.

Would nearly make our negative cash flow on our two residential IP's breakeven.

What do you guys reckon? Ultimately we want to buy in Gladstone this year but I don't think we can get the finance.
 
Ok, I see the temptation there; but... a few quick questions jump immediately to mind as a starting point in assessing this one.


  • Is this one retail, or genuine commercial?
  • Can you see reason for the town to grow, or die out?
  • 4,000 residents is one thing; does it get much tourism above that?
  • Are there many vacant buildings in the town?

  • Presumably, this one is already tenanted?
  • How long have they been there; and term remaining on the lease?
  • Is there much room for further rent increases?
  • Have you got a copy of the lease and sussed out any holes?

  • Are you paying for this one with cash / LOC, or seeking additional finance?
  • If financing, have you investigated LVR's for commercial property (size?) in the region?

You've already identified that there are risks to a deal like this (aren't there always?) and once those risks are considered and dealt with, the next questions that I'd be asking are how does the potential cashflow of up to $12k/pa (unencumbered) stack up compared to your opportunity cost of investing elsewhere? And realistically, does this deal take you closer to your goals, or distract you from them...?
 
Charlie..
14% return sounds very high to me.
As James has suggested, I would be combing over the lease with a microscope as it could very well be an owner occupied and they've created a very attractive lease to move the property
Or it's a very short term. How long has the current tenant been there and do they have any intention of renewing?
Or very high vacancy in the town.

You would expect higher rental returns in a regional town as the risk is much higher than say capital city CBD (though these are also not without their risk's) but 14%... Hmmmm

Give us a little more detail and we can better answer your question.

PS: It sounds as though your financial situation is not as ideal as you would like so be very careful when looking at any property if there is emotion tied to your current circumstance.
We as humans have an uncanny way of making anything look attractive if we really want to.

Cheers
B.D
 
While not trying to dampen your enthusiasm there are a few things to consider.

Finance! Many banks don't want to look at properties where the population is less than 4000.

Management! Is there an agency in this town that will/can manage this property? Preferably there should be more than one, because with just one you are at the mercy of the PM they employ and there is no guarantee that they will hire a competant PM.

Vacancy! Is there a demand in this town? Is it seasonal? Does this property 'fit' with what is desireable in the area.

Repairs/maintenance! What sorts of prices will you get charged from tradies/handymen in this town? If there is a strong demand for work with no qualified tradies you could be looking at huge expenses. For instance, I have a property in a regional area that needed a lawn mowed. Normal size yard, maybe around 600sqm. Charged me $300.
 
Hi CharlieandKath

Is the town around where you live? If so, 4000 pop wouldn't really be an issue imo. Molong, if you know it, only has 2100 folks living there. If you decide not to buy it, send me the link ;)

More info would be great!
 
Hi C&K,


Need way more detail before commenting.


All you've divulged so far is the asking price, a rent (unknown if it is a gross or nett rent), and a fuzzy location.


Try and find out the following ;

  • Frontage to main street
  • Total area of building
  • Green titled land or strata
  • Length of Lease remaining
  • What security has the Tenant posted...3 months, 6 months, nothing
  • Is the rent nett or gross
  • How much are the total outgoings - who pays them
  • What are they selling in there - good margins - good business ??
  • Do you have cash to purchase or will you need to involve a Bank
 
JamesGG said:
Ok, I see the temptation there; but... a few quick questions jump immediately to mind as a starting point in assessing this one.


  • Is this one retail, or genuine commercial? Probably retail.
  • Can you see reason for the town to grow, or die out? None of these.
  • 4,000 residents is one thing; does it get much tourism above that? No
  • Are there many vacant buildings in the town? Yes - but less than there has been over the last ten years.

  • Presumably, this one is already tenanted? Yes - two shops in one
  • How long have they been there; and term remaining on the lease? 10 years
  • Is there much room for further rent increases? Probably 3 to 5% a year.
  • Have you got a copy of the lease and sussed out any holes?

  • Are you paying for this one with cash / LOC, or seeking additional finance? Half cash, half finance
  • If financing, have you investigated LVR's for commercial property (size?) in the region? No

You've already identified that there are risks to a deal like this (aren't there always?) and once those risks are considered and dealt with, the next questions that I'd be asking are how does the potential cashflow of up to $12k/pa (unencumbered) stack up compared to your opportunity cost of investing elsewhere? And realistically, does this deal take you closer to your goals, or distract you from them...?
Click to expand...

Thanks James GG. Answers are next to your questions. Bit of extra sussing out to do and thanks for raising everything.
 
Bird Dog said:
As James has suggested, I would be combing over the lease with a microscope as it could very well be an owner occupied and they've created a very attractive lease to move the property
PS: ...if there is emotion tied to your current circumstance.
We as humans have an uncanny way of making anything look attractive if we really want to.

Cheers
B.D
Click to expand...

Thanks Bird dog. Good point about been owner occupied and they have pushed the numbers up.

Probably a bit emotional as is my home town. I know the area pretty well though.
 
skater said:
While not trying to dampen your enthusiasm there are a few things to consider.

Finance! Many banks don't want to look at properties where the population is less than 4000.

Management! Is there an agency in this town that will/can manage this property? Preferably there should be more than one, because with just one you are at the mercy of the PM they employ and there is no guarantee that they will hire a competant PM.

Vacancy! Is there a demand in this town? Is it seasonal? Does this property 'fit' with what is desireable in the area.

Repairs/maintenance! What sorts of prices will you get charged from tradies/handymen in this town? If there is a strong demand for work with no qualified tradies you could be looking at huge expenses. For instance, I have a property in a regional area that needed a lawn mowed. Normal size yard, maybe around 600sqm. Charged me $300.
Click to expand...

Thanks Skater. All those points above are worth considering closely. All you guys above have given some great pointers.

Where is that lawn? If its close by I could do it for free.
 
locko24 said:
Hi CharlieandKath

Is the town around where you live? If so, 4000 pop wouldn't really be an issue imo. Molong, if you know it, only has 2100 folks living there. If you decide not to buy it, send me the link ;)

More info would be great!
Click to expand...

Thanks locko24. Yeah, home town of Grenfell. Population of town is about 2500 and surrounding areas about 1500. Not many people travelling through like Molong and no mining or anything.

The only thing I can think will help the population growth is people are apparently moving to Young from the Southern Highlands area and this is making Young more expensive so could push people this way.
 
Dazz said:
Hi C&K,


Need way more detail before commenting.


All you've divulged so far is the asking price, a rent (unknown if it is a gross or nett rent), and a fuzzy location.


Try and find out the following ;

  • Frontage to main street
  • Total area of building
  • Green titled land or strata
  • Length of Lease remaining
  • What security has the Tenant posted...3 months, 6 months, nothing
  • Is the rent nett or gross
  • How much are the total outgoings - who pays them
  • What are they selling in there - good margins - good business ??
  • Do you have cash to purchase or will you need to involve a Bank
Click to expand...

Thanks Dazz for extra above points. Must have everything covered now for some good due diligence. I am going to work on this over the next week.

One negative is that the building is heritage listed so would have to comply with all that.

It has two street frontages, 850 square metres so maybe able to build something out the back one day like a residential unit.

I remember when they sold one of the banks in the main street about ten years ago. $80000, massive building. Would have to be worth $250 to 300k today.
 
charlieandkath said:
Thanks locko24. Yeah, home town of Grenfell. Population of town is about 2500 and surrounding areas about 1500. Not many people travelling through like Molong and no mining or anything.

The only thing I can think will help the population growth is people are apparently moving to Young from the Southern Highlands area and this is making Young more expensive so could push people this way.
Click to expand...

Don't know Grenfell particularly well, though it's a nice place. What's the main industry? Agriculture? IMO ag is currently a pretty safe bet.
What's the vacancy rate?
Is the rent being paid a normal amount?

You'd be the most knowledgeable person about your hometown i would imagine.

Good luck. :)
 
locko24 said:
Don't know Grenfell particularly well, though it's a nice place. What's the main industry? Agriculture? IMO ag is currently a pretty safe bet.
What's the vacancy rate?
Is the rent being paid a normal amount?

You'd be the most knowledgeable person about your hometown i would imagine.

Good luck. :)
Click to expand...

Yes agriculture main industry.
Vacancy rate is 5 shops in the main street out of say 50. This has declined in recent years.
Yes rent being paid is pretty standard. Give a bit of a face lift and we could get 20% more rent.
Economies of Young, Cowra and Forbes employ a lot of Grenfellites. Unemployment is basically non existant as if you don't work people give you a hard time. You can't hide here.
 
We did it and I can report on the outcome. The numbers ended up a bit different.

Bought for 90k. Spent 20k doing up front exterior. Total spend 114k with SD, legal etc.

Shop 1 renting for 130 per week with GST
Shop 2 about to rent for 187 per week with GST
Shed out back renting for 30 per week with GST

All up renting for 347 with GST per week or around 315 per week without the GSTring.

Therefore outcome 114k spend for 315 per week rent.

Not too bad eh?? We were wanting to buy in Gladstone early last year but did not make it. Not a bad compromise above though.

Happy New Year everyone and thanks for everyones help above. I appreciated your detail and help.

There is another one in town for sale for $115k with 370 per week rent with another 18 months to go on lease but it is not in as good a position as above. What do you reckon? Give it a nudge aswell.
 
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