Buy vacant or leased?

Z

Zedlum

What is your general preference? Buy cheaper vacant, write the lease you want and spend the time to get a good tenant or shop for the ideal tenant and lease? I have been thinking the later but I will have the capacity to do the former and it might be a good way to up the cap rate.

Thoughts anyone?
 
I'd try and find the right property, and then buy it irrespective of lease.

Leases, though great and the backbone of the game, do come and go, and tenants do fall over on the odd occasion.

If you have the right property it should lease quicker than others, and if you buy it for the right price, thats most of the game won.
 
Trogdor said:
If you have the right property it should lease quicker than others, and if you buy it for the right price, thats most of the game won.
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Thanks. Yes, I guess a good lease does not always mean that the property is a good prospect to re-lease on owner favorable terms. Conversely I guess that a bad lease or empty property does not mean the property lacks potential.

So the key is seeing the true potential of any given property and what it would take to unlock, if it is not already realized.

Quite a challenge when you lack experience! :D
 
Zedlum said:
What is your general preference? Buy cheaper vacant, write the lease you want and spend the time to get a good tenant or shop for the ideal tenant and lease? I have been thinking the later but I will have the capacity to do the former and it might be a good way to up the cap rate.

Thoughts anyone?
Click to expand...

It depends on whether the current tenant is paying market rent or not.

Never cease to be amazed at listings with "great tenant paying <$50pw less than market> and willing to stay!"
 
Zedlum said:
That will not be an issue for me, but yes I can see that could be a problem especially if you had no track record in commercial.
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It's an issue for everyone. If you are paying 100% cash for something you are just losing on the opportunity cost of what you could have bought. For any given amount of cash / equity available, you can purchase around 3 times as much CIP property with finance than you can without.

I would rather have exposure to three times as much property over the long term. To do that I need finance. To gain finance on reasonable terms I need a lease. You can of course try to gain finance after leasing up a property you paid 100% for and then use that cash to buy more. But "cash out" like this can be significantly more difficult than financing a new purchase in the first place, for a whole host of reasons. Do-able but painful... having experienced this I try to avoid it. Lenders get very suspicious of what you plan to do with the money...

So I try to buy properties selling cheap with a lease in place that would be acceptable to a bank. Plenty of properties out there across Australia in that category.
 
The lack of of a willing lender for a property in an "as is" state is simply no issue for what I want to achieve. For now, size and growth over inflation are not my objective... this is just about a base income with some degree of hedging against inflation. I trade in other things for outright real cap gains.

Why on earth would financing a solidly leased property that is 100% owned be any different from financing a newly acquired property? What sort of arcane insanity would make that so? :confused:
 
Zedlum said:
Why on earth would financing a solidly leased property that is 100% owned be any different from financing a newly acquired property? What sort of arcane insanity would make that so? :confused:
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I've given up trying to make sense of Banks' credit policies. Ours is not to reason why...

Your other point makes no sense to me - base income increases x3 and inflation hedging increases x3 as well with buying the right IPs through financing - but it's up to you!
 
This is an interesting thread. Good insights you have shared Mr. Equity.

We are also looking at commercial properties and resi blocks of units and am finding that cash unconditional offers may attract a better discount to purchase, especially with the commercial assets. Whilst we have our limits, the thinking is to purchase cash and seek "cash out" later from the b(w)anks with very sensible LVR's.

The problem is the extra hoop jumping and tooth extraction required for a "cash out" rather than a finance from the get-go doesn't appeal. I have thought about lending our cash to the family trust purchasing the next asset, whether it's commercial or a multi and then seeking to re-finance with conventional lenders. One part of me suspects that the financiers will look at this as a "pseudo loan" and not play, because they are not paying out a "real" lender.

Finance unconditional offers in current market (up here at least) are favoured by vendors and of course listing rea's and so are the ensuing quicker settlements. Whilst we can use all our cash and even offsets to loan to the trust, I wouldn't mind keeping some powder dry by not employing all our folding stuff.
 
HiEquity said:
I've given up trying to make sense of Banks' credit policies. Ours is not to reason why...

Your other point makes no sense to me - base income increases x3 and inflation hedging increases x3 as well with buying the right IPs through financing - but it's up to you!
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No that is not correct, you are not allowing for the cost of leverage x3.... so it all depends on the leverage levels, passing income etc, etc. You may even end up with less for the first few years despite controlling more property.

I guess it all depends on your economic outlook as to how brave you feel on that front! IMO there is A LOT of deep doodoo to wade through... out till say 2020. Leverage, IMO is to be shunned until that coast is clear. My 2c.... but I'd say I'm coming at this from a different perspective to most here. I wish to be bullet proof on this front, for now at least. :D
 
Zedlum said:
No that is not correct, you are not allowing for the cost of leverage x3.... so it all depends on the leverage levels, passing income etc, etc. You may even end up with less for the first few years despite controlling more property.
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I did say "buying the right IPs". If that happened it would be clear you bought the wrong ones!

Your second point is an interesting one. One of the big disadvantages cited by many when we talk about CIPs is the low leverage available. If a 65% LVR isn't conservative investing I don't know what is! Going to zero wipes out one of the greatest advantages of property investing - getting your hands on some of the cheapest forms of debt available, to earn a return well in excess of its cost. As I said - up to you!
 
It is a big subject but to put it simply I am wary of debt while we are near or at the peak of a debt super cycle. Until I see how this is going to play I am going to stay VERY conservative. 18% rates are not impossible here despite most central banks intentions... the market may well drag them higher despite the grand plan for a general "financial repression". It should become clearer over the next few years but for now it is not clear at all and the potential for calamity is still extraordinary.

On the subject of the right property, I was going for circa 10% net but some here seem to think that is a bit over the top. Personally it looks like a small buffer over the cost of finance should you choose to lever up. Netting a figure near the cost of finance seems a little too optimistic to me but I guess people must be doing it!
 
Zedlum said:
It is a big subject but to put it simply I am wary of debt while we are near or at the peak of a debt super cycle. Until I see how this is going to play I am going to stay VERY conservative. 18% rates are not impossible here despite most central banks intentions... the market may well drag them higher despite the grand plan for a general "financial repression". It should become clearer over the next few years but for now it is not clear at all and the potential for calamity is still extraordinary.
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Then would it be sensible to put ANY money into an investment that will most likely have a tennant that cant pay a brass razzoo ?

If you are talking world financial custard, your lease protections might be enforceable but to what end ? no point chasing someone for something they dont have

ta

rolf
 
Hi Rolf,

I'm not really here to push my world financial view and any cip I acquire will be a part of a broader mix. I will leave that debate there, many here would not appreciate the discussion, I have learned that much over the last decade or so! Instead I will concentrate on learning more about commercial property from the guys here that are doing it... finance or no should not really matter much to most of the discussion, although I concede it is a big subject by itself!
 
Zedlum said:
On the subject of the right property, I was going for circa 10% net but some here seem to think that is a bit over the top. Personally it looks like a small buffer over the cost of finance should you choose to lever up. Netting a figure near the cost of finance seems a little too optimistic to me but I guess people must be doing it!
Click to expand...

I'd be interesting to see what commercial property you could buy at a 10% yield in metro Melbourne unless you were talking in the $5m+ market segment. Do you have any in mind?
 
Yes...

1. I will be moving out of here in the not too distant.

2. I really don't mind going a little country to get the yield if I consider the industry a good long term bet. e.g. I am not nearly so bearish on the commodities sector as many have been over the last two years where as retail scares me. I'd rather a 10% + yield on a factory in McKay than a shop in Brighton yielding 4%.

But that is just me ;)
 
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