Buyers Agent and Management

[Zedlum]

Hi,

I'm considering the idea of Commercial Property primarily for income purposes. I would be thinking of property in the 1m to 2m range with no finance involved. My question is... will a buyers agent and property management save me at least as much as they cost, preferably more .

I have no commercial property experience but I do intend to put quite a bit of time into learning about it and I would otherwise be retired so I would have time to deal with things.

So is it better to jump in and "just do it" or will I likely cost myself more than if I use a service provider? If the latter is the go are there any highly recommended practitioners out there?

Thanks in advance!

 

[Scott No Mates]

Hi Zedium

small caps are generally too small to engage an fm company to look after however engaging a managing agent with fm links may be of some advantage

 

[Zedlum]

OK... thanks.

What about a buyers agent?

 

[Scott No Mates]

There should be some invaluable knowledge coming from the BACK as well as achieving a great deal. Commercial vendors aren't as emotional as residential vendors but are also more knowledgeable so dopey offers won't cut the grade.

 

[Zedlum]

Any opinions about Prosper Group?

 

[Jake Milne]

Zedlem, is your portfolio at a stage that can support higher risk assets?

What strategy are you using and what part do you expect commercial property to play?

 

[Zedlum]

Hi Jake

My CRE portfolio is non-existent at the moment, as for the rest I typically hold what most would consider much higher risk assets in terms of near term performance.

I am thinking that some CRE will provide a reliable and predicable income stream to underpin my other activities. In terms of strategy within CRE, well I have my ideas, based on my view of the economy and where it is going but I am really not settled on any particular strategy yet. I really do have quite a bit to learn about CRE.

For the moment I would like to avoid leverage, get into the price area where sounder tenants and longer leases are the norm and avoid higher maintenance places like say small shopping centers. I err more to say industrial space with say a national resource services related tenant than to strata office space in Melb, or most all retail for that matter. So far I have been put off the idea of petrol stations and strata titled places with high outgoings, I don't want potentially high exit costs or a high overhead should the place sit vacant for some extended period.

That said, I really don't know for sure yet, so I will likely spend a year or even two learning before I move.

 

[Bird Dog]

Hi Zedlum and welcome to the forums.

You certainly raise some interesting and broad questions so I won’t prattle on too much.

If you’ve got some time on your hands, the first thing I would suggest before you do anything else is get a copy of the following books.

There isn’t much “decent” literature when it’s comes to this topic however of all the books I’ve read, I found these the most worthwhile.
• Commercial Real Estate Investing: A Creative Guide to Succesfully Making Money by Dolf De Roos (Feb 8, 2008)
• Confessions of a Real Estate Entrepreneur: What It Takes to Win in High-Stakes Commercial Real Estate : What it Takes to Win in High-Stakes Commercial Real Estate by Jim Randel (Dec 19, 2005)
• How Investing In Commercial Property Really Works by Martin ROTH & Chris LANG
If you’re talking about investing 2m, you’ve be much better off sourcing a single good quality premises as the cap rates in this range are much more desirable. Plus, you’ll be dealing with a higher grade of tenant who won’t bother you with leaking taps and broken toilets like a typical mum and dad business person might.

Although you mention you’d be happy to manage something yourself (given you’ll have time on your hands), I believe this is not necessarily the best use of your time. We tend to leave the property management to a dedicated PM for the following reasons.
1: You may be smart but it’s simply impossible to be up with all the latest legislation on fire safety, asbestos management, OH&S, tenant law etc etc etc. Plus, if you decide to go down the path of retail, the retail tenancies act is littered with new legislation that is changing weekly.
2: You’re good at making money in your chosen profession but it’s most likely not real estate so why not leave that to the professionals.
3; And this is one of the best parts of CIP. Our CIP leases state that the tenant pays the Property Manager to collect the rent from them and manage the property. So yes, our tenant actually pays for someone else to collect the rent off them every month. If they are paying for it, why wouldn’t you just use a PM. I still manage every decision and are kept abreast of each issue but only at arms length and only so I can keep learning and improving the lease with future tenants.

I’d much rather spend my time looking for great deals and educating myself than worrying about arranging an electrician, plumber etc.

The other area I would spend educating yourself on is lease terms and conditions as this is sometime where huge fortunes are made and lost. It can be very boring at times but you’d be surprised how much it applies to your overall return.

And finally, Jake has made a very valid point about your strategy. You need to decide if you’re chasing high yield/low CG or a balance of the two as this will have a profound effect on not only the CIP sector you chose (Retail, Office or Industrial) but also the subset within this sector. If you’ve got the money to play with, I’d be looking at a relatively new build that has low maintenance, great depreciation and most importantly, is going to attract a good quality national tenant (although this is never a hard and fast rule).

Good luck and do keep us posted

B.D

 

[Zedlum]

Hi Zedlum and welcome to the forums.

You certainly raise some interesting and broad questions so I won’t prattle on too much.

Hi! and thanks

If you’ve got some time on your hands, the first thing I would suggest before you do anything else is get a copy of the following books.

There isn’t much “decent” literature when it’s comes to this topic however of all the books I’ve read, I found these the most worthwhile.
• Commercial Real Estate Investing: A Creative Guide to Succesfully Making Money by Dolf De Roos (Feb 8, 2008)
• Confessions of a Real Estate Entrepreneur: What It Takes to Win in High-Stakes Commercial Real Estate : What it Takes to Win in High-Stakes Commercial Real Estate by Jim Randel (Dec 19, 2005)
• How Investing In Commercial Property Really Works by Martin ROTH & Chris LANG

Thanks again, I will get the first two and I have got the Roth/Lang book but I should read it again.

If you’re talking about investing 2m, you’ve be much better off sourcing a single good quality premises as the cap rates in this range are much more desirable. Plus, you’ll be dealing with a higher grade of tenant who won’t bother you with leaking taps and broken toilets like a typical mum and dad business person might.

Yeah, I get the idea that the small guys are a real PITA just from reading this board.

Although you mention you’d be happy to manage something yourself (given you’ll have time on your hands), I believe this is not necessarily the best use of your time. We tend to leave the property management to a dedicated PM for the following reasons.
1: You may be smart but it’s simply impossible to be up with all the latest legislation on fire safety, asbestos management, OH&S, tenant law etc etc etc. Plus, if you decide to go down the path of retail, the retail tenancies act is littered with new legislation that is changing weekly.
2: You’re good at making money in your chosen profession but it’s most likely not real estate so why not leave that to the professionals.
3; And this is one of the best parts of CIP. Our CIP leases state that the tenant pays the Property Manager to collect the rent from them and manage the property. So yes, our tenant actually pays for someone else to collect the rent off them every month. If they are paying for it, why wouldn’t you just use a PM. I still manage every decision and are kept abreast of each issue but only at arms length and only so I can keep learning and improving the lease with future tenants.

I like point 3!

Now that you mention it I think they say as much in the Roth/Lang book but I had forgotten it.

I’d much rather spend my time looking for great deals and educating myself than worrying about arranging an electrician, plumber etc.

True.

The other area I would spend educating yourself on is lease terms and conditions as this is sometime where huge fortunes are made and lost. It can be very boring at times but you’d be surprised how much it applies to your overall return.

Yes... I am starting to understand that I am shopping for a great lease as much as a good property. Complex legal documents send a shiver up my spine but I guess I need to come to grips with this beast. This is where I was hoping that a good buying agent would earn their keep.

And finally, Jake has made a very valid point about your strategy. You need to decide if you’re chasing high yield/low CG or a balance of the two as this will have a profound effect on not only the CIP sector you chose (Retail, Office or Industrial) but also the subset within this sector. If you’ve got the money to play with, I’d be looking at a relatively new build that has low maintenance, great depreciation and most importantly, is going to attract a good quality national tenant (although this is never a hard and fast rule).

I'm looking for income out of this so I want high yield property with a good secure lease, reliable tenant and something that will preserve the initial real value of the investment, that is to say capital gains inline with the real inflation rate. I would assume that a good yield would take care of this to some degree.

From what has been said it would seem that a higher value property with a single tenant will be the best option. My only concern here is putting all the eggs in one basket. On that note what seems to be the cut off level when it comes to tenant quality? I know it is a very open ended question but in rough terms. Say if you had 3m would you go for 2 x 1.5m properties or 1x3m as an ideal?

I have also seen some government tenanted places, is that as good as it seems? Are they hassle free?

Yes new is appealing, I am tempted to build as I would typically have done with resi but I don't know what I don't know about this market... maybe that is too much of an ask straight up.

Has anyone here found a tenant prior to building and created tailored solution on some sort of pre agreed long term lease? Is this getting too fancy for my pay grade?

Good luck and do keep us posted

B.D

I'm sure I will blab about my adventures as/when I get to the pointy end of this thing In the mean time I will just hang and ask silly questions till I get it! I do however suspect Daz is correct, you just have to do it and learn.

Thanks for the considered reply!

Cheers
Z

PS. All --> For now I am only looking for broad strokes guidance, I do understand that the specifics of any given situation can vary markedly. Generally speaking, on average, and in my experience type of advice is just fine ---> if you feel so inclined!

Thanks.

 

[Bird Dog]

This is where I was hoping that a good buying agent would earn their keep.

Although I've never dealt with one for CIP, I would expect they are well versed on this part (the lease) of the process as it forms an integrate component of the deal. You may find however that they may not typically deal in the lower end you are looking. I know $3M doesn’t exactly sound lower end but in commercial terms, it’s still pretty small in the whole scheme of things.

I'm looking for income out of this so I want high yield property with a good secure lease, reliable tenant and something that will preserve the initial real value of the investment, that is to say capital gains inline with the real inflation rate. I would assume that a good yield would take care of this to some degree.

I guess that depends on what you consider "High Yielding" Zedlum but a carefully selected property should fulfil the brief.

From what has been said it would seem that a higher value property with a single tenant will be the best option. My only concern here is putting all the eggs in one basket. On that note what seems to be the cut off level when it comes to tenant quality? I know it is a very open ended question but in rough terms. Say if you had 3m would you go for 2 x 1.5m properties or 1x3m as an ideal?

That’s a little harder to answer as it will depend on things like city, type of property, type of tenant and structure of the lease. To put things in perspective however I would say that a 1m property is usually going to attract a significantly better tenant than your average $400,000 strata titled factory out in the burbs. The next jump between $1m to $2m however is not as extreme but it does of course rise. The next bracket would then be $5m and then most likely $10m and beyond.
Whether you split the $3m between 1 or 2 properties is personal preference however as you mentioned, if one was to sit idle the other would service the debt (assuming they are unencumbered) so this would give you a decent SANF (Sleep At Night Factor).
Also remember that a good tenant is not always about the overall size of the annual lease amount but more so about things such as length in business, type of business and the overall economy relative to their industry. I would say that a well structured lease will give you the same security with $1m tenant as it would with a $5m tenant. Just make sure you do your due diligence.

I have also seen some government tenanted places, is that as good as it seems? Are they hassle free?

Whilst govt tenancies will (seemingly) offer you a more stable tenant, they do typically have longer terms but carry with them lower yields. As anyone will tell you when dealing with any govt dept, they always want everything for the lowest possible price and property is no exception.
“Hassle free” comes from the following:
1. Air tight lease.
2. Govt, national or cashed up tenant.
3. Nice fat deposit guarantees in the form of cold hard cash (or hurt money) and directors guarantees.

Has anyone here found a tenant prior to building and created tailored solution on some sort of pre agreed long term lease? Is this getting too fancy for my pay grade?

I like the pay grade reference..
These types of properties typically carry 15+ leases and aren’t normally around the $1m mark. Whilst they do attract a higher yield, this is normally because the building carries a much higher rate of depreciation due to its specific nature. I would imagine this might be a little too much to bite of so early in your CIP career!

I'm sure I will blab about my adventures as/when I get to the pointy end of this thing In the mean time I will just hang and ask silly questions till I get it! I do however suspect Daz is correct, you just have to do it and learn.

Yep! You can only learn so much from books and da Google machine. The rest can only be learned down in the coal pits.

Cheers
B.D

 

[Zedlum]

Although I've never dealt with one for CIP, I would expect they are well versed on this part (the lease) of the process as it forms an integrate component of the deal. You may find however that they may not typically deal in the lower end you are looking. I know $3M doesn’t exactly sound lower end but in commercial terms, it’s still pretty small in the whole scheme of things.

Yup I realize that 3m is not a lot in the scheme of things however from what I have read that 1 to 10m range is too big for most and yet too small for the big money so it is a sweet spot for the privateer. Seeing the number of small properties on the market (< 10m) I would have thought that there would be some quite reasonable lease expertise available in that area?! No? I would have thought that you could buy pretty decent off the shelf leases (maybe I'm a little naive!) and build on them... surely they can't all be THAT unique? Sounds like there maybe an opening in this market ---> CIP lease factory... just a wandering thought.

Yes... I'm leaning toward the idea of 1 to 1.5m property with the best tenants I can find. I have seen a few that, at first blush, look sound.

I'd call 10% high yield, I would think I will be aiming at the 8 to 12 range... I'd guess that over that level something probably is not right.

 

[Scott No Mates]

Zedlum
your yield expectations for the quality of tenant or property price don't marry up.

Either you won't get a quality tenant for the value/size of property you're advocating or your yield expectation for a quality tenant is way too ambitious.

You might expect those returns on a $2 company but not with a blue chip.

As for leases, there are bog standard leases available but then you create your own annexures if required.

SNM

 

[Zedlum]

Zedlum
your yield expectations for the quality of tenant or property price don't marry up.

I have already seen properties that fall within my spec! & I never said "blue chip", I said sound.

 

[Scott No Mates]

I was skimming through the posts on my phone and making it up in between what I might have missed (govt was mentioned by Bird Dog).

But generally a quality tenant results in a higher price/lower yield not the other way around.

The $1-$10M market is highly sought after by SMSF owners so a premium is often paid in this part of the market (it also fits into the investment size for many property syndicates allowing smaller investors to take part).

 

[Zedlum]

The $1-$10M market is highly sought after by SMSF owners so a premium is often paid in this part of the market (it also fits into the investment size for many property syndicates allowing smaller investors to take part).

Interesting.

That is directly contrary to what I have read so far.

 

[Scott No Mates]

The price knocks out the mums & dads but that is where the next lot get in on the deals

 

[Zedlum]

The price knocks out the mums & dads but that is where the next lot get in on the deals

It still looks like a better deal with less competition.