Buying a building in the local shopping strip?

[The_Bludger]

Had a chat to a bloke that runs a charcoal chicken shop in my area. He pays $950 a week in rent and building is valued at $1M. That's nearly 5% return and I'm assuming all outgoings are the responsibility of the tenant?

Seems like a pretty good deal to me. Why do we love resi investing so much? Do we use it as a stepping stone or is commercial investing too complicated or high risk? Sounds like commercial is less of a headache and frees up weekends, instead of painting, tiling or renovating the bathroom for the next resi tenant!

Would love to hear from people.

 

[Ausprop]

the yield seems very low

 

[boods99]

I agree with Ausprop...not the greatest yield for a CIP.

The problem they have is that if the business goes broke, they may find it hard to get another tenant in place as the property is obvioulsy designed as a fast food outlet, thus limiting your prospective tenant pool, without major alterations.

With Resi, there is always someone that will rent it off you, as long as the rent is right...

Its the age old addage, the higher the risk, the higher the return.

Boods

 

[Kristine..]

G’Day there Bludger

Yeah, it all looks good on the surface, doesn’t it!

We bought a Bank in a well established shopping strip back in 1997. Prime position, can be seen from two major roads, plaza out the front, nice solid construction.

It was built for a Building Society in 1984 and had always been used as a Bank or Building Society premises.

I ran my own retail business there for two years and then let it to a photo processing business. The third photo processing business closed in March this year. We were lucky to let it immediately but with three months rent free.

The first month’s rent goes to the Agent, so that’s four months without income. With a tenant.

When we bought we could only borrow to 60%LVR so that’s a lot of equity coming from another property.

Now, you can borrow to a higher LVR with full doc commercial applications but don’t expect residential lending rates, and generally speaking, commercial loans are for a maximum of 15 years – or the life of the lease.

No lease, no value.

Our new tenants have taken a three year lease with two options of three years each. This lease would not get any purchaser a prime loan.

We have a good commercial Agent, but even so, the walls and roof are our responsibility and so is the air conditioning plant and equipment. The tenant pays all outgoings as well as the rent and is responsible for servicing the equipment. After the last tenant Mike reckons the air conditioning filters hadn’t been cleaned since he did them five years previously.

The other commercial property we bought with Solicitor’s funds and that had a tenant for about 15 months after I moved out and now has a new tenant, so goodbye another month’s rent even though changeover happened on the same day.

I had a few capital items with the first tenant – downpipes needed replacing and the sewer outfall had shifted because of the drought, but she obviously didn’t understand commercial leases too well and asked for some other things such as a new door fitting which would have cost $400. This request was politely declined but she was welcome to change the fitting if she wanted to, and rekey the doors at her expense.

However, both properties have improved in value and even though the Bank is now worth at least three times what we paid for it, that was 1997 and this is 2009. The smaller property was bought in 2004 and is now worth about double, and that is in a backwater strip but in a nice, respectable area in the middle of a residential estate. Not a thriving hub of commercial activity!
Interestingly, both tenants are ‘not for profit’ organisations. Sign of the times? Both tenants have committees and volunteers and the Bank is used as a retail outlet but the smaller shop is used for meetings and gatherings. Well, it’s 120msq so it’s not that small.

We certainly don’t regret buying commercial. Both properties are now starting to mature as investments, but the residential have done just as well and we certainly don’t spend our weekends painting and tiling! There is more wear and tear on residential and we have had periods of vacancy when least expected – we had four unexpected vacancies at the beginning of this year (ouch and double ouch) but all properties rented quickly and at increased rents. The two residential vacancies each required a bit of a going over but I am over going over so had the Property Manager arrange for the work to be done. We didn’t have the time between tenants to do it ourselves, anyway, and some things, such as a jemmied front door, were not apparent until the new tenants moved in.

So buy commercial if you have 40% plus GST plus Stamps available, and make sure you always have a healthy slush fund for unexpected – and possibly major – events such as repairs or vacancies.

If you buy a food outlet then you can only rent it to another food business, and although one of my residential tenants set fire to the kitchen, you are at a higher risk of damage with commercial properties.

If you can take all this into account, then take a deep breath and good luck! But there is no such thing as a free lunch so do your homework which will involve slightly more than a bit of a chat to the current tenant!

Cheers
Kristine

 

[The_Bludger]

Thanks guys, especially Kristine. Some great info there...

In regards to yield, what should I be aiming for? 10%? Still building up the resi portfolio, but also have a substantial amount of cash and equity I can play with.

A very successful cousin of mine recommended I sell my resi's and by inner city factories as the yield is excellent and the onus to fix most things is on the tenant. What do others think?

 

[RumpledElf]

Commercial is strange ... we have very few commercial buildings for sale here and they are all over the place. Vacant shops in dubious towns for $20-50k, a tenanted bank in a growing town with a so-so yield and a badly worded advert with an agent that doesn't respond to emails, a falling apart service station for $300k in a stagnant town, and a bakery that looks like it is well on its way to going out of business for $400k (otherwise the building is well located but still not worth THAT much) The price of the bakery surprised me, all the ads on the internet have no price listed but I passed it in the window of the agent when I was buying chook food.

Can't afford any of them, but the bank looks interesting

 

[Cashflow]

I agree the yield is low. You can pick up commercial properties returning 9-10% with long leases that have additional options.

Be aware of commercial buildings that are purpose built (ie fast food outlets, pre-schools, bowling alleys). These limit your tenant pool for new tenants and are also harder to finance. You will also need a larger deposit.

If buying a commercial look at yield, tenant (especially personal guarantees for rent outstanding if business goes broke) and duration of lease.

Personally I find commercial investing easier than RESI - one building, one rental invoice, one rent and no need for a REA (even though the property is interstate) with the returns higher.

But it does also help if you have a good communication with the tenant and you also keep your end of the bargain.

Keep looking and if you find another property ask about it on the forum as there are a lot of knowledgeable people here that will give you advice.

Best of luck!

Peter
www.privaterealestate.net.au
www.cashflowcalculators.com.au