Buying a property that you rent

[skip]

Currently paying 28K per month rental on a retail shop in a nice shopping strip. Now have an opportunity to purchase the building at around high fives. my first thought is that it makes sense to do that however I have no idea how to evaluate such a proposition.
Any help that you smartybrains can give me would be greatly appreciated. I will consider any strategy if it seems that I really should be purchasing this property, JV etc.
cheers
love youse all

 

[Aaron_C]

If your business is profitable and you have the capacity to do it, then I would. However, if your capital is tied up in other things (coming up for a CIP deposit is a lot of dough at those levels) such as business expansion then you may not be able to do it. I would stretch for it as long as the price isn't ridiculous
I own my own shop so I can assure you it is a good decision to make as long as you stay there a long time and are able to lease it out easily if you do decide to stop.

 

[spludgey]

$28k per month including or excluding outgoings?
If it's excluding, then the rental would be less than 6%.
If it's including, then the rental much less than 6%.

You have to decide whether that's a good investment for you. But as far as commercial properties go, this doesn't look that great.

 

[Aaron_C]

$28k per month including or excluding outgoings?
If it's excluding, then the rental would be less than 6%.
If it's including, then the rental much less than 6%.

You have to decide whether that's a good investment for you. But as far as commercial properties go, this doesn't look that great.

To be paying that much rent (And for it to be available for sale) it would have to be on a major shopping strip or in the CBD. A rental yield of 6% is not such a bad thing - try buying any decent shop in Melbourne for over a 6% yield - it just won't happen.

 

[skip]

If your business is profitable and you have the capacity to do it, then I would. However, if your capital is tied up in other things (coming up for a CIP deposit is a lot of dough at those levels) such as business expansion then you may not be able to do it. I would stretch for it as long as stop.

Thanks for that advice Aaron. I definitely feel that the property ticks a lot of boxes; really vibrant shopping strip, lots of cafes, gastropubs, eateries, you know that kinda scene, stca you can build up or behind or both. Very easy i should imagine to rent out in the future or for that matter sell, so a good asset for a succession plan. I just don't know how to work out how much I should be paying for it notwithstanding the fact that it is probably worth a bit more to me than an entity just looking for another CIP, i am not going to pay any more than I have to. The agent gave me a figure that they will be marketing it at just because I enquired about that but there are not many properties that have been sold lately because it is tightly held, so there is very little to compare it with.
It may not happen for me but I would like to think it might.
Onya, Skip

 

[skip]

Sorry Aaron, Spludgey i don't follow. Are you saying nobody will buy it because the yield is not good enough, i am just a bit lost and I really want to 'catch your drift'.
I rent the shop, i pay the rent 28k, I pay ALL the outgoings; insurances, rates etc.
I worked out that based on the figure that I was quoted if I was paying the 'deathgage' instead of the rent it would be costing me at 8% full borrowings another 1500 a month approx but obviously you get all those advantages of depreciation, capital growth etc.

 

[Aaron_C]

Spludgey seemed to think that 6% yield is too low. I disagree as Melbourne CBD shops that are in good locations sell for far less than 6%.

 

[Scott No Mates]

If you know how, do a discounted cash flow and determine the net present value. On the expenditure put the purchase price, on the income side, put the monthly rent, then rent reviews and any of the expenses the lease doesn't reimburse (eg interest, land tax, mortgage insurance etc). Tally it up over 10-15 years (and a theoretical sale in 10-15 yrs time {assume say 3.5% pa compounded growth as the sale price}.

If the NPV & IRR compare better than those for your business, then it will definitely be worth it to you (whether or not it is worth it to another investor, that is up to them to determine).

Also look at the structure for the purchase - is it better for you to hold the property personnally, in the company, in another company or trust etc? If it is the same entity as the business then you will extinguish the lease and not pay rent but be paying interest and all costs instead.

 

[skip]

Spludgey seemed to think that 6% yield is too low. I disagree as Melbourne CBD shops that are in good locations sell for far less than 6%.

Aaron, how are getting the 6% figure?

 

[Aaron_C]

Aaron, how are getting the 6% figure?

Because you are paying $28k per month and are being quoted $5m for the property. $28k pm = $336,000 pa. Divided by $5m is 6.xx%, give or take.

 

[Scott No Mates]

Aaron, how are getting the 6% figure?

Analysis of sales - often from sources like the Aust Fin Review, commercial property section of Sydney Morning Herald etc.

 

[skip]

A thousand apologies Aaron, Spludgey et al.
I have just re read my post and realised that I made a critical error!
Its 28k per year and high fives i.e 570,000 dollars for the property. That changes things a bit doesn't it
Skip

 

[tobe]

A thousand apologies Aaron, Spludgey et al.
I have just re read my post and realised that I made a critical error!
Its 28k per year and high fives i.e 570,000 dollars for the property. That changes things a bit doesn't it
Skip

so now the rental yeild is 5%.....

Either your paying too much rent, or the vendor has unrealistic sale expectations.

 

[Aaron_C]

so now the rental yeild is 5%.....

Either your paying too much rent, or the vendor has unrealistic sale expectations.

5% yield these days in good shops is the norm.

 

[Scott No Mates]

Tobe, how do you come to the conclusion that the OP is paying too much as he hasn't disclosed his turnover? This ratio is inconsequential to the deal except for an occupant.

 

[tobe]

I agreed with an earlier posts that 6% was too low a yeild for a comm property. If 6% was too low, then 20% less than 6% (5%) must be too low as well?

I should have clarified that it was my opinion only.

 

[Scott No Mates]

Tobe, yields are also a reflection of quality and risk. Would you rather a retail property with a 9% yield but so specialised that there is little utility for other tenants?

I could argue that a passing yield of 5% is quite strong (for a cbd property) as this doesn't factor in any capital growth which would be higher in the cbd compared to suburban locations which can sell on (stupid) yields below 3%.

 

[Aaron_C]

There was a shop in Melbourne CBD that is leased to Telstra.....50 sqm on the corner of Swanston and Collins. Strata title. Rent is $500,000. Price? $10m (Sold).

 

[Scott No Mates]

$20k/m2

 

[skip]

If you know how, do a discounted cash flow and determine the net present value. On the expenditure put the purchase price, on the income side, put the monthly rent, then rent reviews and any of the expenses the lease doesn't reimburse (eg interest, land tax, mortgage insurance etc). Tally it up over 10-15 years (and a theoretical sale in 10-15 yrs time {assume say 3.5% pa compounded growth as the sale price}.

If the NPV & IRR compare better than those for your business, then it will definitely be worth it to you (whether or not it is worth it to another investor, that is up to them to determine).

Also look at the structure for the purchase - is it better for you to hold the property personnally, in the company, in another company or trust etc? If it is the same entity as the business then you will extinguish the lease and not pay rent but be paying interest and all costs instead.

Thanks for taking the time Scott, appreciated muchly. Same goes for all those contributors.