Buying Shops

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From: Guy Wood


I'm looking at a property with 3 shops (side by side) & a separate 3 Bed house out the back. The RE Agent said there were significant differences between buying residential & commercial.
Anyone got any suggestions re questions to ask; things to watch for; good books to read?
Combined rent is $440/week & price should be below $220k. Everything's let with happy tenants.
Anybody got a clue as to ballpark costs to strata a setup like this?
Thanks,
Guy
 
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Reply: 1
From: Rolf Latham


Hi Guy

From a finance point of view, A big deposit is commonly the issue with commercial, 25 to 30 %. I know of no LMI insurer that will insure a commercial loan so the lenders want a little extra security

Ta

Rolf
 
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Buying Shops - long response

Reply: 2
From: Michael Yardney


Hi Guy
There are considerable differences between commercial / industrial properties and residential properties that make them a secondary choice for the beginning real estate investors.
The way I see it is :-
1. Commercial properties yield a higher return, and this is usually because the professional investors require a higher rental return to make up for this type of property’s poorer capital growth and longer vacancy factors. One bonus is that the tenants usually pay the outgoings on this type of property.
2. I find commercial properties less management intensive – the tenants take care of repainting and looking after the premises.
3. Lenders will usually only lend to 70% to 75% of the value of the property and I don’t know of any mortgage insurers who will lend on commercial property. This means the investor needs to come up with more equity to purchase a commercial property.
4. The initial investment required to get in to a good commercial property is usually considerably higher than that required for residential properties, as a good shop or office in a strong centre may cost 2 or 3 times the price of a unit or apartment. Sure you can buy cheap shops in secondary centres but they will usually have secondary tenants who are more likely to go broke and leave you with a vacancy.
5. Interest rates for a loan on commercial properties are usually higher than for residential properties- at present about 1% per annum higher.
6. When vacancies occur in commercial properties they are often for considerably longer periods that the week or 2 you may have a residential property vacant. How often have you seen a shop in your community shopping centre vacant for weeks or months?
7. The cycle for commercial properties is different to that for residential properties and is even more dependant on the general economic factors than the residential market.
8. The lease required on a commercial property is a much more complex and usually requires a lawyer to prepare.
My own personal experience owning a number of commercial and industrial properties is that while I have had no vacancies over the last 15 or so years (as one tenant moved out another moved in because I have owned the right type of property) my capital growth on these properties has been very poor even though they are in prime positions, My residential property investments have far outperformed my commercial properties.
So why do I keep them? Good question. Too keep a mix and balance in my portfolio.


Michael Yardney
Metropole Properties
 
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Buying Shops - long response

Reply: 2.1
From: Guy Wood


Great response, Thanks Michael.
So maybe I go for residential ....
a) More property for my equity with the greater LVR allowed
b) Higher capital growth means greater ability to borrow again in future
c) Less hassle.

Comments?
 
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Buying Shops - long response

Reply: 2.1.1
From: Anony Mouse


Michael
you wrote
4. The initial investment required to get in to a good commercial property is usually considerably higher than that required for residential properties, as a good shop or office in a strong centre may cost 2 or 3 times the price of a unit or apartment. Sure you can buy cheap shops in secondary centres but they will usually have secondary tenants who are more likely to go broke and leave you with a vacancy.
There appears to be a paradox here, if commercial property is 2 to 3 times greater, surely it must be keeping up with capital growth of residential units. Not being critical, just experiencing a bit of cognitive dissonance
Regards

"A government that robs Peter to pay Paul can always count on the support of Paul."
Of course, Paul's support is obvious, but it is equally obvious that to rob from Peter to pay Paul will make Peter very, very angry.
My question is this: "How can you run a good government with a sore Peter?"
 
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