CIP worth it for small properties?

[danwatto]

Hi All,

Currently considering next IP and have been thinking about making my first commercial investment.

I've been looking at 9-10% gross, 7-8% net small medical/doctors offices and other offices.

However I only have enough deposit for $200-$250k purchase, assuming 30% deposit, and $10-$20k of closing costs.

How much do you normally find closing costs are for commercial compared to resi? How much more are the lawyers and due diligence and everything else involved?
What should be my budget if buying a $225k CIP?

Assuming closing costs are similar if buying a $250k property or a $2m property (except for stamp duty), is it even worth me bothering with this and should i just get another residential instead?

I am looking at this as a learning experience though, where I can just buy one with lease, and start learning from here, then buy something bigger when I get more deposit from resi equity revaluations. The yield can still be found in the small properties, I'm just wondering if the accounting costs, and closing costs make it not worthwhile..

Or am I just better to wait and buy something bigger once I have more equity?

 

[D.T.]

You can get same yield from resi without the risk, and also in the same price range as you're looking at.

 

[starter]

I made a thread about a CIP I bought in the 300-350k range. Cashflow has been great but it does tie up much more of your equity.

 

[danwatto]

You can get same yield from resi without the risk, and also in the same price range as you're looking at.

10% gross yield in resi? Also in capital city?
Are you talking about single use property like student accommodation or retirement etc?

Have got some 7% and above but had not seen any deals like 10% however I'm happy to learn

 

[danwatto]

I made a thread about a CIP I bought in the 300-350k range. Cashflow has been great but it does tie up much more of your equity.

Thanks I'll have a look, I might have already read it I think. I read lots of this sub forum.

 

[Rixter]

Have you considered putting the funds you have into a CPT..

BWP ASX is one of many.

 

[danwatto]

Have you considered putting the funds you have into a CPT..

BWP ASX is one of many.

Hi Rixter,

Thanks, yes it's a good idea I had thought about that before. If I was at your stage of the game, I would probably be doing something like that as I'd want low risk low leverage safe income to live off.

However I'm still early in the game, wanting to accumulate and have high leverage. I was thinking I cannot get the same leverage on listed proprty trusts (are they called REITs these days?). The only way I know of leveraging into property trusts is with a margin loan (since the $80k would already be leveraged from existing equity).

While I have an appetite for some risk, margin loans are not something I like especially at 70% LVR that I'm thinking of. It's a bit scary the price being based on a sometimes irrational open market, and having risk tied to volatility.

But I can see your point - units in a property trust would get me into this asset class, with next to no closing costs, and lets me build my capital a bit more until I have enough to make this worthwhile. I'll think about it, but would probably rather buy another resi property and get the leverage + tax benefits in the meantime.

However I'm still thinking of giving a direct commercial cheapie a try - I can see one big advantage of it being small. If I totally screw things up, the screwup cost is going to be smaller, and the debt is smaller.

I do want to move towards this long term for my older years, so I'm happy to pay the high closing costs and learn the game even if it eats all my yield in the first few years. But never having done it before, I'm looking for some guidance on how high these closing costs really are, how much $ is it going to hurt to get into?

I will read starter's posts, but would also appreciate anyone else sharing some typical costs for some small deals.

 

[Corey Batt]

How does a B-D grade CIP investment assist in your investment strategy?

 

[Rixter]

However I'm still thinking of giving a direct commercial cheapie a try - I can see one big advantage of it being small. If I totally screw things up, the screwup cost is going to be smaller, and the debt is smaller.

Here's the thing that I've discovered about CIP.. the smaller the CIP the Higher the risk associated with the investment.

 

[HiEquity]

Here's the thing that I've discovered about CIP.. the smaller the CIP the Higher the risk associated with it.

While this may be true in many instances, the extremely long list of exceptions make such generalisations useless in practice. Just like saying investing in RIPs is risky.

DW - I find generalisations don't help. It most certainly is possible to buy an excellent cip in your price range just like it is possible to buy a dud. Advice on which is which can only be given in the context of the lease, the tenant, the location, the yield, the land value, the DD and many other factors.

DD and closing costs can be cheap or expensive, depending on the property.

 

[danwatto]

Thanks guys

In terms of risk I am only looking at capital city business districts office space, but yeah they can have long vacancies too. But I see your point, smaller properties means a smaller business. Small businesses have a higher failure rate etc..

Another thing to weight into the decision, I've just been running the numbers, and the opportunity cost is quite high for me to go CIP when I'm still eligible for more high LVR Resi purchases. My broker says I can get another one with LMI if I want.

OPTION1: CIP with $80k funds that needs 30% deposit:
$20k closing costs (inc stamp duty)
$60k deposit
=$200k purchase

OPTION2: Residential 12% deposit gives me two choices:
2x$200k townhouses; OR
1x$450k property in a CG area...
Both 88%+LMI

So while the CIP gurus may argue that CIP can still generate as much capital growth as residential, with the reduced leverage it would need to return double the CG to make up for the reduced leverage..

I'm going to have to think hard on this. I do enjoy the tax deductions from resi as well

 

[Rixter]

While this may be true in many instances, the extremely long list of exceptions make such generalisations useless in practice. Just like saying investing in RIPs is risky.

Yes it is a generalisation, as generally based upon my DD I have found this to be the case.

But as you say there are good investments to be had.

As with any investment type one needs to conduct the necessary DD and then once confident with the finds make one's decision based upon it.

 

[Shahin_Afarin]

CIP's are great but you will need plenty of cash to cover:

1. GST
2. Valuation Fee (not cheap but around the $1k-$2k depending on the security type)
3. Application Fee
4. Stamping
5. 30% plus deposit (may need more again depending on the security type)

Also note that most lenders will require an established lease and not a month to month or expired lease. Some will not require this if you can service the debt without the use of the rental income.

Be careful with commercial loans as they are completely different to residential loans.

 

[Scott No Mates]

Good point Shahin. Unlike residential property CIP are subject to gst so can add $25-30k unless you are registered for gst.

 

[danwatto]

Thanks Shahin

GST would be ok as I would have a trust with ABN & GST registration.

The other costs I kind of expected.

Although I was wondering how much more legal costs would be. But I guess it depends on the deal and the complexity.

Resi conveyancing usually being in the range of $500 - $1500, what range would you say for commercial?

Cheers

 

[Shahin_Afarin]

GST would be ok as I would have a trust with ABN & GST registration.

You lost me here bro.

 

[Shahin_Afarin]

Legal fees would be the same - its the bank fees (including valuation fee, application fee, etc) that will hurt you more.

 

[danwatto]

Not sure how I lost you What I was trying to say was, I would register for GST before purchasing anything. Also see Scott's prior post.

But thanks on the legal fees, if they are much the same it looks like costs are not much different.

However - if DT can tell me where he finds resi properties yielding like this, then I won't need commercial, will stick with Resi

 

[Shahin_Afarin]

For that price range the valuation could be approx $1,000. You don't pay this in resi lending.

App fee is also anywhere between 0.5% to 1.00% depending on the lender, structure, etc. Again its minimal with resi lending.

I actually like CIP's but need to be aware of the fees and a shrink in lender options if there is no lease in place (or if its expired, year left, etc).

 

[ije]

I'm going to have to think hard on this. I do enjoy the tax deductions from resi as well

Dan- you are mirroring some thoughts of mine exactly. I've been crunching numbers on small offices and strata factories. I'm coming to the conclusion that it's not super returns. I've been reading some Saville reports on Sydney regions ( they do them per region...north Sydney, parramatta, cbd etc) and they provide some interesting stats on roi, vacancy, etc per grade of investment. I think id need to invest more to get the right grade/return/risk profile.

Thanks for kicking off the thread.

Ps-I'm having a session with a trusted fin planner/accountant early next year to help define a strategy for the wife and I, else I will just keep losing sleep researching such things endlessly!