Commercial Property Due Diligence

[Owen]

From: Owen .


I've been offered a commercial property but I have no experience with commercial so I thought I would ask those in the know what other things I should looking at or asking about.

The deal is a small retail outlet in a large complex in Sydney operating as a hairdressing salon. They salon has just signed a new 5 year lease at $825 per month. Asking price $99k neg. so it's a 10% return plus depreciation on common areas. Strata fees are $260 per year.

So the numbers are pretty basic but what else should I be looking at? The lease to ensure has annual reviews/rises factored in? Should I/can I look at the hair salons books to ensure they will be around for a while? How do I find out comparable rents/prices etc in the complex or in the area? What about previous sale info for commercial properties in the are? Do I just value it off the return? How do I find out the expected returns for an area? Is any of this relevant if it's got a stable business renting it and it's putting money in my pocket?

I haven't talked to the owner yet but I am getting together for a coffee this afternoon. Be brutal with me because at the very least it will be interesting learning experience for me.

Owen

"Gambling promises the poor what property performs for the rich – something for nothing"

 

[WebBoard]

Reply: 1
From: Dionysus888 .


Look at $ per sq ft and see how it compares to other similar properties in the area. Have a look at how the rental increases are calculated. Is it a good retail position, what other businesses are around it, do you have a directors guarantee on the rent, are there any options to renew the lease, what if the tenancy falls over and you need to replace it(how attractive is it to other prospective businesses). These are just a few things to consider. Commercial property can be a great investment but normally you would need to look at a much higher price range for good quality. Understand what is involved and be aware of the risks and you can do very well. When they talk about the wealthy people having their money in property, it is commercial( including retail, office & industrial) not residential that is the norm.
Dionysus888

You're not drunk if you can lie on the floor without holding on. ... Dean Martin

 

[JoannaK]

Reply: 1.1
From: Joanna K


Hi Owen,


Hope this helps, but purchase price of commercial is usually determined by the yield.

I've attached my Reality Value Calculator for you.

Check out yeilds in the area - seek out a property manager who specialises in commercial and pick his/her brains.

Have a look at what sorts of guarantees (if any) the tenant has given the landlord, it is not uncommon for commercial tenants to give the landlord a bank guarantee.

Also, check that the rent includes outgoings. Again, it is not uncommon for commercial tenants to pay part or all of the outgoings associated with the property - this will include insurances and land tax too.

Best of luck!

Kind regards

JOANNA

 

[WebBoard]

Reply: 1.1.1
From: Dionysus888 .


Owen,
Another factor you will need to consider is GST. How and what you are purchasing has different tax ramifications. Get expert advice.

You're not drunk if you can lie on the floor without holding on. ... Dean Martin