Commercial property principles

Hi,
I wanted to ask those with commercial property inv experience for your general advice.
I am looking at a small factory (for around 550K, bringing 26K pa) but have not invested in this type of commercial property before and just want to get tips on where the basic principles would differ compared to residential.
Any particular questions I should be asking, or things to consider which are/are not relevant compared to residential?
Thanks for any tips at all.
Pos
:)
 
Hi,
I wanted to ask those with commercial property inv experience for your general advice.
I am looking at a small factory (for around 550K, bringing 26K pa) but have not invested in this type of commercial property before and just want to get tips on where the basic principles would differ compared to residential.
Any particular questions I should be asking, or things to consider which are/are not relevant compared to residential?
Thanks for any tips at all.
Pos
:)

At those numbers stick with residential investing. Even if it was triple net of all costs, a 4.7 % yield on purchase price is woeful for industrial. I am assuming it's in Melbourne which has pretty ordinary yields anyway, but at that level barely worth the risk...........unless it has a twist with upside, such as stand alone with extra land to develop on.

On a small industrial IP (probably strata at that price point you've indicated), I would be wanting 8 % net at the very least.
 
The lease varies substantially from a residential lease - there are few set rules, there is no umpire/regulator.

Leases over 3 years must be prepared by a solicitor.

Leases may be net (tenant pays all/specific costs) gross (all inclusive except for water usage).

Due diligence is is more specific.

Bond is much more realistic (3-6 months depending upon term of lease).

Here's a little more: AIA - commercial
 
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Investing in commercial property depends on your overall investment strategy. Most people get into commercial investing because they provide higher yields than residential properties, however growth ca sometimes be a little stagnant depending on the market conditions.

It's always best to consult your accountant or financial adviser to make sure this type of investing suits your overall position.
Other aspects to consider is financing these types of properties.

Commercial lending works very differently to residential and it's best to research the type of loans that are available to you. Australian banks and other commercial lenders each have their own risk profiles and maximum loan amounts. The maximum available from our lenders are:

80% of the property value for loans up to $1,000,000.
75% of the property value for loans up to $2,000,000.
70% of the property value for loans up to $5,000,000.
Loans from $5,000,000 to $50,000,000 are on a case by case basis.
Aside from the lender, the type of loan and nature of your security will have an affect on the amount that you can borrow:

If a residential property is used as security you may be able to borrow 100% of its value.
Lease doc, low doc and no doc loans will require a larger deposit.
Specialised security properties will require a larger deposit.
 
Most people get into commercial investing because they provide higher yields than residential properties...

Really? The residential tenancies act isn't enough reason? Longer leases? Net or semi-net leases? Ability to lock-out a tenant upon default. Fixed rent review mechanism, no need to negotiate further. Restrictions as to use. Fitout by tenant.

Nup. As Dazz would have said, "you'd have to be a mug not to invest in commercial."
 
Really? The residential tenancies act isn't enough reason? Longer leases? Net or semi-net leases? Ability to lock-out a tenant upon default. Fixed rent review mechanism, no need to negotiate further. Restrictions as to use. Fitout by tenant.

Nup. As Dazz would have said, "you'd have to be a mug not to invest in commercial."

Just need to get the capital behind me and I'm there!
 
you can always borrow.

Of course you can borrow! I had a bank call me out of the blue the other day after I just borrowed circa half a mil from them and ask if I wanted a fancy little piece of plastic that would let me borrow up to 12k on the spot no questions asked.

Everyone and anyone will let you borrow!

But can you pay back? :D
 
Hi,
I wanted to ask those with commercial property inv experience for your general advice.
I am looking at a small factory (for around 550K, bringing 26K pa) but have not invested in this type of commercial property before and just want to get tips on where the basic principles would differ compared to residential.
Any particular questions I should be asking, or things to consider which are/are not relevant compared to residential?
Thanks for any tips at all.
Pos
:)

That return is awful :eek:

If it is a blue chip tenant on a 10 year lease you should expect a nett 6% minimum, for every chink add an extra 1%.

A no name tenant on a 3 year lease would have to be at least 8% for me ;)
 
that can actually be a bugger, esp if not to market and for longer lease terms

ta
rolf

I usually tell landlord clients to have a market review every three to five years, and always on exercise of the option. That way your sins are forgiven if the market moves quicker than the CPI or fixed interim reviews.
 
Market rent reviews can be fraught with danger - they should be able to be an optional if the lessor requests a review (I have seen the requirement not enforced during a market correction otherwise it would have resulted in a 20-25% reduction in asset value or $20m :eek:).

I have seen MRR issued as fixed increases or as CPI and duly rejected by the tenant.

I do agree that MRR should be applied at a maximum of 5-6 year intervals at the lessor's discretion.

Rolf, by 'fixed rent review mechanism' I was alluding to the types of review are agreed in the lease document, these can be fixed $ increase, % increase, cpi, cpi+ % or MRR with or without a ratchet.
 
Agree with player. At this playing level (ie half a mil or so), the industrial sites will normally be at some pretty mediocre locations. Once your tenant goes bust/lease expires etc and it goes vacant, you could sit empty for 1-3 years, EASILY.

The only angle is a residential development permit. If you can get say 3+ stories permit then maybe. If you can get 5+ stories probably jump at it. Sell the thing off for $1.5m in a heartbeat.
 
At those numbers stick with residential investing. Even if it was triple net of all costs, a 4.7 % yield on purchase price is woeful for industrial. I am assuming it's in Melbourne which has pretty ordinary yields anyway, but at that level barely worth the risk...........unless it has a twist with upside, such as stand alone with extra land to develop on.

On a small industrial IP (probably strata at that price point you've indicated), I would be wanting 8 % net at the very least.

Agree with player. At this playing level (ie half a mil or so), the industrial sites will normally be at some pretty mediocre locations. Once your tenant goes bust/lease expires etc and it goes vacant, you could sit empty for 1-3 years, EASILY.

The only angle is a residential development permit. If you can get say 3+ stories permit then maybe. If you can get 5+ stories probably jump at it. Sell the thing off for $1.5m in a heartbeat.


At no point does Player suggest redevelopment of the industrial as an option - he suggests that it would be a strata property. So redevelopment isn't an option without the other owners of the strata being on board.

The conversion from industrial to residential would also require detailed contamination reporting and clearances depending upon what is found on the site and the previous uses of the land.
 
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