Commercial Property vs Residential Property

[bluejeans]

Hi all,

I was hoping whether someone out there would be able to provide advice around the purchase and maintenance of commercial property.

I have identified a couple of commercial properties in the Central West of NSW which on paper look to provide good secure lease returns. However, I am still unsure whether to pursue these opportunities because of a lack of knowledge about commercial properties.

My questions:

1) Are there any rules of thumb on how Commercial Properties (CP) perform against Residential Properties (RP) wrt. Capital growth, rent, vacancy rates?

2) Are there differences to be considered when approaching a lender for a loan to finance a CP investment vs RP?

3) What should we we watching out for when inspecting CP?

4) Is it a good sign if the current tenant is on an 18 month lease with an option to renew for 3 years?

cheers

bluejeans

 

[NigelW]

Originally posted by bluejeans
Hi all,

I was hoping whether someone out there would be able to provide advice around the purchase and maintenance of commercial property.

I have identified a couple of commercial properties in the Central West of NSW which on paper look to provide good secure lease returns. However, I am still unsure whether to pursue these opportunities because of a lack of knowledge about commercial properties.

My questions:

1) Are there any rules of thumb on how Commercial Properties (CP) perform against Residential Properties (RP) wrt. Capital growth, rent, vacancy rates?

- expect higher gross and net returns but higher vacancy rates. You should be able to stand many months vacancy...if you can't then commercial is not for you

2) Are there differences to be considered when approaching a lender for a loan to finance a CP investment vs RP?

- yes. They will typically lend less ie lower LVR because commercial property is regarded as inherently riskier. The rationale is that people always need shelter whether working or not, but businesses can fold and not need space...

3) What should we we watching out for when inspecting CP?

- one of the fundamental differences is that the terms of the existing lease are crucial. Every commercial lease is different and you are, to a degree, investing not only based on the bricks and sticks but on 1) the lease terms and 2) the solvency and prospects of the tenant

- also watch out for the quality of fitout and when it will need to be redone and who is responsible for it...and who has to restore it to starting point if tenant goes belly up

4) Is it a good sign if the current tenant is on an 18 month lease with an option to renew for 3 years?

- it depends. if they're near the end of the 18 months and aren't going to exercise the option then - NO.

cheers

bluejeans

Good luck and get some professional advice, particularly on the lease!

Cheers
N.

 

[geoffw]

Another thing to consider when borrowing, is that apart from a lower LVR, the loan term might by 10 years P&I. That can mean MUCH higher regulasr outgoings.

For some general overview of investing in commercial property, I've mentioned a book in the thread http://www.somersoft.com/forums/showthread.php?s=&threadid=12457. It's general, and will not get you enough knowledge in iteslf to go it alone, but it will give you a fair overview.

 

[Kristine..]

G'day

Apart from population densities in rural areas (minimum population of 10,000, or else 'sparcely populated areas' requirements apply), Banks are shy of commercial properties, and will quite often only lend to the extent of the lease.

Thus, an 18 month lease would, in theory, attract 18 month lending!

This is why commercial properties are often put to the market as soon as a new lease is signed. Ideally, a lease would be based on brackets of five. In Victoria, a first time retail tenant is entitled to a minimum first term of five years, even if they only sign up for, say, a twelve month starter lease.

Banks will generally only go to 15 years for commercial lending, so the ideal lease is

5 x 5 x 5.

Most Banks will only take commercial security to a valuation of 60%, and you will have to put cash or cash from equity to the other 45%.

However, bluejeans, commercial can be a lovely investment, and if you have plenty of equity in other residential property, or a line of credit set up somewhere else*, then you can do very well from small retail holdings.

*The proviso here of course is that if you are using regulated loans to buy in an unregulated situation you really should consult with your Broker as to lenders requirements for structuring the deal.

Cheers

Kristine

PS I am very fond of my commercial property and plan to adopt a brother or sister for it very soon (this week).

Watch this space!

 

[Lilith]

bluejeans,

commercial = office space or retail space? They are very different creatures. The common characteristic compared to residential is: higher risk for higher return.

For an office space, you can probably get by without going there to do a thorough research. If you are dealing with retail space, I'd suggest that you buy a book on how to evaluate a retail space and then spend a couple of days there to observe the traffic flow yourself. Observe how pedestrains walk and turn at certain corners. Most retail locations have a reputation among the retailers in that area, that's why even in a high traffic arcade, you will still see a few blind spots that will be consistently left vacant. If you are investing in a mall, do pay attention to see if there are already anchor shops, it would be nice if you can find out how long their leases last.

 

[bluejeans]

The opportunity is actually a shed ... well actually 2 sheds.

One shed is currently leased as described above to NDC (spin-off from Telstra) ... while the other shed is currently vacant and undergoing refurbishment. The vendor is willing to provide a written guarantee that the second shed can be leased for 2 years).

We had a look through the place and it looks well maintained and in good condition.

Our initial enquiries suggest that the vendor is selling up to invest in other opportunities.

bluejeans

 

[Kristine..]

Lilith

Very good point regarding traffic and traffic patterns.

My ex-bank is in a great spot, high visibility, but was 'invisible' for a long time.

The whole frontage is tinted glass, which makes it very difficult to connect the inside with the outside.

My tenants have 'bannered' the shop, installed neon signs fitted inside against the street windows (the signs are lit continuously), had the rear of the shop (opposite the railway station) fully sign painted, etc

Now, the shop is 'known' to everybody. It has gone from being a shop among others to being a local landmark.

A lump of ugly clay can be turned into the most beautiful and valuable sculpture in the hands of a skilled potter.

You're right. It is important to see how many other skilled potters there are in the immediate vicinity, and to know how skilled your tenant is.

The same is true of any business and of any investment.

Cheers

Kristine

 

[bundy1964]

For loans you can look here -

http://www.morganbrooks.com.au/

http://www.banksiagroup.com.au/default.asp

You can also try the resident brokers here.

Sheds may have the lowest LVR of all the commercial property available.

bundy

 

[bluejeans]

Many thanks all,

From the advice provided, and after doing some further research, it would appear that putting money in a couple of sheds would not be a wise way to invest my capital.

Cheers