commercial property

[drpiat]

hi everyone,

i just need to get my head around commercial property yields, i know whar effects it eg, length of the lease, property grade and rental increases etc, i just need to know if a 10% yeild can drop down into a 6% buy using all these factors in blue chip suburbs andwhat is the real effect, as in what formula can i use this to forcast the yield to a 10%

do i get valuers to do it?? are there any books specifically on this???

thanks

 

[geoffw]

The only book I've seen in the bookshops here has only just been recently released- "How Investing in Commercial Property Really Works" (Roth & Lang). It was on the shelves in a Canberra Dymocks bookstore.

A valuer might be able to give a quick opinion for a very small fee. Mine has been helpful.

 

[drpiat]

yes i understand what u say and thanl you for that.

why im asking cause i know u can drop the yield very quickly (within 120 days) so u can get 100% finance on commercial property,

so i guess there arent any calculations to do this by only speaking to the valuer???

from 10% to 6%???

thanks,,

 

[geoffw]

I'd start by doing some internet research first, so that you understand something of the variables.

There's lots of commercial properties available. Try honing in on your chose field. Google gives the option of suggesting only Oz links- that can help.

There's lots of different sorts of commercial property around. And there's lots of areas where the numbers differ hugely.

Say, shops, office, caravan parks, self storage, factories, listed property trusts...

Each has its merits and downfalls. So you would need to be more specific in your own mind and in questions asked.

Having said that- one important factor with any sort of commercial is the very real danger of vacancies. You have to be able to withstand (possibly long) periods of vacancy. So it's possibly best left to people who have a good income from elsewhere (possibly from residential property) who aren't really relying on that income for their lifestyle.

 

[drpiat]

yes i understand what u saying, ive been researching this for 2 years now,

i just wanted to know if there where any calculaters in determining the new yield to forecast for settlement

 

[Kristine..]

Hi drpiat

I'm not sure I understand this ..."why im asking cause i know u can drop the yield very quickly (within 120 days) so u can get 100% finance on commercial property"...


Yield is simply the rent in dollars divided by the purchase / capital price of the property, expressed as a percentage.

So if the rent on a property you are wanting to buy is, say, $20,000 nett per annum, and the property is for sale at $200,000, then the yield is 10%.

How can this 'drop' in 120 days?

Are you saying you want the value of the property to be deemed to have increased, thus the rent (which is +/- fixed because of the lease) divided by the 'new' valuation, becomes a lower percentage?

eg if you want the lender to accept a valuation of, say, $350,000 for the property, the same rent would then become 5.71%

Is this so the LVR of 60% would come in at $210,000 borrowing capacity?

How would you justify the sudden increase in the capital value of the property?

Municipalities require commercial property to be valued annually. As a commercial property owner I have to fill in quite extensive questionaires, detailing all incomings and outgoings, term of the lease, basis for rent reviews, etc

This information is available to valuers for review, lending, sale, insurance and all the other reasons for valuations.

Without substantial evidence, no valuer would accept a sudden change in valuation.

I refinanced twelve months after buying my bank.

Different lender, exact same valuer! 'Ah, yes, I remember this' he said 'Apart from the new carpet and the security door, everything else is the same. I still have my notes from my previous inspection. Is the air conditioner still a bit dodgy?'

There is no such thing as a free lunch. There is no such thing as a 57% increase in value just 'cos we would like it to happen.

If such a 'golden egg' property did exist, you would be flattened in the stampede of buyers to buy it!

However, while I was working in Melbourne CBD recently, I must admit there is a definite thrill walking amongst those towering columns of pure wealth! Even a small office block would make me very happy!

In the meantime I am happy to recommend commercial property as an investment but make no mistake, you have to be prepared to subsidise it while it grows it's own value (bit like children, really!).

Cheers

Kristine

 

[drpiat]

thank u kristine,

i understand what u saying but u can change the valuation of the commercial property by getting immediate possesion of the property before settlement, therefore changing the yield of the property,

im not focusing on cashflow on my commercial properties i focus on capital appreciation of these properties, just by changing the lease and grade of the building.

i understand what u saying and u r right, but when settlement occurs ive already changed the property, therefore im maximising the property.

 

[Kristine..]

???

drpiat

Wouldn't getting immediate (vacant) possession of the property before settlement mean the property is then owner occupied, and thus there is not a certifiable rent, unless of course you are saying that your strategy is to buy vacant property and lease it to yourself, so that you can demonstrate to the lender that the 'tenant' is paying $ in rent on this extended lease, and that yields for the area are % therefore this 'rent' x that % = this new value?

Well, ... in theory ...

But don't forget, anything too wide of the mark attracts close scrutiny.

If you are paying yourself a premium rent to revalue the property, and if you don't get Blind Freddy The Valuer, you may find that the lender will discount the 'rent' back to the normal level, plus how will you explain the windfall increase in supposed capital value when you have to show the Contract of Sale or failing that if revaluing, the Rates Notice?

I would certainly be interested in hearing more detail in how you have done this or intend to do this.

cheers

Kristine

***************

The Profile etc

 

[drpiat]

ur not fully understanding what im doing and i would love to show u how to do it but i dont like telling my secrets over this, if anybody is interested pls email me [email protected], im also on msn aswell

cheers,

dr piat

 

[Aceyducey]

Originally posted by drpiat
ur not fully understanding what im doing and i would love to show u how to do it but i dont like telling my secrets over this, if anybody is interested pls email me [email protected], im also on msn aswell

dr piat,

Your post makes no sense to me whatsoever.

First you talk about your strategy on the forum.

Then when asked for details you say you will not publish them publicly because they are a secret.

Then you offer to tell the secret to anyone who emails you.

Why not simply post it on the forum before someone who has been emailed your secret does so?

It makes no sense!!!

My first thought is that there is something dodgy going on......

Cheers,

Aceyducey

 

[bundy1964]

Adelaide has changed from the 7% new and 8% and higher returns for older properties to a 5-6% return market with some exceptions.

What used to be 150K is now more like 250K as the crowd has rushed in with little knowledge, this includes Dr's and supper fund managers.

Debanks just tie up more capital so they can do the loans without telling the history of rental returns or risk.

bundy

 

[Kristine..]

Hi Bundy

Yes, the inversion of rates has happened here, too.

But not overnight!

As I have mentioned previously, my rental return on the bank has changed from approx 12% to a current 6%. Yay! This has taken six years.

It certainly did not happen between signing a contract and settlement.

Commercial use in all its multifarous glory usually reflects the 'highest and best use' possible for a property. How anyone, no matter how creative with their structuring, could create a 60% increase in real value in a 120 day settlement which would attract bona fide major Bank finance is beyond my credibility!

Even getting a planning permit for a change of use would take longer than that.

My bank is on land zoned for Public Purposes. This is because the Council had originally planned to build a local community service centre there. However, these plans did not proceed and the Hotham Building Society built a bank on the land, with a permit to operate a bank.

When I bought the property I had to apply for a permit to operate a retail business from the property. This is among 108 shops. Did getting a retail permit add $1 value to the property? If another occupier wanted to run a bank, they would have to apply for another permit. Ditto, commercial use other than retail.

What about my medical centre? Because the residential property now has a permit to operate a business, the property is now rated as commercial even though no business is running and I haven't finished the redevelopment. There is no proven income from the building - it is neither fish, nor fowl, nor good red herring. Has it's value improved at all? I'll bet it hasn't.

And it is a red herring to think that any property can be improved 60% between purchase and settlement just because the incoming owner would like a new valuation for finance purposes.

Having said all that - I would be delighted to be proved wrong(after all, what do I know? I'm just The Invisible Woman)

Cheers

Kristine

 

[drpiat]

hi guys,

eg,

i brought a cp for 500k based on a 10% yield, i changed the nature of the lease, didnt even renovate the place and got a rental at 78k with 7% increases for 10years. the property is worth 1.1mill and i sold it for 1.2m

i did that in 90days


my question to u is, do u fully understand the concept of commercial property????

for a cashflow investor, thats a good buy


ta

 

[Kristine..]

OK drpiat

So, there's nothing magical in this! Phew! For a moment there I thought I was missing something!

So you renegotiated the lease, increased the rent, and on-sold the property with an existing tenant with a long lease and very strong rental adjustments (7% increases? The tenant obviously has a strong attachment to the place).

The lease has been substantially changed. This is like doing a major legal renovation on a property.

It presupposes a committed tenant. A Tenant in these circumstances would most likely be a tenant with a heavy investment in plant and equipment as well as the position of the building.

Obviously you bought the right deal at the right time.

Well done!

Cheers

Kristine

 

[drpiat]

no kristine,

no heavy equipment, no strong attraction to the property


its the way i structured the lease is very major, this is all i do, this pays my bills everything and i only do about 3 deals a year the rest im on holiday!!!!


cool hey!!!!

 

[bundy1964]

Originally posted by Kristine..
Yes, the inversion of rates has happened here, too.

But not overnight!

Hi Kristine

In Adelaide it took less than 3 months for the worm to turn.

Going to tyre kick at an auction tomorrow for a place that history would say should return 10-12%, will see if the market has run out of puff yet or not. Trial run for the office next week to see if I will be in the hunt or not.

I blame MB for it all

bundy

 

[Jerry Maguire]

drpiat

Yes it's all in the lease itself
The valuer will value the CP based on the lease
If you have a 5x5x5x5x5 lease with the rents go up 3% pa
and you rent it out to blue chip client
you can sell the place for much much more

Is that what you did drpiat?

Regards
Jerry
[email protected]

 

[Kristine..]

drpiat

Well, you've got me intrigued.

The scenario you have described is dependent on so many variables, but obviously you hit on the right combination of factors at the right time, to your great success!

Originally posted by drpiat

i brought a cp for 500k based on a 10% yield, i changed the nature of the lease, didnt even renovate the place and got a rental at 78k with 7% increases for 10years. the property is worth 1.1mill and i sold it for 1.2m

So in your example, you bought a property already returning $50,000. Based on a return of 10%, you paid $500,000.

You changed the nature of the lease.

Was this with the existing tenant, or did the existing tenant leave and you negotiated this with the new tenant?

The rental was then increased to $78,000.

This is an enormous increase! The property must have been severely under-rented when you bought it.

In Victoria, commercial leases require that not less than three months, and not more than nine months prior to the end of any period in a lease and in any case prior to any increase in the rent or change in the lease conditions, the tenant be given notice of such increase etc

So in theory (and unless the contractural terms of the lease provided otherwise) if you served notice on the tenant the day you bought the property you could achieve a change in the lease and / or the rent in 90 days.

And for a tenant to agree to 7% increases on a prime lease of 10 years?!

drpiat, these were obviously unusual circumstances, to say the least, and there must have been more to this than meets the simple description you have given here.

However, there will always be individual amazing, and individual depressing, stories to tell.

Yes, markets can shift in a relatively short period of time, and that shift can come about from many factors.

From my observations, the artificially low capital value of many commercial and industrial properties over the last 15 years while we went into and came out of the 'recession we had to have' has now levelled and commercial and industrial is now in a state of temporary market shortage. In and around Melbourne, factories, wharehouses, retail showrooms and office space are being built, in some areas, for the first time for many years.

In the meantime, businesses are still taking up established space as it becomes vacant but there is still a bottom line as far as rent payments are concerned.

The lava lamp of the market is fascinating to watch. Some bubbles rise faster than others, some bubbles bounce around at the bottom despite the warming effect of the lamp.

For every 'amazing' story there will be the story of the shop or office which, even at a low asking rent, has been vacant for five years and still no takers!

drpiat,

Thank you for your post. It's good to work through various real and hypothetical exercises, and Bundy attests to the Adelaide commercial market running 'hot' at the moment.

Good luck with your next purchase, I hope it's just as amazing and profitable as the one you have described.

Cheers

Kristine

 

[bundy1964]

I would think the buyers of such a property wouldn't use things like the commercial price guide.

If I got that yield I would be sitting tight on it, thats just me though

bundy

 

[MJK]

Does any of you commercial investors manage your own property.
If so how do you collect rent. I am invoicing rent and outgoings monthly and being paid by eft, but often the rent is late. What are your experiences. I am used to getting rent paid to me on the 1st or second of the month with my agent managed residential. Does commercial tend to be more of a we'll pay when we feel like it type of thing ?

MJK