Like most people, we were having trouble finding +CF deals scurrying and fossiking (sp ??) around the residential stock. We were also pretty fed up with the constant whinging at the drop of a hat of our tenants over very minor details that took both time and money to rectify...to their satisfaction.
The penny eventually dropped that perhaps we were fossiking in the wrong chestnut pile, and our efforts may have be rewarded more by trying something new. We remembered receiving a "tip" from my wife's uncle, who was heavily into CIP's. His only brief comment was 'Once you've finished mucking around with houses - have a look at commercial'.
We didn't really think much of it at the time and dismissed it as 'something somebody else does', we'll stick to what we know and feel comfortable with.
It took about 18 months of inaction before a combination of whinging tenants / massive negative cashflows from the RIP's and that irking little voice of my wife's uncle in my ear that finally pushed us over the edge and out of our 'comfort zone' - what a scary place that is - but so exhilirating.
We furiously starting researching deals that were +CF, but really we didn't know where to start. These were some of the things we found ;
The financing was completely different
It was more expensive
The bank wouldn't lend as much against it
The agents were different
Everything that was a negative feature in RIP's was suddenly a sought after feature that you paid more for
Different terminology (NLA, nett rent, Lessor, 90 day bank bills etc)
We were literally floundering as most of our techniques for RIP acquisitions didn't work.
Despite all of the 'Oh my gawd's', and 'I don't feel comfortable' moments, we forged ahead regardless, expanding our comfort zone and narrowing our search down.
We eventually decided to have a crack at a place that unbeknowst to us, had been up for auction about 4 months previously and been passed in. We innocently rocked up and found the agent talking a different language. We were both trying to seem non-chalant as if this was perfectly normal, but he instantly cottoned on that we were newbies at this (the three little girls hovering around our knees sort of gave it away too).
The biggest thing that made us uncomfortable was that the vendor was one of Perth's biggest developers...a real sharp cookie who always made buku money off his deals...we were on the other end so we knew we were the patsies being bled. It also had bugger all land component, which we knew was important for future CG, but we just wanted to forge ahead and get the first deal under the belt and cop all the lessons in one hit.
On the positive side, we were encouraged with the 10 year lease, which read like a dream. Coming from a residential background, we couldn't believe tenants would actually agree to all of the onerous conditions placed upon them...and they had to fork out for absolutely everything. The developer had distilled down and cherry picked the best of all the leases he had ever come across in 30 years of investing into this one document. We saw a term that has remained with us ever since "At the Lessee's sole cost and responsibility to the Lessor's satisfaction." What a fantastic term and what a breathe of fresh air compared with RIP's.
We decided to go ahead and the deal looked something like this ;
Capital
1. Purchase Price $ 1.350 MM
2. Acquistion Costs $ 0.08 MM (95% of this was stamp duty on title)
3. Loan Amount $ 1.430 MM
4. Bank Valuation $ 1.350 MM
5. Land value - bugger all
Income
1. Nett rent of $ 120 K p.a. & GST (escalating $ 5 K p.a.)
2. Outgoings of $ 15 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 135 K p.a.
We were nearly duped on the deposit for this. The vendor's agent wanted $ 30K. Upon offering $ 5K, he said it would have to be $ 30K, such that if we had any problems - the vendor could hire a top flight lawyer and sue us with our money...that didn't go down too well...and we had to muster all our experience from previous deals to fend that one off. In the end he backed off with his ridiculous insistence.
There was some issues at settlement that were resolved eventually. They mainly centred around the tenant not getting on with the vendor. Once we took over, all problems seemed to disappear...I still find it amazing how a change of personality and "feelings" massively affects straight forward business transactions. I guess we are all humans who enjoy being treated with dignity.
It doesn't set the world on fire by any stretch, but we cut our teeth on it, and it provided much learning in terms of setting us down a new path. We vowed never to go back to RIP's after the purchase, and that philosophy has served us well.
Cheers,
Dazzling
"No point having a cake if you can't eat it."
The penny eventually dropped that perhaps we were fossiking in the wrong chestnut pile, and our efforts may have be rewarded more by trying something new. We remembered receiving a "tip" from my wife's uncle, who was heavily into CIP's. His only brief comment was 'Once you've finished mucking around with houses - have a look at commercial'.
We didn't really think much of it at the time and dismissed it as 'something somebody else does', we'll stick to what we know and feel comfortable with.
It took about 18 months of inaction before a combination of whinging tenants / massive negative cashflows from the RIP's and that irking little voice of my wife's uncle in my ear that finally pushed us over the edge and out of our 'comfort zone' - what a scary place that is - but so exhilirating.
We furiously starting researching deals that were +CF, but really we didn't know where to start. These were some of the things we found ;
The financing was completely different
It was more expensive
The bank wouldn't lend as much against it
The agents were different
Everything that was a negative feature in RIP's was suddenly a sought after feature that you paid more for
Different terminology (NLA, nett rent, Lessor, 90 day bank bills etc)
We were literally floundering as most of our techniques for RIP acquisitions didn't work.
Despite all of the 'Oh my gawd's', and 'I don't feel comfortable' moments, we forged ahead regardless, expanding our comfort zone and narrowing our search down.
We eventually decided to have a crack at a place that unbeknowst to us, had been up for auction about 4 months previously and been passed in. We innocently rocked up and found the agent talking a different language. We were both trying to seem non-chalant as if this was perfectly normal, but he instantly cottoned on that we were newbies at this (the three little girls hovering around our knees sort of gave it away too).
The biggest thing that made us uncomfortable was that the vendor was one of Perth's biggest developers...a real sharp cookie who always made buku money off his deals...we were on the other end so we knew we were the patsies being bled. It also had bugger all land component, which we knew was important for future CG, but we just wanted to forge ahead and get the first deal under the belt and cop all the lessons in one hit.
On the positive side, we were encouraged with the 10 year lease, which read like a dream. Coming from a residential background, we couldn't believe tenants would actually agree to all of the onerous conditions placed upon them...and they had to fork out for absolutely everything. The developer had distilled down and cherry picked the best of all the leases he had ever come across in 30 years of investing into this one document. We saw a term that has remained with us ever since "At the Lessee's sole cost and responsibility to the Lessor's satisfaction." What a fantastic term and what a breathe of fresh air compared with RIP's.
We decided to go ahead and the deal looked something like this ;
Capital
1. Purchase Price $ 1.350 MM
2. Acquistion Costs $ 0.08 MM (95% of this was stamp duty on title)
3. Loan Amount $ 1.430 MM
4. Bank Valuation $ 1.350 MM
5. Land value - bugger all
Income
1. Nett rent of $ 120 K p.a. & GST (escalating $ 5 K p.a.)
2. Outgoings of $ 15 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 135 K p.a.
We were nearly duped on the deposit for this. The vendor's agent wanted $ 30K. Upon offering $ 5K, he said it would have to be $ 30K, such that if we had any problems - the vendor could hire a top flight lawyer and sue us with our money...that didn't go down too well...and we had to muster all our experience from previous deals to fend that one off. In the end he backed off with his ridiculous insistence.
There was some issues at settlement that were resolved eventually. They mainly centred around the tenant not getting on with the vendor. Once we took over, all problems seemed to disappear...I still find it amazing how a change of personality and "feelings" massively affects straight forward business transactions. I guess we are all humans who enjoy being treated with dignity.
It doesn't set the world on fire by any stretch, but we cut our teeth on it, and it provided much learning in terms of setting us down a new path. We vowed never to go back to RIP's after the purchase, and that philosophy has served us well.
Cheers,
Dazzling
"No point having a cake if you can't eat it."
