Commercial props - our stories
- Thread starter Dazz
- Start date
deleted.. Don't worry
Daz,
If I had a block of land appreciating in value like that and all it cost me was rats and taxes and the occasional week wacking I'd be fairly stoked as well.
However, I can assure you that apart from strategic decisions regarding competition, every acquisition from the $5m block of land through to $500m shopping centres, the price has been based upon NOI (current or projected) and cap rate.
If I had a block of land appreciating in value like that and all it cost me was rats and taxes and the occasional week wacking I'd be fairly stoked as well.
However, I can assure you that apart from strategic decisions regarding competition, every acquisition from the $5m block of land through to $500m shopping centres, the price has been based upon NOI (current or projected) and cap rate.
asdf said:
Hi ASDF, I wrote about our penultimate purchase a while ago and couldn't find it. I stumbled across it just now and so find below my ramblings for our second industrial foray ;
When we purchased the prop, it had been on the internet listing boards for 8 months. It was ugly and it was nasty. It also wasn't cheap. The rental yield was 6.9% gross, and taking out all prop expenses liable to the owners, that brought the nett yield down to 4.5%. Compared to the cost of funds - 7.3%, it was a negative CF prop and obviously investors were sailing over the top of it - dismissing it as a dud. Hell, we did too initially.
Of course, none of that info was actually listed on the internet add - it simply said "wonderful development potential with some holding income" accompanied by a picture of a rusty ol' truck leaning on one axle up against some very dated 60's sheds.....hmmmm, real attractive !!!!
But after some DD, and some head scratching about how we could turn it all around, we took the plunge. Our Banker thought we were nuts. I remember him saying "you're braver than what I am taking on something like this"....perhaps he was right initally. But then, he was just our Banker on only 150K p.a. Risk vs return - right ??
After 11 full months of owning this ugly duckling, paying literally all of the holding costs and putting up with the following ;
1. Verbally fighting with illiterate tenants.
2. Physically kicking out other dregs who refused to pay any rent whatsoever.
3. Having shed walls purposefully vandalised with trucks and forklifts.
4. Having 2 pallets of asbestos illegally dumped at the back of the block.
5. Cleaning up 83 tonnes - yes - 83 tonnes of other people's garbage.
6. Spending lots of hours weeding and tidying the place up.
7. Advertising and negotiating our little sox off
The "ugly duckling" property has now, together with our marketing and negotiating skills attracted a "beautiful swan" Lessee who has committed in writing to a 15 year Lease over the property, starting at a rental yield of 10.25% nett. At the end of the first 5 year term the rent will be 12.4% nett.
So, the property is now cashflow positive, on the same cap. rate it's now worth about 400K more than when we bought it last year, and although we worked our butt off during our time off normal paid work, it now should look after us for the next 15 years hassle free.
Of course, if we wanted to get rid of it now, the price would be so high....with everything now done a nice cruisy fat cheque nett of all property expenses lobbing into your bank account for the next 15 years.....you'd probably think it was a rip off. Maybe so, but then after all of the hard yards we've put in, and the likely growth on the large land component (89% of the value) over the next 15 years, the thought of selling it and handing a plum gift to some passive investor just doesn't appeal.
Bottom line is, the property is nothing like it was compared to when we bought it, the daggy tenants have been booted out, a professional outfit has moved in, and none of the above could ever have been "seen" trolling RE.com or any of the other internet sites.
There's oodles of opportunities out there similar to our ugly duckling - 'cos lots of people love living in and working in pigstys.
What I can guarantee is that none of these opportunites similar to our "beautiful swan" are sitting there on the internet shelf just waiting to be plucked off. They are all still there mind you, but it requires a bit of elbow grease and negotiation before you can actually "see" them.
The Lessee has applied for a License from the council to turn it into a state of the art recycling depot. The License has been approved but is pending on the Lessee being forced to spend ± 150K doing up our property. He needs to completely re-bitumenise the full 7000sqm, install sewerage and drainage, install brand new sheds at his cost and submit traffic flow diagrams and revamp the front sheds into a modern office, all at his expense, before the License is granted. The contractors are there this morning (Perth Friday am) laying the bitumen as we speak. Works should be finished by the end of May, all the while he's paying us nett rent.
Leasing the place for 15 years though, he'll get his money's worth out of the improvements, I'm sure.
You don't normally get that type of assistance from a tenant in the residential sector....one of the many reasons we stopped buying houses over 2 years ago.
Amazing stuff. You have a whole lot of guts, and has paid off. I could never do something like that.
Hi Ben,
Westpac would certainly be classed as a blue chip tennant, did they break leases or just not renew them? I did mention long leases. Also if the properties are in blue chip locations it wouldn't have been overly difficult to find another tennant.
I'm not trying to change your mind if commercial investing is not for you, just giving my opinion, if you don't aggree thats fine.
Regards
Alistair
I didnt say its not for me, no need to change my mind...
I just want people to understand the differences in the commercial market, and even then I am only generalising. The only market I have experience with is Sydney M5 corridor properties.
I was just recounting a story of some unlucky folk who lost a lot of money on the assumption that prime properties, strong tenants and long leases will have low vacancies.
The Westpac branches were on long leases, but when a lease term expires and the option is not taken you are left looking for a tenant.
The properties were bank branches, it is fair to assume that these were blue chip locations, and were not isolated cases - it happened to many many people (it would have been useful to find the article as a reference but I have not been able to find it)
Any reasonable person would have made the same assumptions as you stated (I would have done the same thing) - the lesson to learn is that this is not always the case!
I just want people to understand the differences in the commercial market, and even then I am only generalising. The only market I have experience with is Sydney M5 corridor properties.
I was just recounting a story of some unlucky folk who lost a lot of money on the assumption that prime properties, strong tenants and long leases will have low vacancies.
The Westpac branches were on long leases, but when a lease term expires and the option is not taken you are left looking for a tenant.
The properties were bank branches, it is fair to assume that these were blue chip locations, and were not isolated cases - it happened to many many people (it would have been useful to find the article as a reference but I have not been able to find it)
Any reasonable person would have made the same assumptions as you stated (I would have done the same thing) - the lesson to learn is that this is not always the case!
hi XBenX
just a side line 263 wadell rd was a commonwealth bank built by them and when they closed down food association bought and then me.
and I had a tennant in 7 days this is not advice and each to there own.
ex banks are usually blue chip and they are also usually 3 brick wide construction so are very strong and I did get chubb to quote to remove there safes and it was 110k each to pay them and they got the safes for free,
so I left them there as storage and the tennant uses them.
ex banks are very good from my view so the westpac sites, or the tabs are usually in areas that require tennants and are for me very good places to have a look at.
if people have lost money holding those assets they have not been marketing correctly.
my .002
just a side line 263 wadell rd was a commonwealth bank built by them and when they closed down food association bought and then me.
and I had a tennant in 7 days this is not advice and each to there own.
ex banks are usually blue chip and they are also usually 3 brick wide construction so are very strong and I did get chubb to quote to remove there safes and it was 110k each to pay them and they got the safes for free,
so I left them there as storage and the tennant uses them.
ex banks are very good from my view so the westpac sites, or the tabs are usually in areas that require tennants and are for me very good places to have a look at.
if people have lost money holding those assets they have not been marketing correctly.
my .002
APerry said:
Just as an example, the ANZ branch in Chatswood, Sydney (corner of Victoria Ave and Albert St) closed down years ago, and the place just never managed to hold onto a tenant. It's been all sorts of shops over the years. The Maccas next door closed as well, and it's been vacant for a while.
This is RIGHT on one of the busiest corners of Chatswood, right next to a major shopping centre (Chatswood chase).
Alex
firstly, let me say that this is a great thread 
for those looking at commercial properties near the city, how do terraces with commercial zoning / usages compare with other types of commercial properties. my thinking is that a terrace with both residential and commercial zoning should benefit from the capital gains that is often slower in other commercial properties? i've notice that quite a few terrraces are utilised like this for head offices/galleries/showrooms, etc.
in respect to commercial properties, i do not own any (though i hope to one day) but i have done many deals for lessees. if you have a largish property / development be prepared to compromise if your dealing with a high profile lessee. expect to shell out for fitout, extended rent free periods with fitout periods, gross rentals (not so bad as it will factor in the outgoings to a certain extent), company guarantees only and quite a number of other conditions. on a plus side, you will secure a long lease, a high profile tenant that will add value to your property as well as attract other good tenants who will want to be close to the high profile one that you have secured. in many instances, the lessee will dictate or issue the lease and if things go wrong, alway remember if your dealing with a large organisation, chances are their pockets are very deep having said all this, when it all comes together it works wonderfully for all parties concerned.
cheers,
julie
for those looking at commercial properties near the city, how do terraces with commercial zoning / usages compare with other types of commercial properties. my thinking is that a terrace with both residential and commercial zoning should benefit from the capital gains that is often slower in other commercial properties? i've notice that quite a few terrraces are utilised like this for head offices/galleries/showrooms, etc.
in respect to commercial properties, i do not own any (though i hope to one day) but i have done many deals for lessees. if you have a largish property / development be prepared to compromise if your dealing with a high profile lessee. expect to shell out for fitout, extended rent free periods with fitout periods, gross rentals (not so bad as it will factor in the outgoings to a certain extent), company guarantees only and quite a number of other conditions. on a plus side, you will secure a long lease, a high profile tenant that will add value to your property as well as attract other good tenants who will want to be close to the high profile one that you have secured
. in many instances, the lessee will dictate or issue the lease and if things go wrong, alway remember if your dealing with a large organisation, chances are their pockets are very deep having said all this, when it all comes together it works wonderfully for all parties concerned.cheers,
julie
Gratz Dazz, i hope to one day be in your position
