Dispose of poorly performing commercial prop?

[willister]

Hi All,

Thought I'd pick your brains and see what you guys would do in this situation. The wife wants out and move on...but I sort of feel jumping off at the moment is not a good idea...

We purchased the shopfront/warehouse in 2007 for about $500K - it was quite worn down with a decent tenant (who eventually didn't take up the lease after the first expired). Thought the area was going to boom but it hasn't really nor has it re gentrified. We thought it was an OK buy at the start because the size was 600m2 for the price.

Repairs cost us about $20K, electrical & plumbing work another $20K and legal costs to cover two matters cost another $20K. Had about 8 mths of vacancy in between and renting out for about $30 p/a. We had two nightmarish tenants which has basically put off my wife...

Problem is she wants to move back into residential which is now I believe overheated...I'd stay maybe 2-3 years more to see outcome of this place, but she has lost all patience.

Thoughts?

Thanks.

 

[Aaron_C]

Problem is if you sell the property while vacant you won't get a good price.

 

[Scott No Mates]

Will, quick questions:

Which area is it located?

What is the condition of the premises?

Is it managed or self-managed? Is the agent any good? (ie commercial agent or just the local resi agent who 'can do it'?)

Is it currently tenanted or vacant?

Is it a gross or net lease? (who pays the expenses)?

How proactive is your management of the property?

What is your asset management plan?

What maintenance have you undertaken in the last 7 years?

What maintenance do you intend to undertake in the next few years?

Is the place suffering functional obsolescence? What have you done about it/what do you intend to do about it?

 

[Nigel Kibel]

opportunity costs

Often we are tempted to hold on to bad investments hoping that they will improve.

However they often do not. You also have to look at the opportunity costs. In other words as you tie up your money here and there other opportunities hat could make you more money.

Although the market is strong in some areas in Brisbane I think it is a little under valued and they current commercial markets are very strong

 

[impala67]

Hi All,

Thought I'd pick your brains and see what you guys would do in this situation...Thoughts? .

Really couldn't tell you what I would do without knowing more. This attached thread covers a lot of issues & may be of help.

http://somersoft.com/forums/showthread.php?t=95623&highlight=functional+obsolescence

 

[wobblysquare]

Clarifying numbers

So are you in for a total of 560k, and when occupied returning 18k net pa? (being 600m2 * $30 per m2, per annum).

 

[Mindmaster]

Total cost of the property is $560,000

Rent is $30,000 a year.

This gives a gross yield of 5.6%

Very ordinary for residential property and very low for commercial.

The numbers speak for themselves.

 

[Scott No Mates]

A low yield is indicative of many things: property is underlet, undercapitalised, not highest & best use of the land, functionally obsolescent, poor tenure, needs to be redeveloped to realise value or possibly over priced.

Willister has noted that the place isn't in the best condition which is reflected in the low rent achieved.

If the place looks like cr@p it may not take significant investment BY THE OWNER to improve the yield. If you have expectations that the tenant will pay top dollar for a piece of cr@p, you will be sadly disappointed. They will pay a rate commensurate to the risk/exposure that they have ie if you expect them to work in a pigsty and they pay for the improvements which they make, they will do this at a refuced rent.

If the tenant does a fit out they will remove it in the make good and you are back to square one with a piece cr@p on your hands.

If you want a higher rent then you may need to stump up a fitout contribution and vary the make good so that you can have ownership of the improvements.

Little things like recarpeting, paint or improvement in lighting, power upgrades/asbestos roof replacement, facade upgrades all add to the appeal.

So are you in for a total of 560k, and when occupied returning 18k net pa? (being 600m2 * $30 per m2, per annum).

What is the market rate/m2 for the best property on the market? How does your property compare?

The numbers say very little unless you know the ins and outs of the asset.