First CIP Purchase

Well - after a long time of looking, researching, complaining about awful resi yields, researching, procrastinating, and looking have finally found a decent CIP, and have bitten the bullet and bought it (prime retail) - and settlement isnt too far off.

I'm very excited, and now have a newfound respect for TPFKAD and others who have trodden this path - its been a very steep learning curve, and a lot lot lot (lot!) more difficult and stressful that resi.

However, that said, the income from this purchase will move things up a notch which would have not been achievable with resi IPs and am looking forward to (subject to the continued solvency of the tenant!!) many years of hassle free income, with all expenses paid for by somebody else.

Fingers crossed it now all does what it says on the tin :)
 
A bit hesitant to post too many specifics but some general details:

> 500k and < $1m purchase price (wanted to buy small to keep impact of any initial mistakes low)

Mid 6.x% passing yield (net, + GST + outgoings), 3 x 3 x 3 lease

Over-rented actually, but the cap rates for comparables is a fair bit lower, so valn is about right.

In the greater melb area

Prime retail, no vacant comparables currently, and any which have come up have been snapped up in a very short period of time, even in 2009 climate.

I did learn that once you get over the $1.5m - $2m+ range in the CIP side the deals start to look even better (much less competition with "mums and dads" and noobs like me!) - and also you get less "scrappy" negotiations (more numbers driven, less emotive), but didnt want to / couldnt go that high for the first one!

Also that finding market rent is very hard compared to resi, as its a very illiquid market and comparisons are often not that directly comparable, so there is a subjective element. With the levers of cap rate to apply, and appropriate market rent as starting point of valn its easy to get quite a broad range to negotiate in.
 
No worries thanks.

How was it advertised, internet, paper, sign?

No probs - www.realcommercial.com.au - but I found after a while I was starting to get to know various agents locally and could speak with them / look on their specific websites.

Im going to retain the sales agent as managing agent (they currently do that too) so should be able to provide market feedback going forwards and perhaps more new purchase opps in coming years.
 
Trogdor

Congratulations.
What LVR can you borrow to?
What's the interest rate?
Also, did you mean to say 6% yields?

Thanks BV.

I ended up borrowing 75% LVR - initially looked at 70% but ended up at 75% because I had some hassles with the valuer, and valn came back around 4% below purchase price believe it or not (they took a very conservative view on market rent). Lesson learnt - when you are paying for the valn and you know local panel valuer(s) who will value it at or above purchase dont let the bank pick their own one from out of town! When the valn was disputed the bank just exercised its discretion to lend > 70% - and interestingly rather than going to low 70's% they just bumped it up all the way to 75%.

Interest rate is variable, currently 8.24% - not a great rate, but had some dramas getting financing (due to being advised to chase the wrong bank, losing a week or so, then xmas break, etc..) so was happy to get it all locked away and approved. I had to pay valn fees, lenders solicitor's fees, and a few other fees however. Lesson learnt here - use a broker who only does / specialises heavily in Comm loans (ask them how many comm loans they have written this month) or use a relationship banker at your bank. Dont become the guinea pig for your resi broker!

Im trying to research now how refinancing in a few years to drop LVR (and switch lenders) will affect the interest rate. If I can drop a % or two by going 60% LVR down the track I may do this once I see growth in capital value.

Yep - meant to say 6.4% yield actually based on current rent / purchase price -> i.e. 6.x% with x = 4 :)
 
Mid 6.x% passing yield (net, + GST + outgoings), 3 x 3 x 3 lease

Over-rented actually, but the cap rates for comparables is a fair bit lower, so valn is about right.
Congrats...

What rental increases are you expecting ? What does the lease specify ? Any mark to market reviews ?

When do you expect it to be c/f +ve ? (assuming var rates stay at what they are today)
 
Congrats Trogdor! :D

Hope it all goes smoothly for you and you reach your desired outcome.

You give hope to people like myself, who also wish to move into commercial property investment one day!

Can I ask how long you have been seriously researching commercial property (e.g. actually inspecting properties and their direct figures etc) before making this purchase?
 
Congrats...

What rental increases are you expecting ? What does the lease specify ? Any mark to market reviews ?

When do you expect it to be c/f +ve ? (assuming var rates stay at what they are today)

Thanks keithj.

Lease is cpi annually and market every 3 yrs at option exercise.

Over the long term I'm expecting (conservatively) 3-4 per cent (cpi plus pop growth) but it could be higher as the area is experiencing a lot of growth and is increasing its demographic standing.

It needs around 25pc increase pre tax or around 15 pc increase post tax (based on ou marginal rates) before I goes +ve based on avg cost of funds on the c. 106% lend (comm loan + resi loan)

So around 6-8 yrs pre tax and 4-5 yrs post tax.

However still in my late 20's so strategy is to eventually take out comm loans with resi loans post accumulation phase and then it would be +ve immediately (assuming sufficient resi equity).
 
Yep - meant to say 6.4%

Is it an industrial unit?

6.4 seems a bit low to me and because of the size of the loan your shortfall will be considerable, I'm getting 7.09% for a resi unit I bought last month
so I would have thought that commercial would be returning above 8%?

I guess you're lucky to have a tenant.

I don't know about Melbourne but in Sydney I noticed many vacancies in industrial estates. Perhaps companies would have gone bust or downsized
 
Is it an industrial unit?

6.4 seems a bit low to me and because of the size of the loan your shortfall will be considerable, I'm getting 7.09% for a resi unit I bought last month
so I would have thought that commercial would be returning above 8%?

I guess you're lucky to have a tenant.

I don't know about Melbourne but in Sydney I noticed many vacancies in industrial estates. Perhaps companies would have gone bust or downsized

its prime retail which is very different to industrial and hence to lower yield. In a prime retail strip, heavy foot traffic, and in a botique building which has a few shops and around 5 luxury apartments upstairs with ocean and mountain views for those resi apartments. About 2 blocks to the beach and in the middle of the prime retail strip with cafes, nice restaurants, and lots of upmarket clothing / hair salaons, etc...

In fact, retail often trades as low as mid too high 4% in really top notch areas.

The difference is the vacancy rates are near zero, so hopefully a lot more power to the landlord, but the tradeoff is lower yield of course.

I looked at office (of different types), retail (again different types), and industrial - and wanted something lower risk.
 
Congrats Trogdor! :D

Hope it all goes smoothly for you and you reach your desired outcome.

You give hope to people like myself, who also wish to move into commercial property investment one day!

Can I ask how long you have been seriously researching commercial property (e.g. actually inspecting properties and their direct figures etc) before making this purchase?

Thank you!

Probably around 6 months of actually looking in person, asking for leases, contract of sales / s32's, calling tenants, researching comparables, etc...

Probably another 12 months before that of (very casually) surfing the web / REA websites on the topic.

Good luck!
 
6.4 seems a bit low to me and because of the size of the loan your shortfall will be considerable, I'm getting 7.09% for a resi unit I bought last month
so I would have thought that commercial would be returning above 8%?
Why would you think commercial would necessarily have a higher yield when the tenant pays expenses? Commercial 6.4% is roughly the cash equivalent to 8-9% on a resi, and the prospects for rental increases are much better for commercial. You can put commercial rents up 30 or 50% - or even more if the market's shifted enough, or rents have fallen below market - but try pulling that off on resi, even in a huge housing crisis.

And those rent increases flow through to increased value, which isn't necessarily the case with resi. :cool:
 
Well done Trogdor,

Just a question regarding the maturity of the loans - when does that occur, and what is the process for getting the loan renewed?

Regards Jason.
 
Well done Trogdor,

Just a question regarding the maturity of the loans - when does that occur, and what is the process for getting the loan renewed?

Regards Jason.

Depends on the lender in short. Some do term loans but I wanted more peace of mind so used Adelaide bank who offer a commercial product ("smartsuite comemrcial" is the product name i think) over a 25 year term. 3 year initial IO for 75% LVR and 5 year initial IO for 70% LVR. Thereafter P&I but no reviews - so worst case is I get stuck with P&I for a while if I cant roll the IO. Its sold as a comm loan with resi like characteristics on security / term / refinancing (but not fees!!)
 
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