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Great work Trogy!
A question for you, what are the positive and negative implications on this property of the Retail Lease Act thing?
Also, in addition to Trogdor's post above, there is no scope for ratchet clauses in a retail lease. If market review at end of lease term is less than current rent, it will not stay the same.....it may fall.
Although by what Trogdor has outlined in earlier posts and according to the diligence undertaken, an upward bias is being considered for rents in the CIP's future.
Congratulations and thanks for sharing
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.
Thanks Player - very important point there about ratchet clauses - that slipped my mind.
I see what you're saying. I'd still say that net yield from commercial is higher. And as alluded to earlier, the great thing about commercial is the prospect of large rent increases, which can make yield on purchase price phenomenally high. (Just ask TPFKAD. )Because despite those two things, we still had a perception of a higher yield from commercial.
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!!)
Sure, I'm no expert on this topic, but did some basic DD on it before I moved on CIP...
I see what you're saying. I'd still say that net yield from commercial is higher. And as alluded to earlier, the great thing about commercial is the prospect of large rent increases, which can make yield on purchase price phenomenally high. (Just ask TPFKAD. )
And yes, I know, there's also potential for long vacancies, rent decreases, etc, but many of these risks can be managed with strong leases and comprehensive due diligence.
The lower yield would reflect the risk, he is saying prime retail, so securing a new tenant shouldn't be a big issue.
How old you btw troggy?
Regs,
RH
No worries, misunderstanding.I was not saying it is not alredy higher.
I know you weren't. I was just aware that since I was sounding so positive about commercial, there was likely somebody reading the thread (not you) who was ready to say "oh yes, but commercial has extra risks such as ..." and wanted to get in first.jaycee said:And I certainly said nothing about vacancy rates etc, I'm not comparing/mocking this vs. resi in anyway
No worries, misunderstanding.
I know you weren't. I was just aware that since I was sounding so positive about commercial, there was likely somebody reading the thread (not you) who was ready to say "oh yes, but commercial has extra risks such as ..." and wanted to get in first.
Or 3 x c. 666k low risk retail / office = $2m spend, $120k net return. Each property would have little maintenance (small size, basically just a "shell"), and the only risk to manage is tenant risk / ensuring occupancy. Even if they were vacant 40 - 50% of the time I'd still be ballpark equivalent to resi!!
The way I see it I can aim towards 3 or 4 good quality retail properties in low vacancy areas, and in due course start re-financing these from resi equity and incrementally reduce interest costs then start to live off rents - and have a level of debt that can realistically be paid down / off in a reasonable period of time.
I think that's a really good strategy. The only thing you can't cover for is market/economic risk, where the retail sector is hit and you have a vacant property, isn't it??
What contingencies do you have in place in the event of vacancy?
eg. cash reserves/LOC's to cover 6-12 months vacancy.
I was aiming to have at least 6 months but ideally 12 months per property of rent (or interest repayments as a minimum) + outgoings.
Was there a bond/bank guarantee/director's guarantee on your lease here?
Thanks.
Thanks JIT. Correct, that is always a risk. I dont believe it is in this economy, but the last few years have taught us anything can happen - and if there was a severe recession then sure it is a risk.
Firstly - I wasnt 100% confident of my ability to pick a risk free investment for my first CIP and acknowledged my inability to control the economy. So have purchased this in a structure which sacrifices future income streaming potential in return for deductability of interest and any expenses. So in the event that the tenant goes bust I can support the interest indefinitely from salary + tax refunds. Have a DT with resi IP in it so will just recycle debt once accumulation phase is over.
Not really, this is the weak part of the lease. Its only 1 months rent bank guarantee. I too-ed and foo-ed over this for a while as this seemed very light, but I was buying this property for its merits more than the lease in place and am very confident that I could find a tenant in a couple of months, so compromised on this point. Interestingly the very conservative valuation report noted that the property would be very easy to lease in 2 - 3 months with little or no incentives, and that there are no vacant comparables in the area.
I think it's this sort of scenario where it helps to have your ''investor'' hat on, as looking at it from say a property lawyer perspective may give you a negative bias on the deal, but looking at it from a broader perspective in terms of timing in the market cycle, your overall investment and financing strategy, and the other merits/pros/cons you've elicited... you can make a better decision for yourself, as you seem to have.
It's like buying your first RIP and all your advisors telling you to put in subject to finance/building/pest etc... when you know you only chance of securing the property is a strong unconditional offer.
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!
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Exactly... One think this search has taught me is that when buying a tenanted CIP you are taking a lease which has been negotiated before you were on the scene. This results in having to think pragmatically.