Good and Bad Commercial Property Under $500k

[JIT]

Hi everyone,

Does anyone have any examples of good or bad commercial property investments they have made or been involved with, where the initial purchase price was say under $500k?

Dazzling and a few others here have shared some examples involving bigger numbers, but I am also interested in hearing examples from this lower price level.

Can similar deals be found and done at this lower price level?

Can you still get a good quality tenant on a long-term lease at this lower price level?

Do people agree or disagree that to buy a good commercial property (directly) with a good tenant and lease you really need to invest upwards of $1million?

Thanks,

GSJ

 

[jrc]

Purchase price $135K. Initial Rents $500.00 per month 3 years ago. Current rent $2900 per month approx

 

[Joe D]

Smaller deals are out there.

Here is a simple example of a small office suite (24m2) that I bought in good Perth location in 2003. It was bought with some spare funds as an alternative to buying some shares and because I thought I might use it for my own purposes in the futue.

The (strata) office suits a one man consultancy type business. Office has secure dedicated undercover parking with shared kitchen, secretarial, boardroom and other facilities.

Cost (2003) $52,250 (incl GST), real cost to me $47,400
Gross Yield 19.5% on original cost
Net Yield 11% (I pay most outgoings, eg CR,WR, strata levies)
Current value approx $120k

This is a set and forget investment and I recently was going to buy another one until I discovered the value had appreciated and the return is below par on todays value.

But there are others out there.

 

[grossreal]

hi all
bought 400k for a property inner cbd sydney without a tennent 2002 .
within a week tennant started on 36k on a 5 x 5
with 5% annual increase or cpi which ever is the higher.
first 5 years just finished current lease 51k
value 850k
just refinancing to take cash out.
tennant national company on listed board

500k restaurant in campbelltown
signed new 5 x 5 on 102k per year 5% annual or cpi same mo tenant pays all out goings.
restaurant most well known in the area and tennant wanted to sign lease I drew it up they signed and then it goes to legals.

at 500 or less you need to make the properties get to your cash flows.
at 1.5 mil to 3 mil its alot easier.

I have a comm
just doing
purchase 1.6mil
vendor finance to 20% for 6 months
with a val of 2.5mil of the leases in place already done and paid for
and development possible as it has a da on it.
just doing 85% comm loan which will pay for all building cost and purchase and loan is cover by rent.
so no money in at all except setup costs.

and no not in the sticks.
inner cbd sydney.
I would look around the 1 to 2 mil mark
as your money in is 330k or 600k but if you use the same vendor finance as you do with resi renovate or change tennant the money in and out is very low.
you just have to do the numbers right
remember that this market is not for everyone.
even if you do get smaller in size still try to get a national, listed or big player.
and if food get a franchise tennant so you know they are in it for the long haul.
I reduce my rent at the start and ratchet the rent to get to the required 10 to 11% return in 5 years so the next 5 are good profit.
have fun
all my leases are self managed and I draw them up so what we agree is what I get and what they pay (and they pay for everything)( I even pay for the equipment as is the case with the restaurant but they pay all costs and the equipment is mine, so if they leave I can release fully operation kitchen they pay to fit)

 

[davea]

500k restaurant in campbelltown
signed new 5 x 5 on 102k per year 5% annual or cpi same mo tenant pays all out goings.
restaurant most well known in the area and tennant wanted to sign lease I drew it up they signed and then it goes to legals.

this isnt the one across from the shell servo is it??

 

[MTR]

We have been going for industrial factory units (strata) , approx 200sqm. Purchased 3 (2002), from $110K to $130, average return now $16,000 pa plus outgoings, strata fees, rates, management fees.

On average now each factory unit is worth around $300,000.

 

[sailor]

Good examples in other posts. Mine is 2 strata office units, which I've had for about 8-10 years now. Purchase around $75-85K each. Rents at $1600 pm ($800 each), and I pay all the rates, body corp etc. Leased to my coy. CF has been good...CG...well not much yet anyway. Fingers crossed.

 

[grossreal]

hi davea
no but will post when they open, to give the boys a bit of advertising if you want.
all the inks not dry on the deal at the moment so a bit early and may post the numbers on it once its finalised
its an amalgamated site so there is still some bits to do.
a 4 year project just to get to da.

 

[WashingtonBrown]

I personally wouldnt bother in direct investment of commercial unless you have substantial capital. Im talking a min $2m property and u have mkt experience/redevelopment experience.

I cant see much gain in buying a corner shop or retail strip unless you own and then lease as well...

Why would you....when for instance your TSR (Total shareholder return) on LICs such as the following can yield such great returns

MOF 3yr 16.8% PA
IPG 3y 20.9% PA

And MANY many others...

My point, i guess, is that alot of people look at property LICS as stocks...but they are just holding co's for buildings and earn a fee for a. ascertianing those blds and b. managing them.

And unless you have lots of $ and can generate a substantial redevelopment opp. ...why would you risk it....when you can achieve those returns above...without the hint of margin lending...which would amplify the returns.

Regards

 

[XBenX]

There is also the significant benefit of diversification by going into LICs instead (you wont hear that from me very often) that is beneficial in commercial property due to their significantly higher vacancy rates.

 

[Mofra]

Why would you....when for instance your TSR (Total shareholder return) on LICs such as the following can yield such great returns

MOF 3yr 16.8% PA
IPG 3y 20.9% PA

And MANY many others...

Fair point - however we have just experienced one of the most powerful bull markets ever recorded, and some of us don't have the capital to start at the $1m + level with commecial ppty.

 

[grossreal]

hi all
there is a very good reason for getting into comm property and thats very simple never put all your eggs in one basket.
the number one rule of investing is diversification but your exposure across different asset classes.
yes shares have got good returns
but so do cfd's, so do hedge funds
comm is a stable class and is used for long term returns
it is not a market for everyone but can be used in a balanced porfolio and thats what you need.
if you stick to resi fine but when a shift comes you find you need to find the market that is out performing your resi.
I would look across different asset classes and invest in them in a small way.
when you look at say a 2mil comm you are looking at 700k at most and thats the same as a reasonable resi in sydney with secure tennants.
I find shares alot higher risk ( risk is not bad in my book but it is a higher risk)
in reality there will always be people who say I woud not invest in that class but thats good as it leaves the others for the people that do want to invest.
If I sat down and tried to work out why not to invest it would take most of my day.
what you need to do is sit down and work out why you should invest in this class or another.
remember when one door closes three more open.
I find comm a very good vehicle to give cash flow better then shares, stability and growth.
and I have not seen any comm go backward( except if you go short term and the tennant moves out but thats not my market)
aim long term
min 5 x 5.

 

[WashingtonBrown]

Fair point - however we have just experienced one of the most powerful bull markets ever recorded, and some of us don't have the capital to start at the $1m + level with commecial ppty.

Which is exactly my point..with these funds...you could invest less then $1k to get started if you want.

Regards

 

[Mofra]

Which is exactly my point..with these funds...you could invest less then $1k to get started if you want.

Regards

Agree - but the returns noted in the past 3 years are still considered by the wider market as unrealistic going forward in the medium term given the recent bull market, hence the attraction to direct investment rather than a LPTs/LICs.

FWIW it is much eaiser to 100% gear into shares/LPTs so there will always be an attraction by the wider market - capital protection with tax deductability on structured products do offer a nice cherry on top of the whole offering, although there is something to be said for getting you hands dirty in a direct invetsment kind of way.

 

[WashingtonBrown]

Agree - but the returns noted in the past 3 years are still considered by the wider market as unrealistic going forward in the medium term given the recent bull market, hence the attraction to direct investment rather than a LPTs/LICs.

I agree....as i read recently..."If you have been invested in property or shares in the last 3 years and haven't made money...you never will!!"

But not too sure direct investment will fare much better...depends on the individual and their skill.

My point is...if u arent that experienced in direct commercial investment...u might be better with the safer options of LICS.

Regards

 

[JIT]

Keep them coming...

Hi everyone,

Thanks for the replies so far.

We've had a few examples of some good deals so far.

Keep them coming...

Also looking for any bad deals, under $500k...

Just trying to build the 'evidence-base' for investing in these cheaper commercial deals.

Thanks,

GSJ

 

[Trogdor]

Hi everyone,

Thanks for the replies so far.

We've had a few examples of some good deals so far.

Keep them coming...

Also looking for any bad deals, under $500k...

Just trying to build the 'evidence-base' for investing in these cheaper commercial deals.

Thanks,

GSJ

GSJ, I like this thread and your idea behind it. I'm keen to learn more about Commercial property as in, say 5 years or so when I have a lot more equity I see this as the logical next step.

What I think would be even better is if in responding ppl can post web links to advertisements for good/bad commercial properties in the (say for arguments sake) < $1M range. Then we could look at the type of property, rent, with pictures, to get a better feel for it all.

By the way - aside from commercialrealestate.com.au what other sites are there for commercial real estate?

Thanks!

 

[Dazz]

I'll probably never do this again, but I just spent 10 minutes browsing in the range of most people - 500K or less, in my home town that has apparently gone nuts over the past 2 years or so....

I'm not recommending these by any stretch, but to give you a flavour of what is out there right now ;

1. http://www.realcommercial.com.au/cg...&header=&c=92467834&s=wa&snf=as&tm=1177596475

2. http://www.realcommercial.com.au/cg...&header=&c=70275712&s=wa&snf=as&tm=1177596945


Once again, I would not personally invest in these, but someone just starting out might take a squizz and start comparing some numbers and have a think about what type of net returns they could expect after outgoings, and what type of tenant they could expect.....and more importantly, what type of relationship they'd have with the tenant. The headache factor.

The first example had Alinta Gas corporation as a tenant for 3 years. I reckon they might be a better tenant than Mr and Mrs Average struggling to make ends meet on a wage of $ 450 p.w. with 4 kids and two big dogs.

Totally up to you. Adios.

 

[Trogdor]

Thanks Dazzling. Thats exactly the sort of discussion I was looking for! Much appreciated.

Point taken and well understood regarding the credit risk, professionalism, and general level of stress associated with Alinta Corporation Vis-à-vis the fish and chip store owners as tenants.

The Alinta advertisement does not specify the rental amounts. Wonder what they would be. With the chip shop, 6.8% seems very low when compared to a property trust (or mix of property trusts). Assuming the shop does not go out of business (could happen), I assume rental at the end of each 5 year lease term would increase roughly 15% (assuming CPI = 3%). Hence rental at the end would be $38.2K, approx 7.8%. After 10 years (assuming option exercised), approx 9.07%. Nothing to write home about considering the risk (specialised use, low margin business).

What do you see as the pros and cons of the (Alinta) office space?

 

[Trogdor]

Some ideas??

I've done a quick search of places which seem like they could be worth investigating further based on numbers alone (in Melb). Have no experience in commercial property whatsoever so they could be rubbish!

Comments very welcome:

http://www.realcommercial.com.au/cg...header=&c=70916852&s=vic&snf=as&tm=1177600067

Seems like a good yield for a generic use. Lease short??

http://www.realcommercial.com.au/cg...header=&c=94232555&s=vic&snf=as&tm=1177600266

This one is in the very low price bracket. High yield(8%). Wonder what sort of tenant would rent this though (maybe high turn over, longer vacancy periods??)

http://www.realcommercial.com.au/cg...header=&c=94232555&s=vic&snf=as&tm=1177600266

This one has no details on lease terms but seems to be new (depreciation), high(ish) yeild (7.5%), and a bit larger office (ie. tenants wont either go bust and move out or grow and move out!)

However, as a previous poster said, there is nothing here which seems to beat a LPT by a significant (or any) margin??? Perhaps Im missing something.