Solutions for the small-scale comm. investor...
In general, I understand that the better the tenant, the lower the yield. A good national franchise tenant does give that extra security of tenure, that's traded off with a lower rent. It's the old story of the higher the risk, the higher the return.
My brother in law owns large office blocks. A number of them have large government offices as tenants. The last time I saw him, I asked him how his properties were doing. He told me that there had recently been a review of market rents (I gather conducted by the tenants, part of a regular rent review process), and as a result his rents have increased by $250,000.
Yes it is a bit of a dilemma
GeoffW.
Most of us here who are thinking of going from resi. to comm. would probably do it for the higher yields in comm. At this low price level, the quality of the tenant is so important, but if you buy a comm. with a good tenant and with good lease terms in place already, you are unlikely to get a very good yield.
Where does that leave the small scale comm. investor?!
The alternatives I guess are buying a vacant comm. and trying to find a good tenant after this, while trying to handle the -ve cashflow from a vacancy period of unknown duration. This would seem to offer the greatest upside potential in terms of yield
AND capital growth, but comes with the greatest risk.
One way of mitigating this risk would be to buy with a long settlement period, eg. 6-12 months, and use that settlement period (which is not costing you any money, apart from the deposit amount already paid - but you could of course try and negotiate and make this deposit as little as possible) to search for a good tenant.
What do others think about this?
Alternatively, perhaps you could use a reverse approach, and go to a commercial real estate agent/property manager and first ask them if they know of any good prospective tenants looking for particular buildings/sites. Then, go look for a comm. property that will meet this tenants' needs/criteria. You could sign the contract on the property 'subject to this tenant signing up a lease on the property'.
What do others think about this?
Another way I think could be finding a comm. property with a good tenant in place,
BUT, where there is say only 1 year left on the existing lease. Even though there may be 'options' to extend, having only 1 year left means they may not extend at all, and you could be left with a vacant property at the end of the year. I suspect that you may be able to purchase this sort of property at a higher yield, eg, compared to purchasing at the start of a 5 year lease.
What do others think about this?
ADD: GeoffW, perhaps your brother-in-law could drop in to this forum sometime?!
Thanks,
GSJ