Good and Bad Commercial Property Under $500k

[keithj]

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

I see one of the cons is that Alinta is currently in the throws of being taken over by an investment bank who is likely to be seriously reducing costs. It would be worth checking the exact wording of the lease regarding termination. Although it's unlikely that your lawyer is bigger than theirs.

It's good to be diversified - LPTs provide that. Direct investment at this price level usually doesn't provide any diversification in tennents, and can be considerably higher risk.

My preference for LPTs is dicussed here. And I can buy them in chunks of less than $500K at a time.

 

[JIT]

Hi everyone,

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

There's several others Trogdor, see this thread I started for more sites:

http://www.somersoft.com/forums/showthread.php?t=29333

I'll probably never do this again, but I just spent 10 minutes browsing in the range of most people - 500K or less

Thanks for those examples Dazzling! This is the kind of stuff that young upstarts in comm. property may be able to afford. Not very hard to find on a quick search, but do your own due diligence of course.

Direct investment at this price level usually doesn't provide any diversification in tennents, and can be considerably higher risk.

At this stage, I would have to agree with you keithj, but, am willing to keep an open mind and see if others here can prove me wrong with more examples of good deals under $500k. From this, I was hoping to establish some sort of selection criteria for buying good commercial property under $500k...if people would find this useful.

All other factors aside, at this price level, I feel that the type of tenant you find, is the most important factor in determining whether you've got a good comm. deal or not.

For example, going from a 'mum and dad tenant' in resi. property, to a 'mum and dad fish shop business tenant' in a small comm. property - is not really much of an improvement to me...I recall reading that small business failure rates are quite high, not sure what the % is though...

grossreal made a good point about this earlier:

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.

Grossreal seems to have done it, so will be interesting to hear if anyone else has managed to secure a tenant like this for a cheap comm. property...

GSJ

 

[geoffw]

will be interesting to hear if anyone else has managed to secure a tenant like this for a cheap comm. property...

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.

 

[pursefattener]

I would agree with Gross in trying to get a national listed or large player .

I've just closed a deal on a large industrial allotment which is used as a fertiliser depot . The site is a bit of a mess but the lease is good with plenty of upside . I have Elders as a tenant . It's located in the industrial wastland of a Vic regional centre and there is a gas fired 1B gas fired powerstation planned nearby ....

The deal was under 200k .

I posted a couple of questions about it in another thread a few days ago but no one was interested ??

It's mostly land content.....not very sexy....

 

[JIT]

I would agree with Gross in trying to get a national listed or large player .

I've just closed a deal on a large industrial allotment which is used as a fertiliser depot . The site is a bit of a mess but the lease is good with plenty of upside . I have Elders as a tenant . It's located in the industrial wastland of a Vic regional centre and there is a gas fired 1B gas fired powerstation planned nearby ....

The deal was under 200k .

I posted a couple of questions about it in another thread a few days ago but no one was interested ??

It's mostly land content.....not very sexy....

Hi pursefattener,

Sorry I must have missed that post. I am interested to know what sort of yield you bought the property on and what the lease terms were. Could you share some more details?

GSJ

 

[JIT]

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

 

[davea]

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?

if your only buying a 1 year property, you may find yourself in a position of vacancy in the following year... maybe the risk of currently vacant may outway the return...

however think about your local fish and chip shop, while the owner may change hand, how often does the actual place shut down?? you will always get some rent but just may be from different people...

i think i read the average vacant time for comm property is like 24 months..

if you take a page from large comm valuations, where the to a discount cash flow (DCF) for 10 years and derive the value from that, this means vacancy is taken into account and affects the value

GSJ, have you seed these DCFs for comm property before?

 

[geoffw]

ADD: GeoffW, perhaps your brother-in-law could drop in to this forum sometime?!

I'd love it if he did. He did a lot of property developing in his time, a lot of multi storey office blocks included. But he's now retired from active property activities. He'd rather be fly fishing or travelling.

Besides, he is barely literate. He came from a Greek speaking background, and had to leave school very early to help out his dad.

My sister, a former teacher, didn't really get into this new fangled internet stuff.

 

[JIT]

if your only buying a 1 year property, you may find yourself in a position of vacancy in the following year... maybe the risk of currently vacant may outway the return...

...if you take a page from large comm valuations, where the to a discount cash flow (DCF) for 10 years and derive the value from that, this means vacancy is taken into account and affects the value

GSJ, have you seed these DCFs for comm property before?

Hi davea,

Yes, after that 1 year, the property may be vacant, however, in that year you will hopefully have positive cashflow and more importantly, time to renegotiate a new lease with the existing tenant, and/or, start looking for a new tenant.

I haven't seen these DCF's before. Not really sure how it works either, if you want to explain?

Also, GeoffW, maybe your bro. may not be in any rush to post here, but it was worth a try!

GSJ

 

[grossreal]

hi all
I will post a new comm that I have just offered on and it will give you a bit of an idea of the type of comm that is out there so have a read its at 1.6mil but will give you some idea of what we are looking at.
I will post in this section

 

[JIT]

Thanks GR, look forward to hearing about it.

GSJ

 

[JIT]

Just a thought, for beginners investing <500k in comm., which type of comm. property would be the safest bet?

JoannaK in another thread suggested retail or strata office units.

What do others think about this?

I thought an office property in the suburbs may be a good start. The tenants here could be for instance - professionals, like accountant, lawyers etc...

Wouldn't these sorts of tenants tend to stay longer in these properties, and maybe there would be less vacancy?? Also, maybe less chance of going bust??

Any thoughts?

GSJ

 

[grossreal]

hi GSJ
different comm have different risks I only aim for 5 x 5 with 5 or 6% increases and with something else to offer on this one its a da.
I am just neging on the vendor finance back and we are very close should be done by the end of the week.
I find that you need to find a property that has a long term tennant that is not going to be going anywhere in a hurry accountant are not the best clients as they understand the numbers and if they are very good numbers they would own it themselves unless they have a reason to be there and want to lease but again you want a tennant that wants to stay for 10 to 15 years.
shops can be good if again you have along term tennant or if the shop is to be redeveloped but this is alot more work.
small 10 to 15 sq at 9%, cig or fruit shops again are good as they can turn over quick if the tennant goes bust.
it all depends what your investing platform is.
you are not going to get a suit that fits all in this type of investing it does take a bit of work this one I am signing this week is about 3 months work and getting the outcome that I want so not bad if you can get them every 3 months.
I have written it up but won't post until the ink is dry sorry about that.

 

[JIT]

Hi grossreal,

I guess the problem I see is that finding a comm. with a good tenant on a long-term lease, usually seems to mean buying at a lower initial yield? And the main reason most here would go over to comm. is for higher yield.

As you said in another post, if there is something extra about the deal (eg. DA) or some way that you can potentially increase the value of the lease/property further, before the end of the first lease term, then that may make the deal more attractive.

GSJ

 

[davea]

I am still coming about the DCF, just havent had time yet.

However in brief it deals with increases in market rent will determine your capital gain. Ie CG is dervived solely from a function of rent - so increase in rent means increase in property. Rents are devided by a capatilisation rate (basically yield) which gives you the value. Cap rates are effected by things like future expectations of rent increases, similar assets sold, length of leases...

Certian cap rates in Sydney CBD are around 5% at the moment after some large sales late last year. This is lower than the 10year tresurary bond, however people are happy to pay this as they expect rents to increase in the next 18 months.

 

[Ausprop]

hi all
.... 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.

interesting - could be because the economy has been running so hot for so long and this could change. I was speaking to a mate that owns a factory and he recounted it's history to me. the value has sky rocketed since he bought it some years back but the guy who owned it before him held it for many years and sold it for about the same as he paid for it. I have heard many other disaster stories (first hand, not just idel gossip) which has framed my postion for investing in this class:

- if going small, say around $700k, just expect that it could be vacant for long periods

- if going larger, say around $2m+, try get quality tenant with long lease to reduce vacancy risks

- accept that there may not be any capital growth and that the value comes from the inflation erosion of your loan. any cap growth is just a bonus.