How Much Deposit is Required?

[RedCat]

Hi experienced CPI's,

I am renting a commercial property at present along with another related business. Between us we're paying $8,500+GST rent a month. The owner lives overseas and I told him that I was intending to move one business out and purchase our own property instead - unless he wants to sell to us.

I have NO idea what the value of the property is yet, but I'm guessing $1.2-$1.5M. Anyway, my local bank manager told me that because it's commercial I would need a 35% deposit! Is that right or should I be looking elsewhere?

It's a really odd property - a heritage listed church. Downstairs is a recording studio and upstairs is office space (or live in caretaker space). upstairs is noisy due to the studio and if we move our office out, the owner won't find someone else to move in for that reason.

 

[Peter_Tersteeg]

It might be possible to get away with a 25% deposit plus purchase costs. 65% LVR is the standard answer at the moment, but some lenders are offering 75%.

 

[RedCat]

Thanks so much for the fast reply. I had no idea you had to trump up so much for a deposit. I know commercial property works differently of course, but wow!

I guess I'm moving out and buying a small space for myself then. Maybe in 2 years when the other business's lease is up and he hasn't been able to find another tenant for my space in that two years he'll be willing to sell to use cheaper. Maybe by then we'll have the deposit saved up. Seems that's the only way forward. Thanks again.

 

[Seeka]

Is Vendor financing of the deposit an option?

 

[RedCat]

I'm not sure. How does that work?

 

[Propertunity]

I'm not sure. How does that work?

Hello old friend

Vendor agrees to "loan" you 35% of the sales price.
So you get your 65% of NAB or whoever.....and for the balance of the money the vendor leaves it in the deal - but you have to repay them by a certain time at a certain % interest rate too.

In these current times of credit rules & regs I think most lenders would shy away if there was vendor finance involved - but one or more of the MBs on here would be able to confirm or deny that.

Cheers,
Alan


*edit* Also bear in mind that if you have cash in a SMSF, then this could be used for this type of purchase - ideal actually!

 

[Kristine..]

Don't go anywhere near vendors leaving money in the deal

No self respecting lender will tolerate that

Redcat, you say 'the other tenant'.

So you lease the upstairs, and there is a recording studio underneath? Or vv? Commercial lenders will look at 'the deal', and provided that there is a commercial lease in place over the property you may be surprised at what can be done

One of the major commercial lenders is still in the 'asset lend' space ie will use the lease as servicing and if that covers, don't even want an assets & liabilities statement from the purchaser / borrower

So just asking 'could I buy this property' doesn't really give us any information to go on with eg are your financials up to date, do you have any equity or savings, do you own any residential or other property

When I bought my bank we didn't put any money into the deal. Things haven't changed all that much in lending for commercial since then.

So it all comes down to the strength of the applicant (you) and the strength of the deal, and the answer, as always, is 'it depends'.

Cheers
Kristine

 

[RedCat]

I rent upstairs as an office and pay $3K+GST a month (it's also liveable property for a caretaker residence). Downstairs is the recording studio. There's 2 years left on the lease (with a legal agreement) and they/we pay $5,500+GST a month. The studio includes me as well as 3 partners, one of which is my husband.

I guess I'm trying to look at ways to convince the vendor to sell to us in some part to secure the future of the recording studio (building up the business in a custom built space only to lose the lease in 2 years would suck and the vendor will just keep pushing the price up in future).

All the financials are up to date including 10/11 tax returns. I've got about $100K so far towards a deposit but as yet have not had my property revalued. I refinanced 18 months ago so I wouldn't count on too much growth.

If the property is say, $1.5M and I can muster up a 15% deposit), then the loan would only be $1,275,000 or whatever. The current rental income of $8,500 would likely cover the loan repayments or close to it.

Maybe I need to find a broker instead of talking to my current bank about this. Kristine, which of the major commercial lenders is still in the 'asset lend' space?

 

[Mick C]

Maybe I need to find a broker instead of talking to my current bank about this.

Your current banker will and can only offer you advice on the product they sell- give Kristine or Pt_ bear a call and they will be able to find you the right lender.

Regards
Michael

 

[MIW]

What is your objective to commercial ownership?

I rent upstairs as an office and pay $3K+GST a month (it's also liveable property for a caretaker residence). Downstairs is the recording studio. There's 2 years left on the lease (with a legal agreement) and they/we pay $5,500+GST a month. The studio includes me as well as 3 partners, one of which is my husband.

I guess I'm trying to look at ways to convince the vendor to sell to us in some part to secure the future of the recording studio (building up the business in a custom built space only to lose the lease in 2 years would suck and the vendor will just keep pushing the price up in future).

All the financials are up to date including 10/11 tax returns. I've got about $100K so far towards a deposit but as yet have not had my property revalued. I refinanced 18 months ago so I wouldn't count on too much growth.

If the property is say, $1.5M and I can muster up a 15% deposit), then the loan would only be $1,275,000 or whatever. The current rental income of $8,500 would likely cover the loan repayments or close to it.

Maybe I need to find a broker instead of talking to my current bank about this. Kristine, which of the major commercial lenders is still in the 'asset lend' space?

It all sounds like a recipe for a disaster. I too wanted to buy a shop next door some 12 years ago, where I was leasing, so I thought I will save some money and have an investment. Not only did the banks wanted bigger deposit back then but made shorther repayment time frame, 10 years only, so imagine the repayments? Also, are you aware during crisis, banks can ask for additional repayment, to lower LVR, or force you to sell otherwise (I have not heard it done to residential property)?
The option with the Super seems viable, if you have enough $ there, then you can buy it via your own SMSF and pay the rent basically to yourself, if you plan to stay there.
I discovered that with the same deposit directed towards the residential market I have made wiser investment decision as I had greater borrowing capacity and residential property provided more capital growth than commercial (it's as good as the business that's in it).
Now in your scenario, I would ask what your objective is to this ownership?
Have you thought of the partnership breakdown, and I am confused about the rent (once you say no one will rent it, then the rent you pay will cover your repayments). Also, please note that the yield would be about 6.8% which is not so great for commercial property (expected to be 8-10% yield).
I would check the property's capital growth for the last 10 years and see wether such a financial strech for you is viable. There are many PROS and CONS wether investing residential or commercial and I suggest you think about these first... Remember income does not represent wealth (as it can be lost), but passive assets that generate income can.

 

[RedCat]

Thanks for the well-thought wisdom there, appreciated. I think my situation may be different. My main interest in trying to secure this particular property is to ensure the future of the recording studio.

A friend of ours owns a major Melbourne production hire and rehearsal space. He leases the property and the business is doing really well. They've attempted to buy the property several times unsuccessfully. Last year the owner whopped the rent up from $80K a year to $130K a year!

I'm trying to avoid the same thing. It's a custom built space inside this church and to relocate would cost $150K just in fit out with no guarantee of getting the same sonic result as this church delivers, not to mention getting the approvals through council.

I don't know yet what the property is worth. I had a valuer come over on Friday but it's such a unique building he couldn't even give me a ballpark yet so I'll have to wait a week for the result.

I know the yield would be low but I think that's less important when renting it to my business. To explain that further, my sole business operates upstairs but can operate almost anywhere.

The second business (the studio) is a partnership yes and I know partnerships are frightening, but I've been working in another business with this couple for 15 years with no problems. Additionally, my husband's employment is mostly created via this studio as he's a record producer! Thus for us, every day the studio is hired we get 50% of that income and 100% of the producer income.

I'm 40yo and don't have enough in super to buy via that method unfortunately.

To clarify your question: when I say no one will rent it, the upstairs space is above a recording studio and it can get noisy. I can't see another business agreeing to rent the space. We don't mind because our business is related to it but I doubt the owner would find another willing tenant. Obviously if we owned the building we would improve the soundproofing. I guess at the end of the day my main objective here is protecting the studio's future and my husband's income.

 

[jingo]

Hi Redcat,

From the way you have described the situation, it sounds as though you are making a very wise business decision in looking to purchase the asset. Especially if the current rental payments you are making will more or less cover the repayments, then, you really have nothing to loose yet so much to gain!

I hope you are able to find a way to finance the deal. Being a musician, I fully appreciate how important recording in an environment with the correct acoustics is! Finding another place to rent that provides the correct recording environment could be a challenge. It isn't anywhere as easy as finding an office space to operate a standard business from, for example.

All the best with it.

Regards Jason.

 

[RedCat]

Exactly right Jason. Prior to taking over the lease for the studio a lot of bands I know recorded there and loved the acoustics. It's just not that easy to replicate. For example 301 Byron Bay has a shocking drum sound problem yet it's one of the biggest studios in the country. Bands still record there, but the issue is well-known and sometimes time consuming to deal with.

We've committed to running the studio long-term, so provided I can find some way around the 35% deposit it's a no-brainer to me.

 

[Kinnon Bell]

It sounds like you're counting your chickens before they hatch. Does the owner even want to sell the property?

 

[RedCat]

He wasn't planning to sell, but once I told him we were moving the office out he opened up negotiations. Waiting on valuation now.