Investing in commercial/industrial property for dummies

[flatout]

Following on from my recent post on hitting the servicibility wall, one of the suggestions was to consider commercial/industrial IP's which generally have a higher return and may help offset some of our negative geared IP's. This is an entirely new field to me so I was hoping those that have already ventured down this path could offer some insight to this complete novice.

Some of the things I'd like to know are:
What sort of average yield should be expected?
Do tennants always pay outgoings?
As the owner, what would be my maintenance responsibilities?
Is the value of the property directly linked to the yield?
Is it considered risky to buy vacant possession?
How do CG compare with say residential and how do I find out the historical rate?
How does the bank value commercial/industrial and what criteria would they examine.
I've heard that most lenders won't lend >70% of value of commercial property. Is this true?
Generally speaking, what should I be looking for in a good IP?

Any other pertinent comments would be much appreciated.

Flatout

 

[Jamie]

Following on from my recent post on hitting the servicibility wall, one of the suggestions was to consider commercial/industrial IP's which generally have a higher return and may help offset some of our negative geared IP's. This is an entirely new field to me so I was hoping those that have already ventured down this path could offer some insight to this complete novice.

Commercial Property Education

One current thread that may help.

You can also use the Search Function to find another couple of hundred posts on commercial property.

Jamie.

 

[grossreal]

hi flatout
I will answer in red but as jamie has said there is a few posts on this subject but here is my .002


Some of the things I'd like to know are:
What sort of average yield should be expected between 7 and 10% depending on the tennant and the lenght of the lease?
Do tennants always pay outgoings
mine do
all out goings and I am just buying another and I am getting the tennants to change from there current terms
owner pays the out goings
to they pay the outgoings and 6% annual increase?
As the owner, what would be my maintenance responsibilities mine, the tennant pays the day to day maintenance.
if major then we split 50/50 the cost?
Is the value of the property directly linked to the yield yes hence the 6% annual increase
as the rent increases so does the value
this can change if the area where the property is in shoots up
because westfields start building etc next door
but then when the lease is up, the rental is then adjusted for the demand in the area
but in general the rent gives you the value and usually that is worked out for me at 5.5%
so if its 100k per annum in your hand then the value is 1,818,181 in raw numbers?
Is it considered risky to buy vacant possession no depending on the quality of the property and the ability to release
or if you have a tennant in mind, you can secure the property and negotiate a lease on property
ususally a month is the stand idol time between leases
but mine are 5 x 5 leases and the one I am currently negotiating on has 5 tennants longest 25 years shortest 6 years so they are long term investments?
How do CG compare with say residential and how do I find out the historical rate
comm is not purchasesd for cg
the cg is gained from the increase in rent hence the increase in value,
I buy to gain income to offset negative in residential(not sure if this is the best way but it works for me)
with regard to historic data you find it the same way as resi
with comm its a little easier as usually the neighbours will have been there for a long time and will tell you all about the property unless new and I don't buy new if I want new I build it?
How does the bank value commercial/industrial and what criteria would they examine there is no set rule all lenders are different
westpac one day will say only 70% lvr and then another westpac person will do 80% bank bills plus 2% fixed for 3 years thats 7.2%
with this type of lending most banks take it on application but not alot like nodocs or low docs
so full docs are usually required but income to cover the interest from the rent usually doesn't get you across the line
you need to find the short fall by cash or equity and if you have already resi ip's then the use of these equities ( even thou some people here don't like it) should be look at.
I've heard that most lenders won't lend >70% of value of commercial property. Is this true no I know of a couple that will go up to 80%?
Generally speaking, what should I be looking for in a good IP rule number one in comm is quality
it is alot more important then resi as you are looking at long haul
or the other is to find a comm that you know or have in mind as a tennant and organise that in advance
finding good comm property is a business in itself and there are people out there that are buying comm after comm but it is a very different market to resi and does need a fare bit of training.
I hope this helps?

Any other pertinent comments

 

[APerry]

all lenders are different
westpac one day will say only 70% lvr and then another westpac person will do 80% bank bills plus 2% fixed for 3 years thats 7.2%

Most of the banks will go to 80% for very strong customers, they usually say they won't but most will when push comes to shove. 2% above bank bills at the moment would be about 8.5% so your loan must have been written some time ago, 2% is a hideous margin, I hope you're not paying that.

Regards
Alistair

 

[Dazz]

What sort of average yield should be expected?

Depends on the property. Saw one go for auction on a 3.5% nett yield. It had a large land component. Little retail spot with bugger all land should yield OK though.

Do tennants always pay outgoings?

Not always, but if they don't, keep moving along.

As the owner, what would be my maintenance responsibilities?

Depends on the exact wiording of the Lease governing the relationship. Can be anything from less than nothing...i.e. the tenant fixes up your hovel for free just so they can get on with their business, right the way through to being nagging whingers where you need to cough for alot.

Is the value of the property directly linked to the yield?

Ahhh, one of the great modern myths. My neighbour out in the industrial wastelands would be in strong disagreement with all of the "experts". His vacant block of industrial land is worth a packet, and yields nothing. He's had about 12% p.a. growth over the past 28 years. Alot of vacant blocks are changing hands, or old stuff that is scheduled to be knocked down. None of these yield a jot now, or will for the next 3 or 4 years.....same as ressy development.

Is it considered risky to buy vacant possession?

We used to think so, and we were scared witless to start with thinking "What if the tenant ups and leaves ??" Now, with more confidence in the market, we actively seek vacant properties, as sitting tenants can be a royal pain in the bum, usually they are paying lower than market values and don't like being dragged kicking and screaming into the real world. Much better to attract a fresh new tenant and negotiate all of the terms upfront.

How do CG compare with say residential and how do I find out the historical rate?

We've seen increases of ~ 40% on our ressy stuff during the last year here in Perth. Over the same time frame, our industrial stuff has been doing 75 to 80%. Would gladly get rid of all of our ressy stuff if it wasn't for the CGT.

Someone, somewhere started another modern myth that capital growth is somehow non-existent or dodgy at best with commercial and industrial. Plenty of ressy authors state this over and over, and we were convinced for many years on the merits of this, not knowing any better. When we found out the truth, we were a tad miffed that this patent nonsense can perpetuate for so long and we swallowed it hook line and sinker.

How does the bank value commercial/industrial and what criteria would they examine.

The Bank palms it off to one of the standard valuers and runs with that. The valuers usually use all three methods, those being ;

Summation method
Gross $ / sqm of improved NLA
Cap rate based on a yield if it reasonable.


Comparasion to recent sales is their strongest indicator, as per ressy - same same.

I've heard that most lenders won't lend >70% of value of commercial property. Is this true?

Yeah - may go up to 80%, but if you have ressy equity, hook in with that.

Generally speaking, what should I be looking for in a good IP?

Same as in the RIP category - good growth prospects, decent yielder and something that will attract a decent tenant.


There are few good reasons why the really big institutional investors don't buy houses and flats.....

 

[saucy gibbon]

Ahhh, one of the great modern myths. My neighbour out in the industrial wastelands would be in strong disagreement with all of the "experts". His vacant block of industrial land is worth a packet, and yields nothing. He's had about 12% p.a. growth over the past 28 years. Alot of vacant blocks are changing hands, or old stuff that is scheduled to be knocked down. None of these yield a jot now, or will for the next 3 or 4 years.....same as ressy development.

You have made this statement at least twice now and it is wrong.

A commercial property or industrial property is ALWAYS valued according to the net income it produces or is EXPECTED to produce when complete and is a function of risk ie the cap rate.

Even if a large corporate owns it and has a facility built on it the land is then valued by means of comparable sales. Those comparable sales will be made by investors and the above equation will apply.

I'm not saying that it is impossible that your neighbor has made capital gains by holding land and not deriving income from it. I am saying that the above comment that you have made is incorrect and misleading and that if people ignore the relationship between income, cap rates and valuations then they do so at enormous risk.

As a disclaimer to the above, I have worked for these "experts" for the last 15+ yrs.

 

[Dazz]

You have made this statement at least twice now and it is wrong.

A commercial property or industrial property is ALWAYS valued according to the net income it produces or is EXPECTED to produce when complete and is a function of risk ie the cap rate.

Even if a large corporate owns it and has a facility built on it the land is then valued by means of comparable sales. Those comparable sales will be made by investors and the above equation will apply.

I'm not saying that it is impossible that your neighbor has made capital gains by holding land and not deriving income from it. I am saying that the above comment that you have made is incorrect and misleading and that if people ignore the relationship between income, cap rates and valuations then they do so at enormous risk.

As a disclaimer to the above, I have worked for these "experts" for the last 15+ yrs.

You're absolutely correct Saucy,

Everything I wrote was completely incorrect and totally misleading. Sorry flatout - please disregard everything I wrote, it was complete drivel.

Both myself and flatout will no doubt be enthralled with your vast expert experience and opinion Saucy.

I for one am very much looking forward to your version of answers to her questions.

No doubt with 15+ years of experience hanging around the "experts" (sorry I didn't catch how many CIP's and IIP's you've actually owned ??) you will be able to enlighten the forum far more than I ever will.

Take it away Saucy.....

 

[XBenX]

Ahhhhhhhh people pushing barrows is always so amusing to watch.

 

[grossreal]

hi all
very interest post.
but not helping flatout that much.
comm real estate is not a market place that can be learnt in 5 mins and there are alot of different parts to it and it would be good to decide what part you wish to invest in.
mine are build keep and rent
buy comm to redevelop into resi and comm mix
or if its a good comm buy install a tennant and pay nothing for up keep and 6% annually increase or cpi which ever is the higher.
dazzling is dirt (not into land banking myself but thats his area of expertise and seems to do well out of it and thats they aim of the game)
I have guys that just buy banks or ex banks(one of mine is a ex bank so they contact me if I want to sell)
I know of guys that just buy fast food comm property.
mcdonalds were at one stage not into fast food but had more money in the real estate they were sat on.
I have one person that I know and he does not have any thing over 50sq
buys the 20 to 40 sq mall newsagent,cigerette,drinks bar stalls
and is doing a killing with them
just goes melbourne sydney brisbane
and only buys this type of product and they return over a 12% return to him
thats all he buys the last one he bought was 400k and no financial wall for him.
but he specialises on this one type of product.
comm go from shopping centers to 15sq newspaper stand and all in between
they are all very different and there is no one size fits all.
learn what your good at or like and specialise on that part of the market.
and have fun

 

[Dazz]

Good reasonable post Grossy. Very true how diversified the whole CIP game is, plenty of opportunities everywhere if you are keen. Keep making money mate - you're doing a good job.


As for these smarmy witty little one liners where no-one learns a thing and adds nothing to the subject material being discussed.....frankly it's getting a little tiring. I thought that was why we were here on the SS site.

For all those very clever and witty people, the "barrow" has been dropped you'll be glad to know.

I'm off to buy some property....good luck in your endeavours.

Over and out.

 

[grossreal]

hi dazzling
no problem
I am off to a good start already this year.
my arncliffe will be the last here for a while and got 4 mil for my china project need 5 so looking good.
remember that these boards are free so you get all types.
as for making money we all try
lots of people are very envious and wonder why people make money and they don't
for me its very simple you need to decide what you want,
get up of your a-se and go and get it.
I find it very interesting on lots of boards that people
wish people to post and then these same people think they know better then the person that has posted
and instead of giving what they have done or are doing they decide to try to cut down or attack the poster.
as you know I am not very good at investing as per sitloti and know nothing about developing as a few here have told me with welcome to my world.
I am just a very small one time investors thats floating around having a look at a few boards and knows a bit about real estate.
and as I told a builder today lots of people find my job to be easy but at the end of the month I don't have the safety net of a wage or cheque from a pay clerk.
I am a full time developer,investor (very small as maybe) and from a few here don't know anything
so maybe I am in this same not knowing anything boat but its funny to me that the chinese are waiting to talk to me and they are putting there money where there mouth is
I think jaffasoft has some one running over your neck of the woods with the geralton project (400 houses).
but that just a side line.
for me dazzling keep up the good work I won't be going over your neck of the woods for some time juye china is a little bit more profitable.
this site has a wealth of very knowledgeable people but it also has a few clowns and I have met a couple of the clowns and they have replied to a few posts but thats life.
I haven't got to were I am without meeting the odd clown.
I hope the next comm you are going for you get( unless its one I am after)
what goes around comes around and its funny that I lost a soup to a rival company about two years ago and the same rival company asked me to become there ceo this year and I have not thrown out the idea looking at jv'ing at some stage so you never know where your deals lead.
one door closes and with the bang three open
you just need to look in and decide which one to go thru.
I do think that alot of people have given jaffasoft a hard time with his utube idea but this would be the ideal place for a mp3 or video on commercial real estate investing and I put dazzling down as the first to post electronic books.
I am not a big book reader and even less like to type but comm is a very little understood market but very profitable maybe it should be kept that way.
all the best and will have that scotch one day

 

[gekko_99]

If I'm doubling up on the above sorry but my take is that commercial property is intrinsicly linked to rents and yields even if its vacant industrial land. I know in Brisbane that industrial land has more than doubled over the last five years and people who have landbanked the stuff have done well.

There's an old guy out in the ports near Murarrie who bought industrial land over 40 years ago and put some old metal sheds on it and rented them out. At that time is was a poor location out in the sticks between the city and the ocean. I saw it in the paper before xmas and he was selling so it should be pretty much sold by by now and he'll be a multi-millionare I bet.

Anyway my reasoning is that whatever can be built on the land has a value tied to rents and yields. The value of the land is the value of the end development less all costs of developing it and a developers margin. So if rents double, yields compress and building costs go down your a winner!

The only time non-residential land might be bought without consideration to these fundamentals is if a new town plan is being bought in and the purchaser is being speculative about what they might achieve.

 

[saucy gibbon]

You're absolutely correct Saucy,

Everything I wrote was completely incorrect and totally misleading. Sorry flatout - please disregard everything I wrote, it was complete drivel.

Both myself and flatout will no doubt be enthralled with your vast expert experience and opinion Saucy.

I for one am very much looking forward to your version of answers to her questions.

No doubt with 15+ years of experience hanging around the "experts" (sorry I didn't catch how many CIP's and IIP's you've actually owned ??) you will be able to enlighten the forum far more than I ever will.

Take it away Saucy.....

Hang on there, I never stated that everything you wrote was completely incorrect.

And I didn't answer all the questions that were posted because I believed that they were adequately covered in previous answers and my response would have been mostly repetition.

As I have stated before, commercial, industrial or retail do not fit MY risk profile. I choose not to invest in those sectors.

Obviously you are personally offended by my post, given that this is a public forum in which discussion on property matters is encouraged why then are you taking this personally? I simply stated a view that was the result of my experience having dealt with these properties over a number of years.

Rather than call my experience into question, or make broad statements along the lines of "oh, everything I said was wrong" how about a counter argument.

I always viewed this forum as a place to hear alternate views and question my thinking.

So to come back to the point in question, show me how I am wrong.

 

[willair]

[/quote]
Dazzling,i just have a quick question for you, i,m in the final part of trying
to buy our first Commerical property, a small tilt panel office warehouse
in the Port of Brisbane, clear span,two levels of office accommodation
4 bay parking, and the property is tenanted, land area 250sqm my question
is do you value the property on the land/building or on the annual rent
of 38k the price is in the low 440k's so do i work on the value on the
total sqm,i have had someone value the place,and have roughly told me
what to offer i offered them 375k,got to start somewhere.. .good luck willair.

 

[JoannaK]

hi Willair,

if i may jump in here....

your offer should be based primarily on the income generated by the property, and make sure that $38k income is net of GST, otherwise the income is really only $34,545.

you should do some research of the immediate area to establish yields for similar properties to the one you are considering. Just using a general yield of 8% on a net rent of $38k, the value would be in the vicinity of $475,000.

Then you will need to analyse the existing lease agreement, and make particular note of how long the lease needs to run, whether the tenant pays outgoings, whether the tenant is going to take up any options he has available to him... and that sort of thing, and adjust your offer according to to those other factors....i would look for a lease term (not including the option) of a minimum of 5 years to run before any option periods otherwise the investment becomes a little more risky in my opinion as the tenant can always not take up the option. Alot of people new to commercial have a look at a lease that says 7+5+5 for example, and think it's a 17 year lease, when this is not the case....it is only a 7 year lease with 2 options of 5 years each.

Also take a look at underlying demand for the type of property you are purchasing. If the current tenants do vacate, what sort of vacancies will you need to endure?

i hope this helps some.

 

[willair]

i would look for a lease term (not including the option) of a minimum of 5 years to run before any option periods otherwise the investment becomes a little more risky in my opinion as the tenant can always not take up the option. Alot of people new to commercial have a look at a lease that says 7+5+5 for example, and think it's a 17 year lease, when this is not the case....it is only a 7 year lease with 2 options of 5 years each.

JoannaK,Thankyou i'm only just starting but the area seems to add up.
I just rang the young Lady real estate agent and asked those question's
about the lease, she was somewhat evasive about the lease but it comes
up for review mid dec this year , with option for a 7% increase in the rent
pa,but i will get the paperwork today and try to understand they did not
take our first offer, but they have gone down 15k ,the R/E told me they
have to sell due to family splitup.. maybe i heard that before somewhere.
I walked the total small area at 4 in the morning for three days last week
with my dog,looking at every property some are very large over 12000sqm
none of those properties are vacant,but about one in every four of the
wharehoues office setups are,so what you have said will help me in a big
way.The area is the port of Brisbane close to the gateway motor way
airport and within about 4 klm/s of the Port of Brisbane.Thankyou
good luck willair..