Making profit in Commercial...most effective strategy?

Ok so we're as new as one can be in Commercial...haven't even bought commercial ever before so looking for some guidance from all those who have had successful ventures in Commercial.

We've been doing resi developments for a few years now and its come to the point where its very hard to make the margins we would deem acceptable..so time to look outside the resi box and possibly into commercial.

I don't know if this is a really stupid question and it may be blatantly obvious but i'll ask anyway.....What is the most effective strategy to make a good decent profit with commercial sites??? Our goal right now is to make money so ending up with a commercial property which we can lease out is not what we're after....

So which way to go?:
- to buy a vacant site, build a commercial property then sell? (similar to what we do in resi? does it work the same way?
-to buy something established, renovate and then sell?
-????

Probably can make profit doing either but i'm after some advice from those who have found 1 strategy to be more successful than the other (doesnt have to be out of the 2 i've listed above..can be any strategy).

Any advice, guidance etc would be very much appreciated as i really have no idea where to start!

Thanks in advance!

Kim
 
Kim, just some thoughts off the top of my head, so take them for what they are. :)

Perhaps finding some smaller buildings that have good potential may be a good way to wet your feet in the market? eg. find a group of run down shops, perhaps partially/totally vacant, under rented due to condition, excess land even etc.

I've noticed along Prospect Rd there are a fair few groups like this (though perhaps not for sale as yet) where this could be done. Fair few new shops opening up in this sort of area (for example many foreign supermarkets) who may like to lease a newly renovated shop in a good position. So you buy the old building vacant at a cheaper price than if they were a) leased already and b) in prime leasing condition. Do them up, move some tenants in (would hopefully still be quicker than building from scratch) and sell for a premium price to an investor now that they're nice and new with depreciation, good tenants at a good rate etc.

I can even think of one example off hand you can check out over RP Data and in person: 588 Regency Rd, Broadview - $540k.

It was a group of 3 run down shops, only 2 of which were leased (I assume on periodic leases), large billboard on side of building, and it also had over 850m2 of vacant land behind the shops with driveway access (1,323m2 land total).

The investor/developer has renovated the shops in front, converted two of the shops into one bigger tenancy and now leased them both out to new tenants. He's also cemented, fenced off and leased out the vacant land at the rear to a tenant who needed a location to park a bunch of trucks (or it could be his own trucks for all I know).

Ugly ducklings like this one could be what you're looking for? Wished like hell at the time it was for sale that I could have bought it, but then again I wouldn't have been in a position to renovate them as quickly as this guy did.

So obviously without knowing the leases in place on the shops and land it would be hard to determine current value, but I'd hazard a guess to say it would be a fair bit more for a few months work of renovating 3 small shops and pouring some concrete.

Was following this property for a while, so email me if you want to know any more details I may have left out. :)
 
Last edited:
Steve,

That sounds like a very reasonable price for a 1300m2 block in Broadview!....i'll have a closer look at it...it can be a dummy deal just so i can work through some figures.

Are commercial shops/sites as easy to valuate as residential? I've found that the sites vary soooo much that its hard to place an accurate m2 rate on things??
 
Tip 1 - Find a property that is underlet, vacant or partially let. Make the property 'more tenantable'... how, depends on the property, then get it fully leased. ;)

As you are no doubt aware, CIPs are valued against their income stream, not just their replacement value or otherwise determined value.

Tip 2 - look at CBD properties in regional centres ;)

Tip 3 - when you realise what you now have, consider hanging onto it ;);)


I currently only have one IP, so perhaps I shouldn't be offering any advice. It is a CIP though ;)
 
I know very little about commercial property however the impression I get is that all the profit is in negotiating the leases.

Buying something untenanted is cheaper than the same place with a good long-term lease. So you take on the risk of being able to lease it at a decent rate.

Developing commercial is I expect higher risk than developing Resi since you could end up holding an empty office/shed/whatever for months or years or have to lease it out at a low rate just to get a tenant.
 
So which way to go?:
- to buy a vacant site, build a commercial property then sell? (similar to what we do in resi? does it work the same way?
-to buy something established, renovate and then sell?
-????

Why so keen to sell? Most are in comm for the yields/cashflow on offer - so there shouldn't be a need to sell as it's putting cash in your porcket.
 
i guess i'm assuming it would be similar to what we do with resi development in that the rent is generally not enough to cover the expenses if we were to hold onto them so sell up, take the profit and move onto the next project...possibly not what actually happens with commercial at all :confused: ????
 
Our goal right now is to make money so ending up with a commercial property which we can lease out is not what we're after....

OK, so if you are as green as grass in this field of endeavour, it's probably best not to write off the main chunk of the field before you get started.

Why not have a proper squizz around your local market and pick a few deals to study in-depth. Steve's example looks good....why not take him up on his offer and chase down the particulars....hell, why not go and have a chat with the chap who is making it happen.

If your background is developing things and you wish to pursue this in this field, then I'm no use at all to you, as I have never done that in either field.

Your current strategy sounds like a churn and burn, build 'em and flog 'em type thing cos you don't like carrying the 3% yields they initially generate - fair enough. I just see alot of stamp duties at the front end and alot of CGT at the back end.

Not sure, but I think the moderator of this forum, Joanna is the only one I know who has done a commercial devvy. Why not search her name and have a gander at what comes up, then take it from there.
 
I've started looking into the numbers of that example that Steve provided as its a good starting point given i now know a little about what the guy who bought it did.

Actually we don't pay any CGT so not as bad as one would think...true our strategy may not be everyone's cup of tea but it has worked for us thus far....it would still work if people weren't paying stupid amounts of money for development sites (god knows how they actually make a decent profit at the prices they're buying at) which makes it incredibly difficult for people like us to buy anything at a fair price.

Have done lots of searches in this forum and there's lots of bits of info but not much on what i'm after hence why i posted the question...hoping for some direction.

Will continue to evaluate the deal Steve provided as an example tomorrow...off to bed now! Nite all!
 
Here's another deal, this one substantially bigger, but again may give you some ideas and food for thought. I followed this one for the 18-24 months or so it took from on the market to completion and leasing out:

Building on The Parade at Norwood (No. 137). 972m2, corner block, with old original 2 story building in front (though small - about 260m2 on each level), old building extension at back covering the rest of the land.

Bought by developers for $5.95M. They demolished the entire building to the back of the original 2 story, leaving only the 260m2 building remaining. Built a new 2 story extension over the rest of the land to the rear and rendered and added cosmetics to original front building so it matches newly built portion (very hard to tell now which part is the original). Totally gutted inside of old building, renovated, changed wall structures (used to be an old football clubhouse) to create 4 retail tenancies on ground level and 3 offices on top. Don't really know construction costs that well, perhaps $2M all up?

End result (by my guesstimates):
- 610m2 (?) of prime retail space leased at around $1,200-1,300pm2 to secure national tenants (fashion stores).
- 710m2 office space (could be more, but hard to tell as I haven't been inside) leasing for around another $100kpa total, including a national banking group.

End result probably about a 10% yield being conservative based on $6M purchase + $2M construction. More importantly, properties selling along the strip on about a 5-6% yield, so current value around say $15-$16M, perhaps more.

Bare in mind these figures are based on many assumptions from me which may be off for whatever reason (floor spaces, actual leased rates, construction costs etc), but again - you get the idea. So $8M profit less interest costs for a 18-24 month investment.

There's currently another opportunity to do almost the exact same thing up the other end of The Parade with an old car parts store sitting on around 1,300m2 and 25m prime frontage selling. Has been on the market for over 15 months, I think from memory it was passed in at auction for about $5.5M - the highest bid was the guy that was a partner in the development above (he owns a few buildings along the strip). Just a matter of time before someone does the same and makes themselves some nice coin on this one.
 
Another one to look at Kim: Prominent Adelaide developer bought a group of old shops on Prospect Rd (No. 81) on a L shaped 1,700m2 block. One building running down the length, then another building to the rear facing the other building towards Prospect Rd with car parks parallel to each building (24 in total). I think originally 4 shops in each block.

Some existing tenants stayed in, but in the mean time the developer has been renovating each shop one at a time as they are vacant. An old tenant then moved into the newly renovated shop (at a higher rent) which allows the owner to then renovate the previous shop etc. They're also converting the front shop closest to Prospect Rd into a cafe and creating an Alfresco eating area out the front utilizing space that was just garden beds before.

May be a good idea to drive past this one as you can still see some of the reno's in progress, plus the finished result, and I don't think they've started the outside rendering of the buildings yet to make them look modern - still just the old red brick. I think there's also still one or two shops for lease if you want to check out.

Don't think the construction costs on this one would be huge as a lot of the work is cosmetic, I think they've only moved a couple of structural walls, in another tenancy that they've combined two into one they've just knocked a doorway between the walls. Haven't seen it myself, but I'm told it's a very good job.

They've also bought a group of 4 shops directly across the road and are leasing them out periodically at the moment with intentions to develop them down the track.

Plenty of comparables for leasing rates (incl. one in the property itself) etc, though one word of caution if you want to analyse this deal - take the purchase price with a pinch of salt. He bought it without it being on the market from the family of the owner who just wanted to get rid of it, so I think he got a reasonably good deal on price - compare to other sales at the time to get a better idea.
 
Another one to check out for you Kim would be 43 Wing St, Wingfield - vacant land. I've been following this one for almost 2yrs now. Has been for sale for ages but I think they're asking too much, plus they also have to combat with the current easy availability of land in Wingfield plus other properties where you already have a building.

I like it due to it location parallel to South Rd, even though it is a smaller block. One could knock up a warehouse similar to others next door and opposite, have 6 car parks out front and voila - workshop. My idea would be to perhaps build a small self storage facility on the property and lease them all out. Good location for advertising without any fuss with just a billboard and the rates and sizes offered facing South Rd passing traffic.

I think however they want too much for the land which is why it's been for sale for so long. For say $100k more you could buy a property with similar land size with a building already on it, but if you can get them down on price?

Anyway, another good example to run some numbers by. Do you kind of get the idea I'd love to get into commercial?! :D
 
Hey Steve,

Wow thanks so much for taking the time to post those examples. I'm still working through the numbers at Broadview to see what i come up with and try to understand how it could be a profitable venture.

I'll work through the others as well. Good to know the background of each of the sites as that gives me a better understanding as to what was there before compared to whats there now.

Umm yep, quite obvious you're into commercial :D. You seem to know alot about commercial so why don't you get into it?
 
have to drop into chemist warehouse tomorrow so will drive past that one on prospect rd i'm going to drive past tomorrow to have a peek :)
 
Mainly because we need to buy a PPOR first. :)

Don't do it Steve!

We did this - so we now live in a nice house in a fantastic location but I still have to go to work every morning.

With young kids at home, I'm reminded that if I had bought good CIPs at the time instead, I would have both a nice house at the moment as well as the option not to work...

The grass really is greener on the other side!

And kudos to you sir for the excellent detailed examples in this thread...
 
Don't do it Steve!

We did this - so we now live in a nice house in a fantastic location but I still have to go to work every morning.

With young kids at home, I'm reminded that if I had bought good CIPs at the time instead, I would have both a nice house at the moment as well as the option not to work...

The grass really is greener on the other side!

And kudos to you sir for the excellent detailed examples in this thread...

Ha! :D

Yeah but no real choice, at the moment we live in a very small house which is fine for now, but by the time our first kid gets to 2-3yo I want to be in our proper home. Wife is easy to please, but I want the big house in the good location. I know, I know! :rolleyes:

Having said that, even if I wanted to now I wouldn't be in a position for commercial due to low doc and still relatively early stage of our investing lives. Don't worry, we're not wasting our cash, I'm working our investments as hard as I can, but at this stage I can't really see a viable commercial alternative/opportunity.
 
Buy and hold for cip you need 30% finance in your first deal most of the time and usually the income determines what the property is worth. Unlike resi.where there alot more buyers in the norm buying there own home or ip as they need much less deposit easy to get finance for etc
never developed one but do know of someone who does sells a few and holds 1 just like resi developing.

I hold one small cip and am currently looking at a bigger one out of state.
 
Having said that, even if I wanted to now I wouldn't be in a position for commercial due to low doc and still relatively early stage of our investing lives. Don't worry, we're not wasting our cash, I'm working our investments as hard as I can, but at this stage I can't really see a viable commercial alternative/opportunity.

I once believed the same thing... until I broadened my outlook and looked outside capital cities. CIPs don't always cost more than Resi IPs. Granted the allowed LVR by lenders is lower.

It is possible on a relatively meagre asset base. Even investment numpties like me can do it! ;)
 
I once believed the same thing... until I broadened my outlook and looked outside capital cities. CIPs don't always cost more than Resi IPs. Granted the allowed LVR by lenders is lower.

It is possible on a relatively meagre asset base. Even investment numpties like me can do it! ;)

Some good points, but I reckon I'd be sticking to capital city for my first CIP. It's not that I can't, the asset base is decent, but at the moment the priority is to build up the equity for a PPOR.
 
Top