My First Comm Property Purchase

Discussion in 'Commercial Property' started by Sanzy, 19th Sep, 2010.

  1. Sanzy

    Sanzy Member

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    Hi All,

    I have been reading this site now for a bit over 3 years and have taken a lot of information from it and thought it was about time to give back for all the information I have taken from it. I will start by saying this will probably be a long post that many may find boring but I hope it helps some one looking to move into CIP.

    Firstly I would like to say thanks to all of the regular posters on this site for the large amount of information they have willingly put out into the Forum for people like me to read. Dazz’s posts have been especially inspiring in the commercial property section as well as Gross Real who I had the pleasure of meeting once and have been able to take a lot from his posts. Ridin-High also who has been a help in keeping me encouraged thru the long process that is buying Commercial property.

    Ok so to the meat of the post. I currently have two Residential Properties in outer western Sydney and had an amount in the bank that I had spent a long time trying to figure out what the best way to use it would be, I also work a full time 9 – 5 but do have the luxury of being able to take personal calls and having my personal email open to conduct extracurricular activities like investing as long as it does not affect my normal work. This post is basically the story of my first CIP purchase and I hope it will help others who are thinking about getting into Commercial Property, I know I would have liked some more information when starting to look into if commercial property.

    After researching residential property, shares, keeping money in high interest accounts and commercial property I decided that Commercial property was the vehicle I chose to use. Now after reading thru this forum and others for a number of months I found that I would need at least 30% of purchase price plus costs (at this point I was working off costs being residential costs) using this I figured I would just be able to reach to the magic $1M mark for purchase, this is where CIP starts to really look attractive. Much less outlay and the numbers and conditions are little better the RIP but with more outlay. So the next thing I needed to do was to figure out what type of commercial property to invest in and how much to spend on this property. This took a lot of time searching commercial real estate sites looking thru literally thousands (possibly 10’s of thousands) of property listings of all types, slowly I was able to narrow the search to a price range, property types and locations that suited me and would provide the return I was after, this mainly consisted of removing most retail and professional office from my searches as they did not look as attractive as other types of CIP. Once this had been done I narrowed down to around 10 properties. I emailed the agents asking for more information and then waited. The main information I was after was purchase price, monthly rental and any outgoings the land lord was liable for (while I would love to be like Dazz and have the tenant liable for the lot some deals did have an amount the land lord payed so I worked them into the figures) . I already knew how much I would get investing in high interest savings accounts (around 6%) so to make the risk worth it I wanted at least 10% net return. As each agent contacted me back (mainly by phone then follow up email) I got the numbers I needed and then decided if I wanted to keep looking into the deal or to shelve it, this was really a very quick do the numbers add up yes/no, most were a no but a couple did stick out. So I started to look into them a bit more.

    It was at this point I did the normal setup of a company and trust to buy this property within.

    There was a false start of a property that looked good but once the bank valuation came back turned up a number of issues that killed the deal after around 2 months work. But I did take a lot from this set back; mainly the cost of doing a commercial property purchase was a lot higher than I had first thought. A commercial deal costs more to get thru a bank. Instead of a valuation costing around $400 per RIP I ended up paying around $3000 for the first valuation as well as an amount (around $500) for time spent with my solicitor looking over the deal. That is a lot of money for a deal that did not get thru. An expensive lesson but I now knew to budget around $10000 for bank costs instead of around $2000 for a RIP. I will say at this point I had a great relationship manager at my bank that was able to give me great advice and help to make sure I had the info I needed.

    So by now I was probably 6 months into my foray into commercial investing a few thousand spent on a deal not done and a trust setup sitting idle, I went back to searching the commercial investment sites but did remembered a deal I had seen while negotiating the purchase of the deal that fell thru. This was for the purchase of a small industrial lot in regional South Australia, 11 shed on a 1 acre lot split over two separate titles and was returning just over 10% net. This was exactly what I had been looking for. I called the agent and made an offer expecting to get a counter offer to my surprise the vendor accepted the offer and the deal was on at a similar price to what my last deal was so I knew the bank funding would be ok if the valuation came back fine.

    At this point I got a SA based solicitor on board to work with me on this purchase and also spoke to my bank guy and we started to organise the valuations, and here came the shock. The cost was going to be between $5000 and $7000 for the valuation and they would not start for around 4 weeks with around 3 – 4 weeks to complete the valuations. Now this was partly because of the number of tenants in the deal and party because of the distance from Adelaide to the town this was in, so I booked the one who could do it quickest. So I now had to go to the vendor and ask for a subject to finance clause to be added to the deal as we were still arranging for the contracts to be signed (being from NSW I did not think of this initially and it was a reminder to make sure you keep in mind the rules of the game your playing to get best advantage from it) I was lucky the vendor said yes and we agreed on a sunset date and a settlement date around 2 weeks after the sunset date (this comes back to bite me later). While I was organising this my bank relationship manager found a valuer who had an agent local to the property so they were able to start straight away but still take around 3 weeks to value, so we had around 1 week to spare on the sunset clause. Whereas the valuer I had booked would be delivering around spot on the sunset date. We changed valuer in the hope a local guy would know the local market better and we would have some spare time.

    Now it was just a matter of hurry up and wait, I spent 3 weeks asking the bank and my solicitor if there was anything left to do or that could be done now instead of waiting. The response was nope nothing everything is going fine. Then the valuation came back 2 days before the sunset clause and it was good, it came back at almost spot on what I had a contract for. I was stoked, the bank were now going to lend me my money. So I gave my solicitor the ok to go ahead, we still were waiting for formal written approval but I was told it would be fine, this would arrive 1 week before settlement was meant to happen. So I booked a plane and flew out to look at the property I was buying and also meet the agent who was selling it (and I had been speaking to about managing it for me once I owned it). The viewing went excellent (this was a formality, I did not mind if I saw it or not and after talking to the agent it looked like we could increase the net return to around 12 % straight up with rent reviews and with the addition of a 12th Shed that already had building approval increase it to around 15%, so lots of potential to grow.

    At this point the paperwork started to flow thick and fast mainly from the bank and from my insurance broker so I could insure the property (a condition from the bank and a prudent step anyway). In the 2 weeks between sunset and settlement I thought it was all going well but settlement was delayed by a week. The vendor still had to provide my solicitor information and my bank were not ready to settle yet either (the whole 2 weeks coming back to bite me). Settlement did go ahead one week later, everything was ready and an added nice little surprise, the vendor hit me up with penalty interest. Even thought they were not ready to settle on settlement day, they could charge it so they did. Another expensive lesson, give yourself time as a bank will take as much as you give them plus a bit more.

    So now I am the proud owner of my first CIP, It was not as scary as it looked when I first started. The process was exactly the same as a RIP, you just need to spend much more time looking into the leases, how much they are worth and how long they are for. The lease makes a CIP. I was able to get 5 year funding at a decent 8.15% interest due to sufficient length leases on most of the sheds.

    If I could give anyone advice I would say, jump in and do it. Once you have you will look at all those for sale signs in commercial/industrial areas a lot differently. Just make sure you budget enough time and expenses money for the deal to work.

    I would welcome any feedback or advice. Or just to hear from others at what their experience has been I just hope this helps break that mystery of CIP that some people have of it being really hard to get into and much more complex than RIP.

    Sanzy
     
    Last edited: 19th Sep, 2010
  2. Rooster

    Rooster Member

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    Brilliant post Sanzy and much needed for the forum.

    I've just re read it twice to take it all in.

    Dazz's posts as well as posts such as these, gradually lift the veil on CIP's and what they entail.

    Good to see you get in and have a crack.

    Thanks

    Rooster
     
    Last edited: 19th Sep, 2010
  3. Intrinsic_Value

    Intrinsic_Value Member

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    Well done Sanzy, not just for the purchase, but for the great post.

    Your post is extremely informative (without giving away any specific details, which i quite understand).

    Its really like an ABC step by step learning guide as to how your acquired the property.

    Unfortunately Somersoft is mainly residential, so there is a severe lack of detailed commercial property posts such as yours.

    Again much thanks
     
  4. Ridin-High

    Ridin-High Member

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    Nice post and once again a very well done.
     
  5. Trogdor

    Trogdor Member

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    Congratulations!!

    Good luck with the purchase and thank you for sharing.

    As a recent first time CIP buyer myself, really appreciate more discussion on here re: CIPs.
     
  6. Amadio

    Amadio Member

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    Excellent post.

    For your next CIP purchase (I'm sure there is one in your future) what would you do differently?

    And...do you think that your solicitors should have worded the contract so that you didn't get hit with penalty interest when it was the vendor who was late getting paperwork?

    Great job - all the best with it.
     
  7. Edmond Dantes

    Edmond Dantes Member

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    Awesome posts... thanks for sharing!!!
     
  8. Sanzy

    Sanzy Member

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    Firstly thanks everyone for the support posts, I was a bit worried the post was a bit long winded.

    The solicitor really could not do to much, as both the Vendor and Myself did not seem ready to settle. I could probably have argued it or had different wording but I just think it was one of those situations where I just plain ran out of time to get everything done right.

    What would I have done differently. Given myself around 4 weeks from sunset to settlement instead of 2. That would have also alloud a bit more time to do final confirmation of how much it would all cost. In the end I was with in around $1000 of the budgeted purchase costs to actuals which is not bad when your think that you have to work out, rates, levies, stamp duty, valuation costs, bank costs, rent off sets, solicitor fee's and any other cost you may not have found yet.

    Sanzy
     
  9. Dazz

    Dazz Banned

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    Top stuff Sanzy.

    I really like how you came up against some formidable obstacles, but pushed on through regardless.

    The lessons you have learnt and the nitty gritty detail you now have from this one purchase far outweighs anything you could ever glean from a course / forum / discussion. It just doesn't get into the weeds of details where you need to be to make a difference.

    Top stuff mate.


    ....and don't worry about the small penalty you paid. The Vendor's solicitor wrote the contract, you wouldn't - in most cases - have been able to change the wording anyway, it's all their way. With that small detail, you just make sure you as the Buyer have all of your ducks in a row so you are ready. Penalties are only applicable to the Buyer - not Seller in this game.

    I've never been a Seller yet, so never had the good fortune of being on the powerful side.

    So now I suppose you're busy herding your flock of 11 or 12 Tenants. Did you inherit any ratbags ?? Reminds me of my "ugly duckling" shed complex with 6 existing Tenants, 3 of which got together and refused to even recognise me as the Landlord. That game was fun. It ended with a bobcat and truck.

    ....anyway, once again, well done - top stuff.
     
  10. jezza

    jezza Member

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    Sanzy

    Just read your post and well done, I have started getting into commercial, what I mean by started was in the last month I have read about 4 books and viewed 1000's of place on real commercial. Without jumping on your bandwagon of research you have done, can you explain why you locked in industial or was this what you were tageting, or did you look at offices/ retail etc. Also this might seem like a rediculous question but do all commercial purchases have a GST added to it and then why do some have the yield as Gross and some have the yield as Nett?

    By the way fantastic post!

    ta

    Jezza
     
  11. FormerLurker

    FormerLurker Nerf Herder

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    Great Post

    Great post mate very informative and much appreciated - kudos will be heading your way :)
     
  12. Sanzy

    Sanzy Member

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    Thanks Dazz, your posts helped a lot with giving good honest advice to people looking into comm.

    Luck for me of the 9 tenants all seem really good so far but one of the tenats is the vendor (only a small shed most likly just storage of stuff) so will be interesting to see how that goes but if they move the tenat next to them has already asked about getting more room in the complex so it might just be fine.

    But herding the flock does sound like a good way to describe it.


    I ended up with industrial as it was the best deal I could find that suited my cash flow needs. I looked at everything including Resturants, petrol stations, shops, car yards, offices and industrial and found industrial style blocks gave the return when I was looing. as well as having a couple of tenats meant that if one did a bolt I would still have some income while replacing them. This was just my logic at work and it gave me sleep at night factor.

    GST is a question you need your accountant to confirm but the general rule you can work on is if the place has a tenat already it is a going concern and is GST exempt. if it is vacant you will need to pay GST, which I think can be claimed back at first BAS. My bank offered to do a bridging finance on the GST if needed where they would lend the GST amount as a seperate loan which would be due for repayment at first BAS. But again check with your accountant on the specific deal.

    Gross Vs Nett return
    I take it as gross is total rent / total purchase cost as a percentage. Nett is rent - outgoings / Total purchase cost.

    With Comm some properties have the tenant paying all out goings so Gross and Nett work out he same, but mine there are some outgoings the Land lord is liable for so there is a bit of a difference.

    Happy to be correctedd on any of this as I am by no means an expert on this, and Anything i say is not advice mearly what i think please seek proffesional advice if you need it.
     
  13. antonio

    antonio hungry to learn & Apply

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    Congrats on your CIP Sanzy!

    and Thanks for sharing your adventure with us
    with regards to comm. investing. It really helps.
     
  14. Player

    Player Live Every Day

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    Congorats

    Well done Sanzy. Great post and description of this part of your journey.

    A commercial multi.......beewwdifulll :D

    Being in a regional, a multi also provides you a hedge of sorts (just as a multi-door in resi does) when/if a tenant vacates. Not the end of the world, as you have other income streams putting forth whilst you find the next occupier. ;)

    Is your interest rate fixed? If so, is it fixed for five and does that reflect the average term of the leases in place?

    Will you self manage? If not, what sort of PM fees will you incur?

    Also how old are they (sorry if you've indicated that, I couldn't see it in your post) and ergo what sort of depreciation can you milk?



    Appreciate your sharing. Again, well done :)
     
  15. lizzie

    lizzie when i grow up ...

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    you could've sold tickets to view that experience!

    great work sanzy and thanks so much for sharing. it's very valuable to have some smaller cip stories on here after dazz's mind blowing "stuff"
     
  16. WinstonWolfe

    WinstonWolfe Richard Werner fan

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    Nice post Sanzy.
    I've got a few questions. I understand if you don't want to answer.

    - have you had a QS do a depreciation schedule?
    - how comprehensive was your valuation? did it include reports on condition of air con units, sliding doors, structural integrity of improvements, etc?
    - have you had outgoings compared and confirmed against similar CIPs?
    - was the quoted yield not net of any significant outgoings? i.e. rates, utilities, air con and other maintenance, fencing, security gates, other plant, full or partial property management fees, land tax, insurance, insurance excess, plumbing, gardening, etc.
    - do you think there's any gaping risk uncovered in your leases? i.e. who pays legal costs if tenant loses dispute with landlord?
    - did you see a maintenance schedule and evidence PM had comprehensively overseen it on time, along with receipts for work done and work warranties?
    - do your tenants have similar risk profiles. i.e. are they reliant on the one industry or large client for much of their work?


    We've been burnt by an incompetent PM who failed to keep adequate records of reported damages. Significant insurance claims have been rejected because of a lack of documentation by the PM. These involved :

    - storm damage to bitumen driveways, and the tenant driving over the damage for at least 6 weeks before reporting it to the PM. The dispute then becomes how much of the damage is due to the storm and how much to the tenant.

    - apparent wind damage to large sliding doors, despite the doors being less than 6 years old, commercial grade, no other doors in nearby complexes being damaged by wind, and the damage appearing very much as if caused by forklifts.

    So our lesson was there's advantage in ensuring your PM is on the ball, keeps paperwork up to date, has mature systems in place, carries out regular inspections preferably with lots of photos as may be required for before and after shots for insurance claims, sends copies of all reports to you for your records.

    All the best with it.
     
    Rickardo likes this.
  17. Mr. Fabulous

    Mr. Fabulous Thought Criminal

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    Congratulations Sanzy, top effort.
     
  18. chilliblue

    chilliblue Member

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    Great detail in the abvoe post.

    You are correct that having a good commercial PM is required as there is many a difference between commercial properties and residential.

    On saying that, it the leases are nice and tight, there is often little room for a tenant to move on.
     
  19. steveadl

    steveadl Member

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    Sanzy, just want to add my thanks for your detailed and informative post. Pleasure to read. :)
     
  20. HiEquity

    HiEquity Member

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    +1

    It's all good!