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
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
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