My First Comm Property Purchase

Great post Sanzy.

You said you secured finance at 8.15% and it's returning 10%, based on a 1M purchase price, what is your net return on this property per annum? (roughly, if you don't mind)

I'm guessing after expenses (management?) about 1%?

thanks for sharing.
 
Great post Sanzy, thanks for sharing.

Sanzy said:
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.
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I was expecting the story to take a turn for the worse after reading that... Could you not extend the sunset clause? I'd be very nervous letting the contract go unconditional before receiving written approval from the bank.
 
WinstonWolfe said:
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? NOt Yet I have not as the building are mostly late 70's early 80's metal sheds. All fitout is owned by the tenats-
how comprehensive was your valuation? did it include reports on condition of air con units, sliding doors, structural integrity of improvements, etc? The valuations was quite comprehensive from the point of the area, expected value of property, buildings, How much the current Rent per Sq Meter is vs how much it is on average in similar area's for the same type of buildings. But it just described the buildings (e.g. wood framed metal shed, no damage visable). -
have you had outgoings compared and confirmed against similar CIPs? No, but the outgoings are just council rates and charges for the property so I am happy they are ok for me-
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. Return was quoted as Gross in advertisment. I then used a spreadsheet to work out what the return would be as net of all of the costs.
- do you think there's any gaping risk uncovered in your leases? i.e. who pays legal costs if tenant loses dispute with landlord? The leases are a standard commercial rental leases, so there is definatly room to improve them.
- did you see a maintenance schedule and evidence PM had comprehensively overseen it on time, along with receipts for work done and work warranties? The property appears to have been paritaly self manage partialy managed by a local agent (turns out I think the owner and manager were related) so these types of details were basicly non existant. The fact teh vendor is still has a current lease to a building on the property and in talking tot eh other tenats the property recieved work when it needed it. but may not have had a formal schedule in place.
- do your tenants have similar risk profiles. i.e. are they reliant on the one industry or large client for much of their work? The tenats are a mixed bag, some are small self employed single industry others are self employed with contracts to big business, so the risk profile is quite mixed with about 3 core tenants on long leases with a number of smaller tenats on short term leases.


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.

To me this is the biggest thing I am now focusing on. As there was not an established PM in place I have contracted the selling agent (after talking with them about what I was seeing this being and having them offer some suggestions on how to improve the cash flow from the property). I will be looking very closely into how everything progresses for the next 3 months, then again at 6 months then reviewing if I am happy with the services they are providing. But I can see a trip or two in the next 6 - 12 months to see the property and talk with the tenants to make sure they are happy and things are being attended to.
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gooram said:
Great post Sanzy.

You said you secured finance at 8.15% and it's returning 10%, based on a 1M purchase price, what is your net return on this property per annum? (roughly, if you don't mind)

I'm guessing after expenses (management?) about 1%?

thanks for sharing.
Click to expand...

The finance is not a fixed rate but is currently at 8.15% it is returning around 4% after all expenses are paid ((total incoming/ total outgoing) / Purchase price) so it is a nice amount of cashflow to fund the next project.

Thanks again for the support posts and PM's they are appriciated. I am still figuring some of this stuff out so the questions here are halping me to take what I have done already and focus it more for the next time I jump in head first.
 
Well done Sanzy on getting your deal together . The whole thread is a breath of fresh air on here and a pleasure to read .

Hope it all goes well for you .
 
Sanzy, outgoings generally include building insurance ( and you need the tenants to give you a copy annually of their insurance certificate) ground maintanence etc, as well as council rates and charges. It is usual, for the leases to have these recoverable from the tenant. What do your leases. When the valuer did his comparable leases, weere they Gross rents ( where the owner pays teh outgoings ) or Nett ( where the tenant pays). This can have a big effect of profitability as well as cash flow. I am still frustrated by banks offering rates nearly 2% above residential rates, when they generally have you behind the loan, as well as the property.
 
Sanzy, I'm not into commercial myself yet, but I would highly recommend you get a depreciation report done. You say the buildings were built in 70/80's, but you may be surprised what a Quantity Surveyor will come up with. I had the same thoughts with a property I own built in 1950, and boy was I pleased with the QS report when it arrived! ;)
 
Sanzy said:
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.
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Nope, not boring at all...I enjoyed the read, there's always something to learn :D
 
Hi Sanzy,
Good to see you getting in the CIP game. Well done. :)

Quick question...do your Leases have provisions in place to enable you to recover the property management fees from the tenants in the form of VO's?

Cheers

Boods
 
chilliblue said:
PM/management fees are incorporated into the outgoings.

You can and will pay PM fees even in retail.
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Not in WA, not sure about the rest of Australia...s12(1f) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 specifically prohibits this.


Boods
 
Great Work

Hi Sanzy,

Thanks for the post and congrats on the first CIP. Your description of the process brought back some memories for me of what was going through my mind at the time also. Forking out large amounts of money (compared to Res), at the bank's mercy (I had an 11th hour LVR change from the 'Head office in Sydney' to contend with) and seemingly hands off the wheel. Enjoy the next phase with the hands on the leases, and I agree with steveadl - the non cash deductions are something else.

All the best.
 
Excellent Post

Great work and great post Sanzy. Kudos for taking the time to put it down. Great timing to read this post and other classics from Dazz. We have 8 months left of an earn out, after selling our share in a business, so we can start shopping in earnest!
 
What a great read Sanzy....

It's post's like this that really put things back into perspective and make our aspirations a reality again..

Thanks again for contributing.
 
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