Opinions on two commercial properties

C

china

I would be grateful for your opinions on the following two commercial properties.

One:

http://www.realcommercial.com.au/property-retail-nsw-neutral+bay-500658279

Pros: Long term stable medical tenants present since 2003
5+5 year lease
Located in busy commercial precinct in desirable suburb close to Sydney CBD with long term proven capital growth

Cons: Only 7% yield - but may be able to negotiate down asking price
Is 5+5 term too short?
Strata building: no development potential



Two:

http://www.realcommercial.com.au/property-medical+consulting-nsw-tweed+heads-5696545

Pros: Long term 37 year lease!
Multiple tenants
Located near Gold Coast with high population of elderly requiring medical services, hence ongoing demand for the property
8% yield
Tenant pays all outgoings including land tax
Ownership of land and building so can develop down the track

Cons: ? no capital growth in this region
? no other use for this site


It would seem to me that if either property was fully paid off, I would have a passive income till the end of my days. Both yield higher than term deposits and seem to have secure tenancies for long periods.

What are your thoughts? Any glaring problems?
 
5+5 from now or since start of lease in ???

If it was now, then quite reasonable. The location seems prime to me- I would not have thought that there would be a shortage of tenants even at the end of a lease.

Would Tweed be going beyond your means? I don't know how much you could get on a comm loan, and at what rate. Check your borrowing capacity- also your comfort factor. Would you really want to put so many eggs in one basket?

What's the rent rise over the period? A standard is CPI with a review at the end of an option period. For a longer lease there's the possibility that it would be a smaller increase.

Comm properties tend to have capital value related to rent, so you may not get the growth spurts and slow downs of resi.
 
geoffw said:
5+5 from now or since start of lease in ???

If it was now, then quite reasonable. The location seems prime to me- I would not have thought that there would be a shortage of tenants even at the end of a lease.

Would Tweed be going beyond your means? I don't know how much you could get on a comm loan, and at what rate. Check your borrowing capacity- also your comfort factor. Would you really want to put so many eggs in one basket?

What's the rent rise over the period? A standard is CPI with a review at the end of an option period. For a longer lease there's the possibility that it would be a smaller increase.

Comm properties tend to have capital value related to rent, so you may not get the growth spurts and slow downs of resi.
Click to expand...


I have emailed the agents for further details on both properties with regards to the timing of leases, contracts and CPI info, etc.

The Tweed situation would consume absolutely all my resources - LOC on PPOR, savings, share holdings - probably be at 50-60%LVR at $4mil. I understand commercial lending can be up to 70% LVR with higher rates ? 7% currently. It would devour all my income and probably pay it off over the next seven years and then probably retire. No sleeping at night here.

I can't see myself looking into multiple IPs over time - may as well research one as carefully as humanly possible and get it right.

I can't see any major pitfalls with either investment. I think both sets of tenants have long term staying potential and rent is not their concern as long as there is populaton demand for their services. Obviously 35 years is a long time and if Tweed turns into a ghost town during that period, then I could be screwed.
 
That comes down to semantics really. The Wikipedia article talks about the Gold Coast metropolitan area, so includes Tweed Heads- not as a part of the region, just as a part of the extended city.

For you the more important issue would be the land tax you would pay in NSW vs the land tax over the border- especially if you are going to be owning in the name of a trust.
 
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The other thing to check with a comm loan would be the P&i term. I don't know if a comm property loan gets treated like a comm loan for a business, where the P&I term is only for the term of the lease. Ten year P&I vs 25 year can have a huge difference in repayments.

I wouldn't be going in for everything you had on a big purchase. Too much risk.

Have you ever talked to a financial advisor? It may be worth while, even if just o get the structures right. The differences in tax paid could be big. For instance there may be benefits in purchasing through a SMSF or a trust. But you should get advice regardless IMO.

Edit: a bank may also be very nervous about such big numbers, especially with little borrowing history. Find out what you can do before doing anything. At least you may be able to limit your search parameters. Talk to a broker.
 
I would give them both a miss, I see the medical profession as a dying industry and you could end up with a specialized building with no other medical business to move in.

With Medical forums and Wikipedia there is no reason to go and see a gp anymore and with You Tube directional videos most surgical procedures can now be performed in the home with a bottle of whiskey a latex glove and a bowling ball.
 
china said:
http://www.realcommercial.com.au/property-medical+consulting-nsw-tweed+heads-5696545

Pros: Long term 37 year lease!
Multiple tenants
Located near Gold Coast with high population of elderly requiring medical services, hence ongoing demand for the property
8% yield
Tenant pays all outgoings including land tax
Ownership of land and building so can develop down the track

Cons: ? no capital growth in this region
? no other use for this site


It would seem to me that if either property was fully paid off, I would have a passive income till the end of my days. Both yield higher than term deposits and seem to have secure tenancies for long periods.

What are your thoughts? Any glaring problems?
Click to expand...

second property the current lease plus options total 37 years. How easy will it be to keep this property up to future standards of practice. How easy is it to get licensing for day surgery
 
geoffw said:
The other thing to check with a comm loan would be the P&i term. I don't know if a comm property loan gets treated like a comm loan for a business, where the P&I term is only for the term of the lease. Ten year P&I vs 25 year can have a huge difference in repayments.

I wouldn't be going in for everything you had on a big purchase. Too much risk.

Have you ever talked to a financial advisor? It may be worth while, even if just o get the structures right. The differences in tax paid could be big. For instance there may be benefits in purchasing through a SMSF or a trust. But you should get advice regardless IMO.

Edit: a bank may also be very nervous about such big numbers, especially with little borrowing history. Find out what you can do before doing anything. At least you may be able to limit your search parameters. Talk to a broker.
Click to expand...


I would be interested to know what the brokers on this forum think about the above.

I would like to talk to a financial advisor but in my extremely limited experience of just one - they have no idea. Certainly, they have not owned commercial property. My accountant who does my annual tax returns certainly had no idea.

My super is held with first state super - it has just 155k in it and hence I don't think I can do it via smsf.

My current thoughts on financing a 4 mil IP purchase.

Deposit 1.6mil (40%): LOC on PPOR 600k + cash 1 mil
Lend on IP: 2.4 mil

This gives 60%LVR on the IP and 80% LVR on PPOR.

I would still have after purchase: super : 155k, cash 600k, shares 110k

Currently, I have the 1.6mil in a term deposit at 4% which is due to expire in five weeks time. Interest rates have dropped again and surely I cannot keep holding this in term deposit
forever - anything has to be better.
 
jrc said:
second property the current lease plus options total 37 years. How easy will it be to keep this property up to future standards of practice. How easy is it to get licensing for day surgery
Click to expand...

The tenant for this property is an ASX listed company that runs about 22 hospitals in this country. I think it will be their responsibility to maintain standards and credentialling. This is usually not a problem. Most private hospitals have been around forever.

I am also wondering what are the pitfalls of such a long lease? In 37 years time, I may be one or two foot in the grave but the attraction to me is that it seems to be a one stop investment wherein if I pay it off over time e.g. seven years with 300k p.a. rent and some of my working income, it should be like a pension fund wherein I can get 300k pa. for the rest of my days?
 
china said:
Geoffw, what does this last bit mean?
Click to expand...

I'm sorry. "Especially if you are going to be owning in the name of a trust".

Late at night + autocorrect.

Land tax provisions may be different if you own land in the name of a trust. In NSW there's a limit you can have without paying land tax, but that limit doesn't apply with a trust. It's based on land value only. I don't know about Queensland. It can be a substantial bite out of your income.
 
geoffw said:
I'm sorry. "Especially if you are going to be owning in the name of a trust".

Late at night + autocorrect.

Land tax provisions may be different if you own land in the name of a trust. In NSW there's a limit you can have without paying land tax, but that limit doesn't apply with a trust. It's based on land value only. I don't know about Queensland. It can be a substantial bite out of your income.
Click to expand...

https://www.osr.qld.gov.au/land-tax/about-land-tax/land-tax-rates.shtml

Qld Land Tax free threshold in a trust is $350k - then it is upwards from there. $600k threshold in personal name.

pinkboy
 
Yep, you like those medical uses China.

Tweed Heads - good long term security but as others have pointed out capital gains in a 'regional town' may be subdued but it is on the border. What is the foreseeable demand for these services (pretty good except for the DIYers). Who is the vendor (the current occupiers or some non-related party)? ie how does the lease stack up? Due diligence.


Cremorne - is this a strata as the area appears to be much less than the entire building? How does the current rent compare to market? Has the option been exercised or is it VP as per the advert?
 
china said:
I would be interested to know what the brokers on this forum think about the above.
Click to expand...

Usually commercial term loans are for a period of 15-25 years (15 more common). Max LVR for that size of 70% usually. You may be suited to go on commercial bank bills or a term facility with a smaller lender if you don't want annual reviews.
 
china said:
I am also wondering what are the pitfalls of such a long lease? In 37 years time, I may be one or two foot in the grave but the attraction to me is that it seems to be a one stop investment wherein if I pay it off over time e.g. seven years with 300k p.a. rent and some of my working income, it should be like a pension fund wherein I can get 300k pa. for the rest of my days?
Click to expand...

price to market on long leases usually NOT in favour of the owner

ta
rolf
 
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