Opinions on two commercial properties

[china]

Thank you all for all the kind suggestions.

I have learnt a lot from this thread and all the good advice given.

But just had an update on both and it means that I am back to realcommercial.com.au

1. Neutral Bay medical centre has just been sold.

2. On phone discussions with Tweed Heads, I find that I do not own the land of the property contrary to my previous belief - hence, this does not reflect good value.

Back to the drawing board.

 

[westminster]

Thank you all for all the kind suggestions.

I have learnt a lot from this thread and all the good advice given.

But just had an update on both and it means that I am back to realcommercial.com.au

1. Neutral Bay medical centre has just been sold.

2. On phone discussions with Tweed Heads, I find that I do not own the land of the property contrary to my previous belief - hence, this does not reflect good value.

Back to the drawing board.

A very good lesson though and a step forward on narrowing down what you want and what it means.
For every ad on realcomm or re that I do basic feasability on 95% get sold or don't stack up. It's being patient to find something in that 5% at the right time, for the right value and in the right place.

 

[china]

I am just wondering whether there is some sort of professional service which conducts all an investigation into all of the questions that have been raised in this thread regarding a purchase of commercial property. I understand that there are valuers, surveyors, brokers, building inspectors etc. However, I wonder whether after I have conducted my own due diligence, whether there is a full time professional who could do a much more professional job in assessing the worthiness and merits of a commercial property purchase involving all aspects.

 

[Rolf Latham]

2. On phone discussions with Tweed Heads, I find that I do not own the land of the property contrary to my previous belief - hence, this does not reflect good value.

I think this puppy is too big for your risk profile in any case.................even it were the deal of the week youd be on Sleeping tabs most nights for a while: )

The land issue, of itself isnt necc a deal breaker.

What happens if you have a strata floor in Gov Phillip tower .............. not a good investment because its strata ?

ta
rolf

 

[china]

I think this puppy is too big for your risk profile in any case.................even it were the deal of the week youd be on Sleeping tabs most nights for a while: )

The land issue, of itself isnt necc a deal breaker.

What happens if you have a strata floor in Gov Phillip tower .............. not a good investment because its strata ?

ta
rolf

Very correct, but increasingly, my feeling is that I will probably only want to purchase one "set and forget" property investment -allowing me to diversify my investment portfolio and generate a passive income indexed to inflation.

I can't see myself endlessly searching for more IPs - it has already taken two years to get to this point.

So may have to stock up on sleeping pills!

With regards to strata, I think that in a regional area of uncertain capital gain, strata increases the risk over building and land.

 

[geoffw]

With regards to strata, I think that in a regional area of uncertain capital gain, strata increases the risk over building and land.

If you're looking at commercial capital gain is generally a different animal to residential. Generally the capital value is linked to rent. If the rent is linked to inflation, as it may be with a longer lease, then the value is likely to be also linked to inflation. The value of the tenant may influence the rent- a tenant with a national presence and history of stability may have a lower return than an individual.

An option renewal may give the chance to review the rent- if market rents have gone up higher than inflation then you have the chance to increase rent to bring the property to market, which in turn would increase the capital value.

 

[china]

If you're looking at commercial capital gain is generally a different animal to residential. Generally the capital value is linked to rent. If the rent is linked to inflation, as it may be with a longer lease, then the value is likely to be also linked to inflation. The value of the tenant may influence the rent- a tenant with a national presence and history of stability may have a lower return than an individual.

An option renewal may give the chance to review the rent- if market rents have gone up higher than inflation then you have the chance to increase rent to bring the property to market, which in turn would increase the capital value.

But surely, appreciation in land value would also contribute to capital gain and a rise in the value of land and building when it comes to resale? Lets say all other things equal, a land & building in Sydney cbd over ten years would have better appreciation potential than land and building in Walgett, regardless of rental.

 

[geoffw]

But surely, appreciation in land value would also contribute to capital gain and a rise in the value of land and building when it comes to resale? Lets say all other things equal, a land & building in Sydney cbd over ten years would have better appreciation potential than land and building in Walgett, regardless of rental.

I don't know what would happen with the price of land.

Probably a big increase in land price in Sydney CBD would have been achieved by putting much taller buildings on the same piece of land. There's a limit on how high that would go.

Your yield in Sydney CBD would be smaller. Walgett would have achieved a much higher yield so the overall result may not be much different.

 

[see_change]

I can't see myself endlessly searching for more IPs - it has already taken two years to get to this point.

We took one year of reading on this forum before we bought our first . Then we bought 19 in the next two years .

The amount of DD you're doing to get the first one is a great learning curve , If you stuck to residential , you'd find that once you've bought the first one you will be able to walk through the next few and tell within a couple of minutes whether it's a worthwhile investment .

On our trip to Brisbane we went through all of the available properties on the next ( hundreds ) and narrow it down to around 25 of interest . Several of those went under contract before we could see them . We have offers in on three ( one accepted ) and depending on what happens with those , we have another 3-4 that would be ok . low maintanence , not land banking , just nice properties with good returns , ( though nothing spectacular ) . Just set and forget .

You don't need to buy at the bottom of the market or pick up the perfect property to make good money . We have made over 100% profit on really crappy properties that we would never think about buying now.

I think you would be hard pressed to find any property bought in Sydney two years ago that would not now be making a good profit now . I think the same will apply to properties bought now on the central coast or central areas in Brisbane .

Cliff

 

[handyandy]

I am just wondering whether there is some sort of professional service which conducts all an investigation into all of the questions that have been raised in this thread regarding a purchase of commercial property. I understand that there are valuers, surveyors, brokers, building inspectors etc. However, I wonder whether after I have conducted my own due diligence, whether there is a full time professional who could do a much more professional job in assessing the worthiness and merits of a commercial property purchase involving all aspects.

You can try and contact 'scotts no mate' as I think he can act as a buyers agent on commercial.

http://www.domain.com.au/Real-Estate-Agencies/LaneCove/FKVaccher

Wouldn't hurt to just talk to him and see whether you have any common ground.

Cheers

 

[china]

You can try and contact 'scotts no mate' as I think he can act as a buyers agent on commercial.

http://www.domain.com.au/Real-Estate-Agencies/LaneCove/FKVaccher

Wouldn't hurt to just talk to him and see whether you have any common ground.

Cheers

Will do thank you once I find the next property for assessment.

 

[geoffw]

Will do thank you once I find the next property for assessment.

I think the idea is that, as a buyers agent, he could help you to find that property for assessment.

 

[Aaron_C]

If you ever want to buy down in Melbourne there's a few here that may interest you.

 

[china]

If you ever want to buy down in Melbourne there's a few here that may interest you.

Although I understand that it does not make investment sense, I would still prefer the first IP to be in NSW, preferably in Sydney. Gives me a greater sense of security that I can check it out easily and conduct close quarter micro due diligence before and after purchase. I also like long established medical centres as tenants simply because I understand the industry - centres with many GPs, often run by a corporate group. These places are often in busy retail strips wherein the property can be used for non-medical purposes should the GPs move away.

 

[Rolf Latham]

places are often in busy retail strips wherein the property can be used for non-medical purposes should the GPs move away.

I was about to face palm on the micro DD and personal physical presence ............. but then I saw this common sense,and maybe you arent yet quite your wost own enemy

ta
rolf

 

[china]

I was about to face palm on the micro DD and personal physical presence ............. but then I saw this common sense,and maybe you arent yet quite your wost own enemy

ta
rolf

Surely, most novice investors on their first IP must conduct micro DD and engage in personal physical presence?

 

[Rolf Latham]

Surely, most novice investors on their first IP must conduct micro DD and engage in personal physical presence?

not in my 13 years of experience of a few deals with clients

Sure some do.

That said, if you are going to "one egg" your basket............

ta
rolf

 

[Phiber]

Loving this thread guys, really a good read.
Ta

 

[John M]

China,

I hope you are well. I would like to voice some concerns/feedback on what I have read from you in this thread and in others:
- Firstly, you need to be talking to a mortgage broker. You are trying to purchase property but it appears as though you do not understand how you will fund it, what rate you will obtain finance at and what your borrowing capacity is. This is like trying to score a goal but not knowing how far you can kick.
- Secondly, I don't like the idea that you don't own any IPs but are looking to spend around $4-5m on a single tenanted property as your first IP. Talk about jumping into the deep end. Every investor has their own goals and strategies but if I had a few $M to spend, I'd buy a few smaller investments, or at least a multi-tenanted property to spread the risk. Especially if you are sceptical about every tenant you look at (ie in a previous post you asked what happens if Healthscope, an ASX listed company, folds.). Any company can fold, and anyone can choose to not take up option periods. ie in the past year I have seen an ASX company back out of a 7 + 7 Year Lease and the owners, who thought they had an ASX company for 14+ years, ended up getting a pay out and getting a lesser tenant to replace an ASX company on a much shorter lease. The new tenant is now behind on rent.

I've also seen 2 large banks move out of premises. Again, not an ideal situation to be in if you're buying one property with an 'A Grade tenant' based on a low yield, and then they move out and you realise they were paying above market rent, and you have to cover the holding costs for months, or years, while it's vacant.

The point I'm making is, you're looking at putting all your eggs in one basket and you're basing your decision solely on yield and your prediction on future growth. Have you compared the rents of your potential properties to what market rents would be?

I had a valuer call me yesterday to get my opinion on a property which sold in my local area. He said the yield was around 7.5% which seemed great. But the tenant was paying $170/sqm net, and the market rent should be around $90-100/sqm at most. The buyer is obviously an out of town investor thinking they're getting a great deal at 7.5% yield with a good tenant but when the tenant moves out they'll realise they paid double what the property is worth!

- It's hard to purchase commercial property unless you know your market inside out, so you can snap up a good deal quickly. If you're waiting for something that ticks every single box that's great, but don't expect your 8% + yields because the yield will be inversely related to the quality of the investment. I would suggest engaging a reputable BA if you are having troubles purchasing, and want some professional and comprehensive assistance in finding something which will allow you to sleep at night. There are plenty of older guys out there who have spent decades in the industry, know everyone and everything there is to know and will advise on a good deal quite easily.

- It should also be mentioned that someone who knows their market will be able to negotiate a better price than someone shooting blind. If you engage a BA on a property of this size, I'm not sure what their fees would be like but they might cover their fee with the savings you receive from their negotiation skills.

I hope this helps somewhat. Please remember this is general advice only.

Best of luck with it all.

Regards,

 

[china]

Hi John,

Thanks very much for your thoughtful and informative post.

Many good ideas which I shall take on board. A few issues:

1. I am not sure that there are many full time buyers agents for commercial properties.
2. Comparable market rents are hard to ascertain with no ready source of info unlike resi rents where a quick search of realestate.com.au. will suffice
3. The disappearance of tenants is a major concern - is there insurance for this?