Purchasing shops/commercial

[Gordi]

Advice needed from those in the know. We are looking into buying 2 shops which are on the one title. It will bring in approx $800 in wkly rent combined and the propsed auction price is $450k. Just need some advice when buying commercial shops and what things should we look into so we dont get caught out of pocket. One shop is owner occupied and willing to sign up a lease and the other has a few years left on current lease. If we decide we want to break the lease before then is that possible and what things should we consider?
We are thinking that in the future it could be re-developed into flats. We arent sure what inspections which may be needed for commercial.
Any help or advice in this area would be greatly appreciated.

 

[DaveM]

70% lvr at commercial rates, do your sums at 7.5-8.5% to see how they come out

 

[Shahin_Afarin]

Sounds like you are going for the cash-flow - in that case you need to look very closely at the lease (especially the current lease).

Regards

Shahin

 

[Aaron_C]

Where to begin? Make sure that the rentals are market rentals and not BS. That's the key.

 

[Dazedmw]

In NSW? Retail Leases legislation differs from state to state so its important to know where you are. I only know about the RLA in Vic.

Usually its pretty difficult to break a commercial lease if the parties have been following the terms and the tenant wants to stay. Of course anything is negotiable but you might be stuck with the tenants until final expiry of the lease (including option terms).

As someone earlier said you are buying cash flow rather than just a property so the leases are key. One thing that catches people out in Vic is that Land Tax is a non recoverable outgoing here.

 

[Dazedmw]

Is the $800 a week including outgoings? What is the fully net rental? Is this at market rates?

 

[John M]

Advice needed from those in the know. We are looking into buying 2 shops which are on the one title. It will bring in approx $800 in wkly rent combined and the propsed auction price is $450k. Just need some advice when buying commercial shops and what things should we look into so we dont get caught out of pocket. One shop is owner occupied and willing to sign up a lease and the other has a few years left on current lease. If we decide we want to break the lease before then is that possible and what things should we consider?
We are thinking that in the future it could be re-developed into flats. We arent sure what inspections which may be needed for commercial.
Any help or advice in this area would be greatly appreciated.

In regards to the shop which is owner occupied but willing to sign a lease:
- Is what they are offering in line with market rental, or an inflated/deflated equivalent?
- Why are they selling if they want to continue running their business there? Question why they are selling the premises. There may be a genuine reason; however, they may also be struggling, and therefore may not be able to keep up with rent payments if they sign a lease with you.

What is the net return? How easy is it to re-let the property? What is the vacancy rate in the area for this type of property? Compare the current rent with comparable properties on the market, and properties recently leased within the area.

If a tenant signs a lease with you and they are paying rent on time and holding up their end of the bargain, you can't just break the lease early (unless they agree).

Also be mindful that financiers will want long term leases in place in order to fund purchases of commercial investment properties (the brokers may be able to provide further advice here). The banks will probably laugh at you if you are buying something with 1 year left on the lease and there is a high vacancy rate within the area.

Good luck!