Renting out a resi/comm (mixed used) is a pain

Hey all,

In about 5 weeks time I will be the proud owner of a resi/commercial (mixed) in the inner west (<5km from CBD by foot)! The property itself is 80% resi and 20% commercial. The ground floor has a commercial unit with an office space of about 6mx6m facing the street, a separate spacious kitchen and bathroom. Levels 1 and 2 comprise the residential aspect of the property, offering 3 bedrooms (all with built-ins), 2 baths and a very spacious rear balcony covered by a clear veranda.

The property itself is still new (2005 build?) and the build is great with quality finishes. Only issue is the difficulty of finding tenants for the entire building. The offering is obviously niche (best for those who want to rent, live close to city and run their own business from home) and the ask rent isn't unreasonable at all. If anything, the entire rent amount will be tax deductible since the entire building is on a single title and the lease agreement will be commercial.

Currently, we are asking $1300pw + full outgoings + GST. One tenant came in with a counter of $1200pw + half outgoings + GST but then settled for another property further out west when we declined. 2 weeks later another offer came in for full ask but the tenant hasn't been responding to my agent's calls since Tuesday.

Should we bite the bullet and just offer the resi aspect of the property on a 6 month lease for $850pw? Based on surrounding properties, this seems to be the norm for a house of a similar build. Another alternative is to try and list the property with an agent with commercial experience in the area and on realcommercial.com.au rather than realestate.com.au (currently listed).

We would like for the building to be tenanted at settlement to alleviate any pressure induced by our loan repayments.
 
Definitely put in on real commercial and go with an agent who specialises in cip, you need to be advertising to the right market.
 
Do the residential and commercial parts of the building have separate entries or can you do some minor work to get this outcome?

Finding a tenant for the lot is a more restricted market than either straight commercial or residential.
 
Do the residential and commercial parts of the building have separate entries or can you do some minor work to get this outcome?

Finding a tenant for the lot is a more restricted market than either straight commercial or residential.

Both have separate entries. The commercial unit front has a massive glass window on either end of the entrance which spans across approx. a 6m frontage to the street.

The house was previously tenanted to a chiropractor who ran his business from the commercial unit, and lived in the resi above it. That was back in 2011 for $1200pw + full outgoings + GST. There's been some interest from accountants, lawyers, vets etc. but none have stuck around long enough...

I'll tell my current agent to list it with realcommercial if I don't hear back from him mid-late next week.
 
That sounds like it would be a ***** to rent out. Most people with that kind of money to spend would probably have their own place already. Also how many people really want to live where they work?

Can't you just rent them separate?
 
I can rent them out separately since they have separate entrances (and I could have the internal door locked between the resi and commercial spaces).

Reason why I would like to rent both out would be for the full outgoings. That way the tenant would also pay for council + insurances + water rates etc.

It's a no-brainer to rent the whole building out under one lease. In the area, small and crummy 3 bedders are yielding on average $850pw in rent alone. Say you have an ABN and are willing to lightly (not even full time) run your business from downstairs. Given the commercial arrangement, if you make between 80k-180k (in 37% tax margin), you could claim back the FULL rent on your tax (resi + commercial) since the whole building has been zoned for business use and is under a commercial lease. That amounts to $819pw and the commercial space below is essentially a bonus.

If you earn $180k+ gross (45% tax margin), your rent will only be $715pw post-tax. Given the demographics in the area, such a scenario is not uncommon at all!

I just think some people in this day and age are blind to some of these benefits. They just look at the initial price tag and run very far away....

PS: The aforementioned 3 bedders in the area have an internal floor space of ~140sqm. My building in total is 239sqm in floor space alone (resi + commercial)
 
Who says they will be paying all the outgoings? You may end up having to pay those to get someone in there.

Also you cant claim the whole rent on tax. It's got nothing to do with how it is zoned. Unlikely the tax office could or would check but that would be the ruling.

As i also said, this property is very niche. You have to find someone on good money who is happy to **** where they eat so to speak. Not easy.
 
Who says they will be paying all the outgoings? You may end up having to pay those to get someone in there.

Also you cant claim the whole rent on tax. It's got nothing to do with how it is zoned. Unlikely the tax office could or would check but that would be the ruling.

As i also said, this property is very niche. You have to find someone on good money who is happy to **** where they eat so to speak. Not easy.

Why would I have to pay for outgoings? I will happily wait until somebody is willing to pay full outgoings. The last tenant, albeit paying $1200pw, also paid all outgoings. It's a norm for most commercial properties. We received a $1200pw + half outgoings offer which we threw off the table. I won't cave for a 2+1+1 year lease just so it doesn't remain vacant for a month.

You say the whole tax can't be claimed but surely they could get away by saying they use >50% of the resi component for commercial purposes as well. We even had an interest from a WA-based company who wanted to hire out the building as a retreat for any worker they send to Sydney... that'll be 100% deductible for them just like any hotel bill. It's not up to me how they want to do it but the commercial lease is in place for the whole building which is under a single title. If you say the whole building can't be taxed as commercial then why did the retail side of every bank decline me and refer me to the business banking side for a 100% commercial loan? I even tried to negotiate with them and prove that it's only 20% commercial but nobody budged on it since it is all under a single title. I even tried many brokers with no luck. Again, not my business how they claim but the incentives are there to claim up to the full amount on their tax.

I think my next step would be to have it listed on realcommercial to reach the right audience... If that fails, I will just co-list with an agent with experience in commercial leases who has confidence to lease it out. If that also fails, I will just rent them out separately. I should be able to net $850pw on the resi + $500 ex gst on the commercial (+full outgoings for commercial) which would break even with the current asking $1300pw + full outgoings.

What's your take? Really appreciate the input received so far.
 
If you earn $180k+ gross (45% tax margin), your rent will only be $715pw post-tax. Given the demographics in the area, such a scenario is not uncommon at all!

Then add back FBT.

The concessional rebates for Living Away Allowances changed a couple of years ago making LWA more expensive, the result was that properties in this bracket suffered greater vacancy or suffered a drop in rent.

If I was earning $180k, why would I want to live above a shop in a commercial zone - that smell of fish & chips/Mickey D's/local restaurant fat is a real turn off.
 
If anything, the entire rent amount will be tax deductible since the entire building is on a single title and the lease agreement will be commercial. .

The residential part would be a private expense generally - unless being used as an office etc and therefore would not be deductible.
 
Because of the zoning and your preference I would be listing it in the commercial vacancies for sure, I think your agent is slack if he isn't and would be finding another one who specialises in commercial in the local area.

I would be describing the the premises and the lifestyle offered prominently in the ad and the price would be way down the bottom :)
 
Thanks for posting guys.

So how much would FBT be on such a property? Just curious to know wha the post-tax cost will actually be for the tenant.

As for the area, it has only been zoned for mixed use. It is immediately surrounded by other residential properties. At a glance, the building is very modern and looks more like a grand townhouse with a large foyer for the residential rather than a crummy looking resi/commercial building like 90% of those out there in NSW.

I'm sure the tenant could get away with staying they use ~50% purely for commercial. Will keep you guys up to date with what happens.

Cheers
 
Hi

I would just check whether the development consent for the building allows the residential to be let separately to the commercial. If if does then I think you should play the percentages and lease them separately and try for the best market rent for each component. The wider your potential market the better rent you will achieve. You can lose a lot of money waiting around for the perfect tenant. And trying to work out such a tenant's net tax position in order to estimate the max they will pay is a waste of time. You might as well just ask them what their budget is.

Short term commercial rentals can be popular for tenants wanting flexibility so why not lease resi and commercial separately on 12 month leases. That way you'll get it leased quickly and can re-assess in 12 months time.

I appreciate that you'll be getting a gross rather than a net rent by leasing the resi separately but the resi is 80% of the building so that's how it is likely to play out.
 
When you bought this property, what was the strategy you had in mind? Someone else's negative gearing for tax isn't really an investment strategy, so surely you had a number of types of businesses in mind that need to be serviced in the area, and that convenience to the business would be a boon (such as a vet perhaps).

Maybe approach these types of businesses locally (or the RE who is letting them) to see how much what they have is going for, and see if you can offer something better.
 
Where abouts is the property?
With regards to outgoings you mentioned 'it's a norm for most commercial properties' ....not at all. Really depends on the area,size and type of property and the type of tenant tbe property will attract.
A good local commercial agent should offer well informed advice.
 
Hows the marketing going?

How much is the outgoings?

I note you posted on the 11th July - 6 weeks ago - that you turned down $1200/wk with 50% of outgoings.
Thats $7200 you are out of pocket and counting.

Just wondering at what stage do you bite the bullet and take a slightly lower income to at least have some income? Even if it is below what you believe is 'market' rates.

Blacky
 
So you've bought the property for something around the $1.25mil mark + SD + Legals + adjustments going by the numbers in your thread here:

http://somersoft.com/forums/showthread.php?t=99220

Assuming $500k borrowed from BOMAD (Bank Of Mum And Dad) is 40%, $750k loan from lender 60%.

Leaves you with around the $150k cash that you originally had to pay for the extras + a little left over to tie you along.

IO repayments @ 10% to BOMAD = $50k/pa = $961/wk
IO repayments @ 5.2% to Lender = $39k/pa = $750/wk

$1711/wk in repayments and no income yet? :eek:


pinkboy
 
Skix
Any update? Have you found tenants?

Blacky

Apologies all! I've been busy lately

Found a tenant indeed. They moved in start of last week and they're renting the whole property as it suits their needs. We settled at $1100pw net + full outgoings for a 2+3 year contract with no rental free period on a full commercial lease.

Jaggannath - Vet would be ideal for the area. The property is in the Leichhardt municipality of NSW in a suburban area. The current tenants will be setting up part of the property as a photography/portrait studio.

PrimeCommercial - Outgoings include all usages, water rates, council and even my building insurance (as negotiated). I would much rather take a $100pw hit to my rent for full outgoings. I suppose it was part of the negotiation talks. My agent wasn't that great since their forte isn't commercial. Next time I'll be using an agent more suited for the property.

Blacky - I was out of pocket by about 6 weeks worth. On our part there wasn't a mad rush since we're able to service the loan with relative ease, even when untenanted. I don't think my agent did a good job informing us about the true market price. Before we bought, he wrote a rental appraisal for $1450pw :eek:. I knew it didn't smell right so when he listed for $1300pw I seemed ok with it. Little did I know that we were getting little interest for the property and my agent didn't actively engage me on it. Whenever I asked about the open houses, the main response was "nobody came but we have 1 or 2 people who have expressed their interest...". Then when the offer for $1100pw came in, they told me to take it and then gave me a speech about "the market". Had I known, I would've listed for much less to stir up enough interest. Lesson learnt I suppose.

pinkboy - Haha really enjoyed your post. I'm an actuary by nature so numbers and calcs are innate to me. All of this was accounted for in a model I set up in excel, backed by a macro I wrote to stochastically simulate 10,000 paths interest rates could take over the term of the loan. The loan is currently interest only and the total repayments are about $5100 per month based on the current arrangements with a rental stream of about $4800 per month.

Hoping to get it positively geared by year-end (with my bonus coming through + the GST rebate on the purchase price + FHSA sum in July '15). I'm already looking at buying my second property now.
 
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