Seeking Advice on Commercial Property Purchase

[muppie]

Hi, I am looking into buying a commercial property. This prop will be for my company to operate as an office, so that I can hire staff. There are other plans for the office space too which is to support the growth of my company's services in the future e.g. 1-2 years.

At the moment I am thinking of having my company to buy it.

The asking price is 384K. It can also be leased at 52Kpa (asking price). IT has 5 offices upstairs + a boardroom, and some rooms downstairs + some storage area which I have plan for. The location is good (to my mind anyway), near a business centre and close to a Honda and a Ford Dealer.

What are some of the things to consider when buying such a property?
What are the typical interest rates for such a thing (company buying it, and commercial)?

 

[Kristine..]

Hi Muppie

The property sounds great, and if you would be happy to lease it at $52,000 plus outgoings that represents a good 13.5% return on the asking price of $384,000.

If your trading operations can support the rent, why not buy it yourself and rent it to your company? That way you get a great tenant and all the tax benefits of the investment, too.

Regarding interest rates, are you looking to use the property as security for the loan, and what LVR would you be seeking?

If you can secure some or most of the loan against residential property then you can hedge the rates and get a reasonable deal.

I am currently paying 8.15% on one of my commercial loans, and 8.5% on another. Both retail shop premises. By the sound of it you are looking at office space, but you don't say if it is free standing or a strata office within a larger facility.

Muppie, there are so many different lenders out there, your borrowings will be unique to you and reliant on the security, LVR, length of time you have been trading - if you do buy the building in the company name you will have to personally guarantee the loan anyway, and if your primary income is from the company and so on and so forth.

Perhaps if you can share a little more detail on what you have in mind?

Cheers

Kristine

 

[muppie]

If your trading operations can support the rent, why not buy it yourself and rent it to your company? That way you get a great tenant and all the tax benefits of the investment, too.

Hi, why is this more beneficial than having the company buy it ? It seems to me that if I buy it, it would make a +CF investment and thus increasing my income tax, whereas if the company buys it, say under IO loan, it would be completely tax deductible.

Regarding interest rates, are you looking to use the property as security for the loan, and what LVR would you be seeking? If you can secure some or most of the loan against residential property then you can hedge the rates and get a reasonable deal.

This is the area where I don't know anything about. I am thinking whether it would be possible to get 100% lvr.

I am currently paying 8.15% on one of my commercial loans, and 8.5% on another. Both retail shop premises. By the sound of it you are looking at office space, but you don't say if it is free standing or a strata office within a larger facility.

How many years is your loan period? Is it IO or PI ?

This office is a strata office. One of 10 I think.

if you do buy the building in the company name you will have to personally guarantee the loan anyway, and if your primary income is from the company and so on and so forth.

Can you tell me a bit more about this? I don't even know what to ask along this line Thanks for your help so far.

Another alternative I am thinking is to rent a house and use it as an office.... or buy a house myself and rent it to the company... can an office operate from a residential area / house?

 

[APerry]

Muppie,

When dealing with commercial loans there is a lot more to think about. Some have higher interest rates but lower upfront costs for example, while others will give you a low interest rate but slug on high fees. I recently took out a loan of a similer size for 7.75%, but had to pay a 1% upfront fee. I think I should be able to do better than this next time.

Regards
Alistair

 

[muppie]

I just inspected the property this morning and talked to the owner. They said they had valuation at 530K (what a big difference to the intial price 384k that I was told). Owner said he wants 550K

He spent about 150K (or so I was told again) on the fit out. And it is quite a nice fit out I must say but surely there's depreciation and he shouldn't expect to recoup the whole 150K (esp the fit out seems to be about 2 years old) ?

The whole area is 183m2 but they are calculating it with the mezzanine area for a total of 300m2 that's why the price is higher.

 

[pulse]

Muppie,

Its worth thinking about the finance early, I'm currently buying a property with finance through CBA. Part of the price is secured by residential property.

On the residentially secured part:
interest only for 5 years, whole loan over 25 rate same as variable, 80% VR

on the commercially secured part
P&I only for duration of lease! (maximum 10 years) 70% VR, rate about 1% higher

Makes you look twice at buying commercial property.....
Difficult to service a large loan over 5 years!

Cheers
Pulse

 

[markp]

muppie

It doesn't sound like the property is for sale. Hence the different asking price.

I would ask to see the contract.

What is the total net area?

 

[muppie]

Hi pulse, Can you explain what it means by "secured by residential property" ?
Are you buying two properties at the same time?

Is this bought by yourself personally or by the company?

 

[muppie]

I was told that the owner is having a divorce and wants to postpone the sale till december... so what I think is we can lease it for now till dec and have the lease up as part payment or something like that. Really from our point of view is just a delayed settlement if that's the case - but I haven't talked to the owner yet to confirm this.

 

[APerry]

Pulse, You need to shop around a bit more for your loans.

 

[markp]

A delayed settlement thats good.

No money down for 6 months. But is it definitly for sale?

 

[willair]

I just inspected the property this morning and talked to the owner. They said they had valuation at 530K (what a big difference to the intial price 384k that I was told). Owner said he wants 550K

Muppie,
can i just ask a simple question.who in the first place said 384K
then the next time the price is above 550k,it sort of tells you something
about the people you are dealing with,i like the gold coast but the mud sharks
only come out at low tide.
good luck
willair.

 

[Peter 14.7]

Muppie

I have a lot of experience in Commercial property and I always say what is the value of a commerical property that is empty? the answer is $0.

I dont fully understand the deal but you should ensure that :

1. you can lease to someone else at the same rate as your are paying, your buiness may not be there forever? it may grow, fall over, relocate, be sold.

2. what are the outgoings are how are they calculated

3. fitout is worthless even if it works for you, it may not work for the next lesee Ignore the value. Second hand workstations are worth $500. It would cost him to pull them out.

Banks see Commerical as more risky due to "here on day , gone tomorrow aspect." Ala One Tel, Ansett, HIH, or up your way Big Kev.

FYI Peter 147