Thoughts on cheap commercial like this?

Also, being so small (39m2) may make finance harder. Factor at least 30% deposit, plus closing costs.

Also, not sure on GST issues being commercial. You'll need to investigate this.

Mind you, I don't want to discourage you either, but forewarned is forearmed.....

Cheerio.
 
Frank,

Some questions I would ask.

What would you expect the cap rate to be for a property like this ?

What are the outgoings ?

What are the terms of the lease regarding outgoings recovery, option periods, guarantees ?

How much office space is scheduled to come onto the market, will this effect the vacancy rates ?

Who is the tenant ?
 
Where do we start......

39sqm is not too bad for a small office.

Minimum loan values for the type of loan chosen may play a part.

The deposit realy doesn't have to come from cash, a seperate loan from resi property can get you over the line.

Some brokers will charge an arm and a leg to set a loan up for you.

80% or under lvr can be found with many lenders, some will go to 100% and some will do 100% at home loan rates for a no doc via private funds.

The sale should be GST exempt as a going concern as it is leased, check with the agent though. You will need an ABN and GST reg for that to apply though.

It's better to have the outgoings paid on top of the rent rather than let the tenant pay them directly as sometimes stubbiour money comes before council rates :eek:

Rent sets the value of the property, ask an agent not connected with the sale what market rent could be achived ( photos would help as a minimum here if you can't get an inspection ). Valuer would quote a expected rent but depending on the lender you may not see that or it may be too late when you do.

Do an online check of both vendor and tenant. ASIC, ABR and Austlii are good starting points. Been caught there myself with my last buy :eek:

CG generaly follows CPI movements as that is how most rents are set.

bundy
 
my opinion

To me, the rental return seems a bit low. I thought for commercial you'd be looking for returns of more than about 10%, because you have to factor in vacancies, particularly in city properties. When we were looking for properties for our own business, admittedly further out from the city, alot of properties were selling really quickly. A lot of businesses are buying their own properties, to get in with the property boom. So, there were heaps of rental properties available, but not many for sale. That was out Seven Hills way.
We were looking at more expensive properties, but the rental return was generally around 10% I think. That was in Seven Hills.
I think the thing with commercial property is that you need to be able to manage long periods without a tenant. I saw a building for rent a few weeks ago which has been vacant for 2 years! Admittedly the price is too high, but still a very long time!

Penny
 
Penny

At the top end of (my) Main St there is a building with four tenement shops, of which only one has been occupied for as long as I can remember.

I enquired to rent one of these shops circa August 1994. An A4 sheet of paper with the phone number was taped inside each of the three vacant shops.

The owner was not very pleasant and certainly not very encouraging.

My commercial manager tells me that every agent in the area has contacted this owner, the Council has contacted this owner, various developers and lots of individuals such as myself, have contacted this owner, to no avail.

The shops are empty because he doesn't want to rent them.

That's his choice, but it means the top end of the Main St looks neglected and poverty stricken, and to the casual observer it looks as if the street is not doing well.

I have found commercial to be every bit as good as residential. Small office suites such as Frank is thinking about will always be in demand. However, I would read the lease with a strong pair of non-rose coloured glasses. It is a multistorey building - the maintenance on the lifts will be many thousands of dollars each year, ditto the fire service and common areas such as corridors, foyers and service areas, light bulbs and window washing, and if the whole building is air conditioned, add electricity as well and water if it is a reticulated system.

How many bodies corporate operate in the building? You would be a member of how many of these?

If the 7.7% is paid net, with the tenant paying all outgoings, fair enough, but if it is gross then this is a deal which will cost you money even if it produces money for you in the long term.

Finance is relatively simple, Frank, as you have other properties, but do a realistic income / expense statement before you get too enthusiastic.

Cheers

Kristine

When I was selling serviced apartments, to determine actual % return, I added rent, plus pre-paid expense (body corporate, rates, insurance, maintenance allowance etc), plus tax add-backs (tax refund/rebate actually received because of depreciation claimed on this investment) to get a true gross yield.
 
Kristine,

When I was selling serviced apartments, to determine actual % return, I added rent, plus pre-paid expense (body corporate, rates, insurance, maintenance allowance etc), plus tax add-backs (tax refund/rebate actually received because of depreciation claimed on this investment) to get a true gross yield.


Isn't this a net yield ?

Or is it ROI (due to the inclusion of tax benefits.

I don't think its gross yield.
 
Thanks for the information everyone, you've been very helpful. 39 Sqm isn't huge but for office space I don't think it's that bad. Especially considering the price.

Even though the vacancy rate in the city is reasonably high, my thoughts are that something smaller would be less likely to suffer from this and would be in high demand (lots of starting out professionals seeking CBD office space).

I will talk to some other real estate agents in the arena and find out demand and prices for similar offices in the area.

I will also find out the term of the current lease and whether they pay all outgoings.

Bundy - I'm not 100% sure what you mean by the GST? could someone else give me any information on this? I thought you only had to pay GST on new buildings.

Regards

Luke
 
Originally posted by saucy gibbon
Kristine,




Isn't this a net yield ?

Or is it ROI (due to the inclusion of tax benefits.

I don't think its gross yield.

Actually, you saucy thing, it's none of the above

A gross yield (on anything) is the cash amount realised, usually the actual amount of the rent

The net yield is the money received less any direct expense, in other words what's left in the pocket

The Return on Investment is the % against capital involved, such as when a deposit of $10,000 is used but the interest payments are met by the rental income and there is $250 per year left over, then the ROI is 2.5% (being $250 / $10,000 per annum), or if looking at the balance sheet and the property has increased by $10,000 in value ($10,000 / $10,000 = 100% ROI)

So I guess my calculations would give me the 'effective yield' of the investment, and I used this process to illustrate the difference between the lease on the serviced apartments I was selling and the usual return based on a regular residential lease on regular apartments which are sold vacant and it's up to the owner to rent them out and out of that rental income all the other expenses need to be paid.

For example, my Bank purchase price was $220,000 (many moons ago) and the rent is $26,000 (11.82%), but the tenant pays insurance, all rates and general maintenance, worth approx $3,000 per annum (there is no body corporate), so the effective yield is $29,000 or 13.18%.

Conversely, on a residential property bought about the same time for $190,000, which now returns a rental of $19,240 (10.13) I pay approx $3,000 per annum in outgoings, which reduces the yield to 8.55% before adding back the depreciation benefits (which I don't have current figures on so won't do that now in this example).

True cost or return is made up of many factors and is often distinctly different from gross or net and should include opportunity cost but right now I think I'll have a cup of tea and leave you to your calculations!

Regards

Kristine
 
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