What do you look for in commercial property investment?

[Telejazzer]

I have to admit that I've never been to a commercial property auction before and planning to go to have a feel of the commercial property market.

So again the question on what to look?

What do I ask the Real Estate agent?

How do know if it's a good investment or not?

I know the questions are a bit generic that's why I ask what you look for to give us a bit of an insight.

Thanks.

 

[Rolf Latham]

Hi

I think the first thing that one would need to help here is the approx value of the property.

A 300 k shopfront will be very different to a 5 mill hardstand

ta
rolf

 

[Wunderbar]

I would only look at a commercial property if I had enough residential property assets to back me up. Commercial property is very unforgiving because usually larger sums are involved and you can have very long vacant periods.

 

[Compropmanager]

I have to admit that I've never been to a commercial property auction before and planning to go to have a feel of the commercial property market. Seeing as you are just going to have a look and that it is an investment

So again the question on what to look? The age of the place any maintenance work outstanding (fire extinghuers are a great idea as to how it's being looked after) obviously if it is tenanted or not and whether other tenants/owner occupiers are in the area, how their businesses are doing, the list is endless.

What do I ask the Real Estate agent? Quite simply ask for the section 32 and insure it has a lease attached, if it is vacant your questions should be focus on why there is no tenant, how hard it would be to get a tenant and at what rental would you expect (this will give you an idea on price without asking for the price directly)

How do know if it's a good investment or not? This tells me that you should read more about the world of commercial before raising your hand at an auction. but to answer the lease or the potential lease will make or brake commercial properties for an investor

I know the questions are a bit generic that's why I ask what you look for to give us a bit of an insight. as mentioned earlier a few more details like is it one shop, 4 shops, 1 small factory, 1 mega factory, office space???

Thanks.

@Wunderbar

If you know what your doing commercial can be lower risk than residential it is the same with most investments a day trader will tell you that stocks are the way to go same with a residential investor will tell you that residential property is the way to go, but commercial property is a steep learning curve. It's amazing how many people that invest in residential and commercial treat them like the same thing.

 

[Compropmanager]

Points below (as I felt that maybe I was a bit vague)

1. The area and the demographics are not really important but will affect you as these will be the customers of your tenants also how well businesses in the area are doing, what are the tenants for the commecial properties like, are they one man bands or have multiple staff or well known and trusted companies.

2. The Lease this is by far the most important thing as this makes you either earn money or lose money, Also does the letter of the lease get followed, funny that many a tenant/landlord/agent follow their idea of a commercial lease without actually reading the thing.

3. The property itself, here you are looking mainly at the structure and it's condition if the tenant has fit-out insure that the lease details what items are the landlords items unless they are in the lease forget them (for now)

there are more but this is just to start you off

 

[Telejazzer]

Thanks to all that replied so far

Specially to Compropmanager, my sentiments exactly. I really appreciate the responses and looking forward for more.

I hope to be able to contribute in the near future as I gain more understanding and experience about the subject.

 

[Wunderbar]

@Wunderbar

If you know what your doing commercial can be lower risk than residential it is the same with most investments a day trader will tell you that stocks are the way to go same with a residential investor will tell you that residential property is the way to go, but commercial property is a steep learning curve. It's amazing how many people that invest in residential and commercial treat them like the same thing.

Yes but what I am saying is that Commercial Property mistakes are much more costly. Anything is lower risk with due diligence.

 

[Telejazzer]

Yes but what I am saying is that Commercial Property mistakes are much more costly. Anything is lower risk with due diligence.

So true. Due diligence followed by risk management should be applied on almost anything shouldn't you? Before buying a business, property, car, getting married

 

[Compropmanager]

Yes fair comment shame that these landlords are sometimes to interested in the here and now rather than the future. how would this be for a deal

10 year lease
100k per year with 4% increases every year beginning in the 3rd year Market is around 95,000
12 months worth of rent as a bond/deposit
outgoings paid by the tenant

The catch is that the tenant wants 12 months rent free

wouldn't you take it when all the other parties have wanted 2 or 3 year leases around the 90k or 85k mark and only want to pay around 2 months bond/deposit

Sorry should add that risk management doesn't seem to really factor into some peoples minds as much as you would think normal

 

[Telejazzer]

Yes fair comment shame that these landlords are sometimes to interested in the here and now rather than the future. how would this be for a deal

10 year lease
100k per year with 4% increases every year beginning in the 3rd year Market is around 95,000
12 months worth of rent as a bond/deposit
outgoings paid by the tenant

The catch is that the tenant wants 12 months rent free

How does the 12 month rent free period work? Is it 12 continous months or spread over the 10 year lease?

What's the guarantee over the 10 year lease? Some sort of financial guarantee instrument? Bank maybe?

Of course certain due diligence has been done to go for this deal. Nothing sarcastic about my questions btw.

 

[Compropmanager]

oh the 12 months is upfront so if the lease starts on the 1st of March 2011 then the first rent payment is due on the 1st of March 2012 (outgoings start on the 1st of March 2011)

Before chilliblue or someone else mentions that this might scare a potential buyer in the future we even made it that the lease commenced on the 1st of March 2012 with a deed/licence to cover the first 12 months so that no future buyer needed to know about the 12 months rent free.

Also the 12 months is in the form of a bank guarantee secured by the tenants assets (cash/property etc) although cash can be held by us this isn't normally the case with this kind of money. this had an expiration date of 2022 to cover any over-holding (basically if the tenant didn't move out at the end of the lease)

 

[chilliblue]

The fundamentals of looking at property are the same regardless of zoning. You essentially need to

1. work out your comfort price and the return that you want.

2. decide which location.

3. decide type of property i.e retail, commercial, industrial etc.

4. understand past and potential vacancy rates.

5. make a decision on the type of usage.

6. what are the costs to hold.

7. can improvements be made and if so at what cost.

8. what is the exposure, parking, signage etc,

and everything else that goes with generally searching for any investment.

If I was looking at entering the market I would also attain copies of the various acts (Retail, Commercial) as well as local council requirements to have a basic education of what you are planning to get into.

Go out and talk to the various levels of agents. From the shopfront general agencies to the larger nationals that specialise in what you are looking out.

Knowledge is the key.

With regards to the proposal you placed forward
10 year lease
100k per year with 4% increases every year beginning in the 3rd year Market is around 95,000
12 months worth of rent as a bond/deposit
outgoings paid by the tenant
12 months rent free

Why on earth would you give a tenant 12 months rent free? If you really must issue rent free periods, then perhaps:

1. Half the rent for twice the length of time (full outgoings), or

2. On nominated dates and only if the tenant has not breached any essential terms, issue rent relief of fixed amounts.

You need to get any tenant into the habit of paying rent.

Or alterntively, undertake some capital works that you can get some return on.

Never take the easy way out when negotiating leases and ensure that your manager is like minded.

 

[willister]

I cannot stress enough, there two points (in a myriad of other things others have brought up here):

1. Quality of Tenants.
2. Quality if Structure/Buildings.

We purchased into a relatively good location, medium sized commercial/industrial property (warehouse) circa 850m2.

Quality of the old tenant gave us the most heartache - ran a part time business (refused to do it full time) that was floudering, suffered from increased competition and this severely affected his cashflow so he was late on rental payments which in turn, I suffered. Added to this, was an absolute ratbag to deal with and in the end, had to submit to a week's rent free period for him to move out. Luckily, he was on the end of his contract and was much easier to get rid of (i.e. didn't renew his contract). Finally, he even left the place in a less than satisfactory/acceptable condition, unfortunately my old agent didn't have the balls and returned his bond anyway.

Quality of the building - Ongoing issue, and we have dumped $25K into the joint already. $16K into an old asbestos roof, $5K in plumbing and I've now penciled in $4K in contingent electrical costs! Building was built in the early 60s period - got it relatively cheaply but consequently, had to put in a bucketload to get it up to scratch.

I can't stress enough these two point as described above, not only did it waste a lot of time, money and heartache but also the stress.

 

[PrimeCommercial]

I'd have to agree with many comments here.

- Age and state of repair of the building would be high on my list.
- Definately the lease if there is one in place.

10 year lease
100k per year with 4% increases
12 months worth of rent as a bond/deposit
outgoings paid by the tenant

Sweet deal. I'd only have a handful of Landlords that would be able to cover 12 months rent free but without more detail ~10% incentive is quite low considering what many others are having to give.
I have had a dozen or so landlords recently cover 12 months rent free (and a couple 24months) but not through choice and most cant afford it.

 

[Telejazzer]

Thanks to all that replied so far. I now have some guidelines when I start going to these auctions.

Keep them coming though.

 

[willister]

I guess another point to add: for any type of commercial property - be it industrial, commercial or warehouses, always keep the property "nice and simple"....don't install too many partitions or office suites that require lights.

The more you put in, the more likely things will go wrong and for structural costs to repair, in most cases, will land on the landlord's lap. For anything the tenant puts in (e.g. additional lights there weren't there at the start of the lease), make sure he does the servicing etc.

I learnt this the hard way I guess, I had a warehouse with perhaps 200m2 worth of offices - with fluro lights. I got a pretty big shock (pun intended) when I realised they were with old wiring and needed a rewiring!

A relative who purchased the property next to me had the same building structure (old 1960s) but had the bare minimal essentials - single toilet and wash basin and a kitchenette without any offices and lighting was minimal! His repair bills was about 20% of mine! Plumbing was almost 50% of my costs.

Probably also a couple of other points:

- You'll need an army of reliable, trusted and competent tradesmen - especially plumbers and electricians.
- Ditto for people like Accountants and Lawyers who will give you good advice, this is worth gold compared to cheaper prices that others offer, so don't always go for low cost!

R/E Agents - I honestly haven't found a decent one, the original one we had when we purchased the property - we couldn't trust that bloke! Lied through his teeth, used tactics that he didn't receive emails you sent a week before etc. When we were on the marketing for renting the property, made phantom potential tenants, enquiries etc. All expected to an extent but this one was pretty poor.

I can't say for sure, but it would be really tough to find a good agent vs all the rest of the people you need to make it happen. If anything, they're generally useless...the second one we had was generally the same as the 1st, perhaps even worse...we only got him because he was based close to the premise, making it easier for him to market the place.

Location is just as critical as RP, but here, you'll need a good frontage and exposure, that is vital!

 

[guppy1]

> With Commercial its's all about "traffic", "street frontage" and "parking" This applies to shops and factories Business Zone 1 ( Retail) and Industrial Zone 1 ( factories and workshops) are the best you can get.


>I like small Factories because they are easy to rent out ( cost between 130,000$ to 200,000$) , and you can do Industrial leases and Retail leases ( just apply to council to operate retail lease from a factory as long as parking is ok)

>Small Factories with a retail lease are great if they are in a busy location. I stay away from retail shops as most of this has moved to the large shopping centers like Westfield. But there are some good buys around.

>For example, I tried to buy an Industrial Zone 1 factory in Carrum Downs a couple of years ago, but it sold in 6 hours ( four guys in line before me).

> It was a new 370 square meter factory with a Retail lease right on Frankston Dandenong road. Asking price 355,000$ with a 25,500$ a year long term tenant.

> Thats almost 7.2% return, which really helps with the repayments.

> The best part with Commercial properties is that the tenant pays all Body Corporate, Insurance, Council rates Water etc ( all "outgoings")

> Our family has 12 small commercial factories workshops. If you buy one in a good location, you never sell it.

 

[Telejazzer]

Awesome guys. It's great to hear from people sharing their experiences. Much appreciated.

 

[willister]

Business Zones

All,

Under FAQ in http://services.business.vic.gov.au...17&infotype=FAQ&from=faq&pk=1317&cat=Premises

This might be handy to know for Business Zones:

Business Zone 1: business centre for retailing and other complementary commercial, entertainment and community uses
Business Zone 2: offices and associated commercial uses
Business Zone 3: integrated development of offices and manufacturing industries, and associated commercial and industrial uses
Business Zone 4: a mix of bulky goods retailing and manufacturing industry, and their associated business services
Business Zone 5: offices or multi-dwelling units with common access from the street


1 and 3 in that order seem to provide the most flexibility....

 

[Ridin-High]

I have to admit that I've never been to a commercial property auction before and planning to go to have a feel of the commercial property market.

So again the question on what to look?

What do I ask the Real Estate agent?

How do know if it's a good investment or not?

I know the questions are a bit generic that's why I ask what you look for to give us a bit of an insight.

Thanks.

- Location, Location, Location.
- A style of property that will remain in demand