Who's a GOOSE?? (What to consider when buying commercial property)

[keg75]

Hi All,

I have seen a commercial property that could be a good opportunity as an investment. It has a high rent comparable to the asking price (more than 2 times) + outgoings with a lease for 2 years + numerous options to extend. I'd rather not tell any spoecifics as someone else may swoop ;-)

I have only dealt with residential property to date, being a block and a villa thus I am not sure of questions to ask the vendors agent. Nor am I versed in the tax issues or the financing issues which relate to buying comercial properties.

If someone has bought a comercial property can you outline

1) The questions you asked the agent initially. I don't want to look like a goose when I first talk to him, which will avoid me getting taken for a wild ride or ripped off.

2) What type of information you aquired for your due dilligence. new commercial centres, population growth rates, growth rates etc...

3) How you go about financing the property purchase. do you need a business loans or other type of structure.

4) Formulaes that you have used for evaluating whether or not the property
is worth it's while...

5) depreciable items - what can you claim and what are the rules are (like the dates you can claim from etc is it the same as residential)

6) Can someone provide a DUMMY fpu file or a dummy example which shows some numbers.

Anything else that you can add that would be helpfull in determining whether the Investment opportunity is worth it.

I am pretty green on this subject, which is why I am asking. Obviously Time is of the essence so please respond asap.

cheers keg75

 

[Andrew]

Make sure that you are registered for GST so that you can claim back the GST you'll
pay when purchasing commercial property. If you're really clever you'll time the
purchase to coincide with a BAS reporting date so that you can claim the GST back
almost immediately.

Also do your due diligence on the tenant, the lease isn't worth much if the tenant
is insolvent.

andy

 

[RightValue]

Keg,

This has been covered before and I have given some lengthy replies
try this thread.

http://www.somersoft.com/forums/showthread.php?t=9697

also please note that the property you refered to only has a 2 year lease, the options and not the liability to renew lies with the tenant.

I hope this helps,
RightValue

 

[Kristine..]

Andrew

Keg mentioned the property comes with a tenant, therefore GST is not applied as this is considered a 'going concern'.

Unless the rent - or other business activity - exceeds $50,000 per annum, registration for GST is voluntary.

I am registered for GST, therefore I have to collect GST from my commercial tenants, even though my husband is not registered for GST and the rental income is below $50,000 per annum.

However, I can only declare / claim half of the GST collected as only half the owners are registered. The other half is considered 'lost income' by the ATO and is not accountable. Yep, doesn't make sense, but that's what happens to it.

From the tenants' point of view they collect GST from their retail customers and pass it on to the ATO. They pass some of it on to me because of my registration so it makes no difference to them.

However, the sale of commercial premises subject to a lease is not subject to GST whether or not the purchaser is registered for GST.

Cheers

Kristine

PS Keg: I just love my commercial properties. Go for it!

 

[Macca]

Keg,

I always compare the square metre rate of rent being paid with comparable premises in the area.

If your rent has been inflated to make the deal look good, you can expect the tenant to "walk" at the end of the lease.

A good example of this is when the some of the banks started selling off their premises about 10 years ago , a lot of people bought on skinny % because the bank has been there for years etc, only to find the branch closing after the lease finished.

I know of one branch purchased on $30k a year rent, cost $300k, 10% nett return, wonderful !! but 2 years later the best rent they could get was $15k, which meant the building was now worth $150k, not so wonderful.

With only a 2 year lease in place, find out what it would rent for on the open market and then do your sums .

 

[bax]

Things to Remember when buying Comm Pty

Here is a quick list of memory joggers to consider when buying Comm Property.
If it is a good deal, put a minimal holding deposit on til you can check it out.

Check out the tenant and his history.
Check all neighbouring tenants.Do this yourself personally!
ask them about the area, roads, parking, new schools, bypasses, new shopping centres,and similar properties to your own.
Talk to other landlords in the area.
Speak to the local residents about the shop in question.
Talk to the council about future plans for your local.
Make sure that you are provided with a full and comprehensive list of the goods and chattels being provided with the sale, maybe you need a quantity surveyer for this.
You do not usually have to worry about the state of the shop, as it is in the interest of the tenant to keep it looking good to gain more sales.But undrneath the facade, the last owner may not have kept the maint up.
Why is it being sold, i mean the real reason!!!
Parking is a most important item with Comm Pty.
Is there a body corporate, if so talk to them, they may be trying to get rid of your tenant.
Is it an offenceive industry eg with special EPA or waste problems.
What is the plumbing/ maint history on the building.
Remember that some types of tenants cause you to have higher insurance costs (if you are paying for the premium)
Tenants usually pay all outgoings with Comm ,so Maint is your only worry.
Make sure that the tenant does in fact make the payments, or else you will be liable in the eyes of the council etc.
Banks usually only lend up to 60-70% on Comm.
Rea's will charge you 7-9% to manage the place, if you must use them.
Leases,there aretwo types, one can be provided by the Rea, the other by the law Inst, both have been tried and proven, with pluses and minuses.
Rents are usually provided one month in advance, so allow for this if your repayments to the bank are weekly etc.

You must do all of these things yourself if you want the true answers.

There is heaps more i can say, pm me if you want more.
Finally Comm is the way to go, just do it.

 

[dwyerfam]

Be informed by reading the AFR newspaper everyday. There's lots of info in the property section re the sale of commercial properties and who's paying/buying at what rate/yield etc. Interesting stuff!

Danny D

 

[Aceyducey]

Be informed by reading the AFR newspaper everyday. There's lots of info in the property section re the sale of commercial properties and who's paying/buying at what rate/yield etc. Interesting stuff!

And also according to the AFR, there's a relatively large number of commercial properties going under the hammer in Sydney ATM (51 versus average of 20 at this time of year) as another fallout of the new NSW exit tax.

So potentially a few bargains this weekend...if you can afford the entry cost.

Cheers,

Aceyducey

 

[keg75]

Thanks for your responses so far...

The property is just above a 12% cap rate going from the listed rent and the lower asking price or 10.7% using the uper asking price.... I haven't queried anyone yet about the surrounding area so it maybe abnormal...I wanted to get some questions together etc before I approach - like I sadi before I don't want to look like a goose. Apart from cap rate are there any other formula to gauge an investments potential? has anyone used FPU for comercial property? if not it could be a nice little add-on "commercial property".

Interesting about the GST (the rent will be a lot less than 50K) and at this stage I would probably only have the one place so I wouldn't have to worry about GST for sometime. I assume it's 50K cummulative ammount not jsut on the one property.

I understand the how the options work - I have an IP with a 2 +2 option and the tennant is not taking up the 2nd term. Luckily I have another interested party that has already ear marked the house for another 2+2 term. My girlfriend said she would consider buying into an investment if If the house released so I'm happy about that. Anyway I digress.....

Bax thanks for your points. i can almost copy the list into word and add bullets (a nice basis for a questionaire). I take it you have some reasonable experience in comm prop investing. thansk for the offer to approach you for more info, i may just do that.

The only issue I can see from the outset is the 70% LVR - I would likely have 10% at this stage. so i may be forced into another residential property first, which would be okay, but would mean a missed opportunity in this case. If there is a fair term left on the lease would the bank make variations to the LVR ammount ( ie mortgage insurance or some way other way like a guarantor).

I don't get the AFR, bit pricey for a paper.. what type of information and in what detail do they provide it? is it by suburb, city state?

Please keep you responses coming - the more info the better!!! Like I said I'm very green on this subject.

cheers keg75

 

[DAAJ]

Whats the point of having a + 2 years if the tennant decides to move out not a very secure structure for the landlord, any thoughts?
Dom

 

[Olly]

I'm also trying to get my head around what is considered a good deal. I think I've got the rudiments for residential thanks to this forum, and even though I'm not planning on going into commercial property I'd like to at least understand the rudiments of that too.

Here's something I heard today -
Large company was looking for a developer to buy land and build their next branch to their specs. Cost - about $3million. Lease was 5/5/5 which I understand to be a 5 year lease with the option of a further 2 x 5 year leases. Rental income per year - about $250,000. The company already has other branches most of which have been there for 20 years plus. Their newest 3 have been there for between 5-10 years. This sounds like a good deal to me - is it?

Olly

 

[Macca]

Hi Olly,

Naturally there are all sorts of numbers to crunch, but it would depend on the costs of getting the thing to completion, that's the builders job.

Commercial is very different to residential, traditionally, in cities and major towns, residential returns 6% less expenses, commercial returns 10% nett, as always the return is higher because the risk is higher.

From an investment point of view, I believe that it is important that the building can be used easily and effectively for something else should your original tenant leave after 5 years.

I think the biggest trap of all in Com prop is people see 5+5+5 and think Wow that's a 15 year lease, unfortunately that is obviously not true. The reason they take 5 years and options is that if the area does not work, then they will vacate after 5 years, leaving the owner with a building with a bad reputation and a very large white elephant.

In most areas, an experienced commercial investor, will have noticed a building or small area that always has tenant churn, it may be the traffic flow is wrong, or parking is on the wrong side of the road, bad area for vandals .............. can be lots of things, but the area just doesn't cut it so it gets a bad rep.

When you commit big lumps of money, a vacant building can send you broke, hasn't happened to me, but it does happen if you over commit, as we know. Sometimes you will see local groups put together to buy the biggies, say a Bunnings or a distribution point for Coles, Woolies etc, these unlisted property trusts are usually advertised in papers etc and allow you to own a % of the building, can be a single asset company formed to buy the building.

I know of one building sold on 12% nett, used as a mail sorting / local distribution point for Australia Post, sounds good, but if Australia Post centralise their distribution, ( quite possible IMO) the building is useless in its present form. It would require major structural changes to be of interest to any other commercial tenant.

As always, Olly, it is a calculated risk, just a matter of finding something you are comfortable with.

 

[XBenX]

SMH Commercial property section is also a good source of info.

They have rent/psqm and buy price per sqm published, its called title deeds or something similar.

 

[keg75]

On the previous example from Olly, your debt could be 600000, you need to find out as much as possible, the income isn't your only gauge of an investments potential.... as you will see from the above posts there are various things to review or determine...

Apart from the cap rate and the other items mentioned is there any other formula that can be used to gauge the return from a comm prop. to gauge whether it's worth it?

keg75