Your advice please !

[888Katone]

Interesting opportunity - your expert advice please!

Hi all,

We are a husband and wife team - hubby with great accounting skills, wife with property management background - specifically shopping centres. We are looking at an opportunity at the moment (got it thru word of mouth as it was taken off the market) where a sporting facility is going for the 2,500,000 mark on a main road in a strong outer suburb in melb. The rental is $200,000 p.a per year. So the yield would be good if the price could be lowered you'd think. The property is on 3/4 of an acre and it is zoned Res 1. Lease is 7 years with three 7 year options going up 4% each year.

Firstly - for all you experienced commercial investors - whats the pros and cons of this investment including depreciation - what we could do with the remaining land - building is 400m2 with rest mainly carparking and a long driveway from the main road.

Secondly - our assets include a house in a very strong suburb valued at 650,000 with 180,000 mortgage remaining and a unit that is worth 320K which is 90% mortgaged. We are not holding shares at present. Hubby income is $95k gross - wife not currently working but if I was could earn around $30K or $60k max due to young kids.

Secondly Is there any way known possible and we are fans of lateral thinking processes that we could actually buy this place given our assets are greatly outweighed by this purchase price ?

Looking forward to contributing to this forum often !

 

[Perp]

Good morning! First let me say that I wouldn't classify myself an experienced commercial investor - there are plenty on the forum - but I'm not completely green, either.

The primary potential fly in the ointment that I see is the residential 1 zoning - this could limit the development potential of the property. Before going any further into this deal, contact the local Council and find out what it's possible to do with the site into the future. Depending on the local rules and what permissions have been given, it may be a "quasi-commercial" property (ie permission has effectively been given for it to be used commercially), or it may be that no expansion of commercial activity is permitted. If the latter, that may be a significant problem, both for the value of the investment to yourselves and to a lender. After talking to Council, discuss it with your mortgage broker.

I'm assuming the tenant pays outgoings on the lease, but please confirm that, because if not, it changes the equation quite a bit.

If the deal still looks good, see if you can achieve entry to this property in this manner:

1) Ring up and talk to some local commercial valuers and commercial real estate agents, and indicate that you're considering purchasing a local commercial property, and ask if they'd be willing to chat. Don't tell them the asking price; tell them all the other details and ask them what they think it's worth. Let's say that the "middle of the road" figure is $3M Obviously if they say anything less than $2.5M I'd be reconsidering. Probe them with regard to their reasoning.

2) See if you can secure the property with 35% vendor finance, eg $1.625M payable at settlement, and $875K payable later - try for 3 years with no interest (giving yourself room to move to 1 year with 10% interest if required).

3) Borrow 70% - of $2.5M this is $1.75M - which gives you $1.625M for settlement and $125K for purchase costs and a buffer.

4) Upon expiry of the vendor finance period, obtain a new commercial valuation which will be based on capitalised yield (amongst other things) rather than purchase price, and this should (with a little luck) be sufficient to increase borrowings to 70% of the new valuation and pay out the $875K vendor finance.

If you need a good mortgage broker, PM me and I'm happy to recommend one. Good luck!

 

[888Katone]

Great answer Tracey - thanks for that - I like the lateral thinking there - I think he would definitely go below 2.5m but as you say it is important to see what that piece of land is worth to someone with commercial nouse.

Would anyone else like to have a go with an equally interesting solution ?