Thought I would post something a bit different than the regular resi property discussed in here. I was perusing cheaper commercial properties and came across this Cafe. 1/41 Popes Road, Keysborough, VIC 3173 - Shop & Retail Property For Sale - realcommercial List Price: $384k (Claimed) Yield: 6.5% Inferred Rent: $25k Assuming: 30% deposit = 115k 6% Stamp Duty = 23k (Assumed) Legals/Professional Fees = 8k Total cost Invested Capital = $146k IR = 3% Gross Rent = 17k ROI = 11.6% Pros Yield Affordability Adjacent residential zone. could this mean the subject plot has potential for re-zoning and development? (long shot) Cons Older building Unconfirmed strength of tenant. Has local traffic been impaired by coronavirus? (given it is in an industrial estate I presume less so) Strata title (TBC) small land size inflexible use Potential Adjacent residential zone. could this mean the subject plot has potential for re-zoning and development? (long shot) Fitout may be depreciable Capital growth linked to rent review increases ROI improves with leverage and a better IR ROI improves with a cheaper purchase price What do you guys think? Are there any other pros and cons you can come up with and what other considerations are there?
What makes this one interesting is that the fit out is included in the sale, also it is food, making it more sustainable as people still buy food (not like a clothing store) The fit out would make it easier to attract a tenant, but also easier for a tenant to leave (as they have no capital invested in the fit out). Being in an industrial area it means that it is often not a 7 day a week business, this is a plus giving the operator 1-2 days off a week (as they are often owner operated) so they don't burn out (no overtime wages). In the ROI calculations you would need to add in body corporate and insurances also.
just an exercise on an affordable commercial property. most people only think resi and are more often than not priced out of commercial. Does a typical commercial lease not stipulate the tenant pays Body Corp fees? I know my commercial tenant pays my insurances so I have assumed this as no cost in my calcs.
Not all leases are nett (with tenants paying expenses), they often only pay selected expenses eg utilities. If a tenant is on a nett lease, they are generally not required to pay any contribution towards capital works (in the sinking fund) unless those works are completed during the tenant's tenure (they then can request a refund if the works haven't been done as they have derived no benefit).
That is a matter for conjecture - how many other take aways are there in the immediate area? Are they hammered by mobile caterers eg food trucks? It looks like it has had had a clean (tick) but what is the condition of the motors of the cooling equipment? When was the grease trap/kitchen exhaust last cleaned out? Fitout is mostly roll-in/roll-out (sinks/hood/coolroom are fixed in place) - so removal & salvage is easy but alternative uses are limited due to low ceiling height (not an industrial building).
The fact that its in an industrial area is good, lots of potential hungry customers, however @Scott No Mates makes a good point about mobile caterers. If it was me would spend time watching the activity around the shop, i.e. early breakfasts from 6am, morning tea and lunch and find out about any mobile caterers in the area.
From my experience cafe food is usually better than a mobile caterer. I also think the mobile food trucks target areas that are under construction rather than established areas. it saved the tradies time from leaving site. god forbid they don't get a full 'smoko.' That's just been my observation on site working for a commercial builder. something else that i havn't looked into yet is whether there are any other competing cafes in the area.
You can forget nearly everything mentioned until you get a deep dive into the lease agreements (past and current) everything else is a waste of time. Resi is about cap growth, Commercial is all based around rent, aka the strength of the lease agreement. Weak lease, weak value. Anything less than 7% net yield is not worth it. Imo with no education in commercial property or outsourcing any of the execution forget about it. Commercial can far more complex than resi on not to be messed with.
I'm looking at one now which may be 7% gross... need the full lease. this is in a regional area. what are the things you look at apart from strength of the lease, outgoings etc?
Security (bond, bank guarantee, director's guarantees) Rent (reviews, market rent comparison, if reviews had been applied) Other adjustments/recoverables eg water & sewer charges (even on gross leases) Time remaining on lease Options or break clauses GST Competition (other premises/vacancies) Complementary uses Zoning
