Commercial investment - small coffee shop

Discussion in 'Commercial Property' started by Jacko, 30th Nov, 2019.

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  1. Jacko

    Jacko Active Member

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    Hello all,

    I've been visiting this forum for sometime and always found it to be very informative but this is the first time I'm posting. I've considering investing in commercial property and recently noticed a small coffee shop space in a small shopping arcade in the CBD of one of the capital cities.

    The yield is about 6.5% which I find to be reasonably attractive but obviously want to get your views on that as well as prospects of capital growth. I like the fact that investment amount is relatively small but the downside is that given the space is small there probably isn't too much I would be able to do to improve the property either. As mentioned, would love to get your views as I don't really have experience in commercial.

    Cheers.
     
  2. balwoges

    balwoges Well-Known Member

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    There are others who can advise you on commercial leases and finances, however I am willing to bet you will be working long hours for the same amount of money [or less] as working a normal job. You will need to look very carefully into every aspect of buying the business.
     
  3. TMNT

    TMNT Well-Known Member

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    are you buying/running the business as well???
     
  4. The Y-man

    The Y-man Moderator Staff Member

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    Assuming you are just buying the property:
    1. Which CBD we are talking about? If it is in the heart of one of the eastern seaboard capitals, it may be ok
    2. Is it 6.5% net (after expenses) or before?
    3. Will you be taking out a loan?
    The Y-man
     
  5. The Y-man

    The Y-man Moderator Staff Member

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    @Jacko

    Just to put things in perspective, I have money in shopping centres through REITs - effectively joint ownership of many shops rather than a single owner of one.

    Advantages:
    • spreads my risk such as vacancies across a bigger portfolio
    • can access cheaper loans
    • better negotiating power over tenants.
    • desirable locations ~ tenants come to us, not the other way around (in most cases)
    • get about 6%pa yield AFTER all expenses paid including management fees, repairs, maintenance, common area maintenance, HVAC systems, security, rates etc.
    Disadvantage
    • what centres get sold, bought/ held and where money is spent is largely out of your control.

    In the case of a single coffee shop, you need to ask yourself how often do you see one go under - because every time this happens, you are up for 1. a vacancy 2. a rent reset.

    The first is important as the bank may have reason to call in your loan with 30 days notice if the property is vacant (unlike residential). Obviously not an issue if you have not taken out a loan. Also, you will need to keep paying rates and any body corporate fees for common areas etc.

    The second is important as often you have to provide inducements (like rent free weeks for low rent) to get tenants in, and where you make money is in the subsequent years when you ratchet up the rent (annual increases in your lease contract). If your tenants keep turning over, yo may see significantly less yield than you first thought,

    The Y-man
     
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  6. Scott No Mates

    Scott No Mates Well-Known Member

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    Strata retail is a bad idea - retail requires a strong centre management focus, direction on a marketing plan, strong cohesive retail mix, quality anchor tenants, effective leasing strategy.....

    A strata shopping centre has countless conflicting interests, no cohesion. Each owner for themselves. Just as likely to end up with 3 or 4 nail bars, foot spas and a fish shop next door or another coffee shop or two.
     
  7. datto

    datto Well-Known Member

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    I observed a retail space in Sessex St Sydney (China Town). It was about 15 sq metres and vacant.

    The price was about 350K from memory. I don't think it ever sold and it was on the market for several years.

    What I didn't like about it was it's location next to an escalator. I thought idiots could easily throw objects from the escalator and onto the retail space.

    I tested my theory by riding the escalator and throwing objects. I had no qualms about security though who quickly escorted me from the building.
     
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  8. Stoffo

    Stoffo Well-Known Member

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    There I was thinking that @datto would have used the space to open a "pipe shop" :D

    In addition to the others suggestions (not advice......)
    The devil is in the details
    Is the coffee shop owner selling the freehold, or another owner
    How long is the tenants lease, do they have options
    Is there a directors guarantee (do they actually even own anything else/home)
    Outgoings, who pays what on the current lease agreement
    Strata fee's, are these accounted for pre or post return.
    How much other property do you own, land tax......
    Loan and ownership structure to consider also

    (*not tbe first time I have seen a developer in a new complex "lease" a shop to his spouse being a clothes outlet with a 12 month lease at near double market value, so listed for sale with a great return that almost justifies the exorbitant price tag.........
    Business folds soon after sale, no director guarantee in place, and she has no assets anyway !)

    Am sure there is a dozen other things....
     
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  9. Jacko

    Jacko Active Member

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    Sorry been busy all day but thanks for the useful comments. I was simply thinking about a buy and hold strategy. I would take out a loan and then put money in the offset and only draw out if needed. The yield is net at 6.5% and I intend to use this to fund my residential properties but it seems from what you said there could be a lot of issues with these small businesses. The place is in the Perth CBD so is it not a good yield? If not, what would be a good yardstick for Perth?

    Cheers
     
  10. Jacko

    Jacko Active Member

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    Thanks, this definitely makes me want to steer clear of strata retail.
     
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  11. Jacko

    Jacko Active Member

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    Well, the space I was looking at was next to the alley was of the toilets. I don't think it's a big issue but I could tell the centre wasnt very brightly lit....kinda felt like a B-grade place. I just felt if I can buy into a net 6.5% stream of income then I would be happy...
     
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  12. Jacko

    Jacko Active Member

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    The coffee shop owner still has another two years but with no options. Don't know if there is any directors' guarantee. 6.5% is net. My wife and I own a couple of residentials in the eastern seaboard but these are low yielding so wanted to invest in a commercial. The coffee shop was a relatively small amount with a decent yield that's why I was interested, but at the back of my mind I also thought there must be something not quite right with it...
     
  13. Trainee

    Trainee Well-Known Member

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    a etf will get you that.
     
  14. geoffw

    geoffw Moderator Staff Member

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    I'd go for that.

    I have a small commercial property. It's been a disaster. Apart from the extensive vacancies, I'm trying to get back just a little.of the $28,000 of unpaid rent I'm due.

    While the stock market can go up or down, in the long term it's it's historically gone up in the longer term. If you have a ten year + outlook, it may be worth considering. An ETF spreads your risk across companies; I personally have ETFs in several different sectors to spread the risk, but many wouldn't go that far. (I have ETFs in shares in Australia and the US, government bonds, gold and real estate.)

    Australia has had an especially good run in the last 30 years, though past performance is no indicator etc.
    Australian Shares Performance in the Last 30 Years | Canstar
     
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  15. Beano

    Beano Well-Known Member

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    Small retail is a struggle .

    Observations from my retail portfolio
    1:The small retail tenants (Mum and dad) do not seem to make much money.
    2: the larger retail tenants carry a lot of grunt and wield a lot of buying power.
    The fear of losing a major tenant inhibits a landlord from pushing rents up
    3: body corporate cost increase faster than the rents so landlord margins are squeezed
    4:changes in the immediate locality (like vacancies) dramatically affect coffee shops and they are very quick to fold
     
    Last edited by a moderator: 2nd Dec, 2019
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  16. Stoffo

    Stoffo Well-Known Member

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    Don't get any of us wrong, there are reasons to go with commercial, you just need to find the right one........:D
    Often the right one is a large premises, and these often cost far more than residential :oops:
    Often the leases are for multiple years, 3-5 years with options, even up to 10 years, then the outgoings can be negotiated into the lease also ;)
    Remember though, there is always a longer term between tenants also :(
    (I remember the old pizza hut on Melb rd North Geelong sitting idle for YEARS)
    It is about finding a premises that suits your budget and risk profile :cool:
     
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  17. Jacko

    Jacko Active Member

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    Thanks Stoffo and all for your points, all very helpful. I might go speak to the Rethink Investing mob on commercial and see what they say. Has anyone here used them or another other BAs for commercial property? Are they worth it?
     
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  18. Daydreamer

    Daydreamer Well-Known Member

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    Hi, just wondering whether you ended up talking to the Rethink investing mob, as that is the only name that has been suggested in reply to my question about BAs. If so, what are your thoughts and are you using their service?
     
  19. Jacko

    Jacko Active Member

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    Hi Daydreamer, I did speak to them to understand what they offer. I am in the process of speaking to a few other agents but they definitely seem to be quite knowledgeable in this space.