Commercial investment - small coffee shop

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.

 

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.

 

are you buying/running the business as well???

 

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.

 

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.

 

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

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....

 

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

 

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

 

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...

 

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...

 

a etf will get you that.

 

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

 

Don't get any of us wrong, there are reasons to go with commercial, you just need to find the right one........
Often the right one is a large premises, and these often cost far more than residential
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

 

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?

 

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?

 

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.