Commercial Property - $4.5m Purchase

So it really pays to have large cash buffers (and lines of credit at the ready) so you are prepared in the case of a tenant vacating and to manage anything that could arise at the annual review.

 

Hi

This type of asset should sell with a yield of 3% to 4.5% and is for the big boys with fat wallets!.

One would have to check all the legal uses for the site under the current zoning and also check any heritage issues or whether it could be added to the heritage registrar in the future. Keep in mind what opportunities are allowed today could be very different to what is allowed tomorrow.

I would also want to have a very nice bank balance behind me to cater for any capital improvement required and higher than average annual maintenance needed for this type of building and I would even want some professional advice via written reports on when future expenditure is required and how much etc from a building inspector that specialises in these types of properties.

I do see this as a risky investment that could give an owner a lot of grief for the current low rental return that they will receive but purchasing a site like that in St Kilda and holding onto it for 20 to 30 years "could" make you a squillionaire.

I think this asset suits someone with a spare $5million dollars in the bank not looking for an immediate return who can purchase it outright and just let it sit till it needs to be demolished (if allowed) and then put a nice apartment building on it as it will have to be better than leaving those funds in a silly bank account!

Regards,

alicudi

 

Yes thanks. I think that is all sound advice. This is not a bread and butter commercial building, and is likely to sell for a very low yield reflecting the development potential and location. It would be interesting to know whether the yield is gross or net and whether the tenant picks up such things as land tax. If you assume $50k per year for maintenance and $100k for land tax, and some vacancies, the ~$200k rent could be swallowed up very quickly.

 

GOT CASH ON HAND ????

Please don't discount the benefits of being the sole owner of an older building.

Many older buildings were "over engineered", this allows for further extension to the area above the building (subject to zoning/council approval ).

So you may have the potential to turn the 400mt/600sqf allotment into 900+ square meters

Having the cash reserves/ability to develop further can pay multiple dividends

 

Nice point. Did not think of that. On a related point, have always wounded why a lot of the buildings in this area have been somewhat neglected. Could easily paint front of facade or do semi-minor renovation and improve rental return for relatively small capital outlay. Eg create usable loft and get additional $80k in rent. My hunch is a lot of buildings in the area have been held by particular families for long periods (general area experienced considerable European immigration before, during and after Second World War) and they are exceedingly passive landlords.

 

You will get some of the answers from the DD materials.

An advice I've received from my lawyer when I was purchasing my commercial property was that personal/director's guarantee is something nice to have but it will take a lot of time and money to recover rental losses from the personal guarantee.

Normally, land tax can't be recovered from tenant. there are some triple net leases but it's very rare. (council rate and utility access charges. sometimes building insurance. in rare cases land tax)

Also, I found interest rate for commercial investments are around 1% higher than residential investment interest rates.

As many already pointed out, the building looks like a heritage listed building and there might be some asbestos issue. not a big deal but when you need to do some maintenance, heritage listed building with asbestos can cost a little bit more.

Unlike residential, It can take a few months or years to get a new tenant for commercial property. Over the last 4 months, there were 5 shops going vacant in street where my property is. and it's not really something fun to watch.

 

Thanks for your detailed reply Eric. In this StKilda area, there are about 2 streets (Acland and Fitzroy St) where rents are very high, with high turnover of tenants. When tenants turn over, shops are often vacant for at least 3-4 months. One very prominent shop has been vacant for around 18 months. On residential properties I own, I think 2-3 weeks is about the longest vacancy I have experienced. I also get the sense that many shopping strips are struggling - further afield in Melbourne, iconic strips like Chapel St and Toorak Rd have many vacancies (shopping centres like Chadstone and the Myer Emporium have sucked a lot of traffic away). Although sale prices on those iconic strips probably holding up quite well given the amount of residential development happening in the area.

 

Sorry, what are the ‘DD materials’?

 

Due Diligence Informations. like sales contract, lease contracts, building & pest inspection reports (if available), outgoings (council rates, land tax, water rate, insurance and etc), Asbestos report and so on.

 

Parking is a serious consideration with commercial.
Not only for customers, but for staff also now.
I am looking more at multi level parking structures, there is less to damage and the returns are improving (if you can get one)

 

another question I can answer is..

no you can't have a finance clause but you can get longer settlement like 3~6 months settlement which will give you enough time to get the loan approval. (given that you are confident that you will get the approval)

 

Yes, I cannot imagine putting in an offer for a property like this without a number of ‘subject to ....’ clauses. Otherwise, you are carrying too much risk associated with not settling, particularly around not getting finance. (As an aside, in the residential area, a lot of investors think a pre-approval is a guarantee of approval by the bank and it is not). I wonder on these commercial properties (maybe not this one) whether some you can buy an ‘option to purchase’ that operates for a year that allows you time to stitch the deal together (and maybe sell some existing properties to assist with financing) and work through the DD process. Anyone had experience of doing that?

 

Yes. But this property will be auctioned.

I've tried to put finance and valuation clauses in the contract for a few properties (private treaty sale) but no one agreed. Well.. that was in 2016~2017. The seller's market it was. it might be a little bit different now.

I got the finance approved just 2 days before the settlement even though I had finance preapproved. It was really scary.

 

Yes, times have changed. I have purchased multiple residential properties without ‘subject to finance’ clauses (always had finance pre-approved) but just would not do that again in the current environment. So, that really excludes buying at auction. When you move to CP, the risk of not getting finance increases considerably. For a property like this, you are taking on ~$500k of risk putting a deposit down at the fall of the hammer. Unless you have the money in the bank to settle on the full purchase price, or lines of credit or shares (or are working to very low LVR like 20%), then you are taking on too much risk without a ‘subject to...’ clause in my view.

 

Following on from this comment . Someone I know HAD a large multimillion dollar commercial portfolio on Sydney’s Northern beaches prior to the GFC . Never missed a payment but when GFC hit , values drop , asked to payback some money which he didn’t have and within a year or so was bankrupt .

In his 60’s . Hard to come back from that .

Cliff