Entry level Parlour space

Hi all.

I toying with the idea of getting a commercial property as my 2nd investment property. I believe I can comfortably afford something for 600k. I am unsure what DD questions I should be asking are though however.

The space I am looking at has a 33k rent 1 year into a 5+5 lease @3% pa increases. It's a 72sqm space being used as a Thai massage parlour. The space is part of a larger commercial development built in the last 5 years in Melbournes outer suburbs. It has a poor walk score but is in a precinct anchored by one of the 2 major supermarket chains amongst others. The area is tipped to grow in population by over 50% over 20 years.

What questions should I be asking the agent regarding property specifics?

• Who pays outgoings?
• What outgoings are there?
• What is body Corp exp?
• Tenant PL statement?
• Caveats on use?
• PSUB/easements (seems unlikely there'd be anything?

Would love to hear your advice and thoughts on getting started small in this space!

 

Maybe it's just the way that you have written the post - But 'Thai Massage Parlor' does bring up certain connotations.

If they do indeed provide sexual services without the appropriate licenses, I would be mindful about what would occur if there was ever a complaint, which lead to an investigation and therefore your client needs to leave.

Often these things end up on local papers and then even tho the business has left, you are the one left holding the tainted property - Almost like it has radioactive fallout in it.

 

I wasn't sure how to describe the space and given it's occupied by a massage place, Parlour seemed appropriate albeit shady like you said! It doesnt look particularly seedy nor does the location however!

 

I don't know the area, however, 72sqm isn't very large and I look for a minimum of 8% net return on commercial. Historically, what is capital growth like in commercial property in the area? What are the demographics? Supply and demand? Is there a lot of empty space in that area? What is the vacancy rate? I have found that most of these small spaces aren't good long-term investments for capital growth, but I don't know the area that you are looking at. I prefer standalone commercial space, for example, an old house that is zoned commercial.

 

I would have to do some digging re the areas historical CG on commercial. If you've got pointers on where you look at that would be a great help. I don't believe this property has much of a sales history as it is still quite new though.

Is it okay to assume that capital growth will at minimum be tied to the 3% rental growth each year and grow at the same rate or is that too simplistic?

Residential vacancy rates in this area are very low/strong as the area has seen strong growth in the last decade. Is it okay to look at this kind of residential metric?

 

I wouldn't assume capital growth, especially on this type of product. Look for other comparable sales if it is quite new, same building, street etc. I am no expert, but to me I treat residential and commercial fairly similar, the value is in the land- in residential property would you buy a unit or a house for capital growth? If you can buy a freestanding property, an old house with correct zoning, a warehouse etc, you can add more value, it can suit a variety of tenants etc. This is just what I do, it might be different where you are and your investment strategy. I would consider other types of commercial properties.