Example 2: Purchasing a Hotel / Pub, No Money Down.

Hi All, This was a long thread to get through from start to finish. I have only joined the forum today, use to be a Somersoft member years ago. I would like to share my story in purchasing a Hotel with no money down. The building is in a East coast capital city, about 12 KM from the CBD. Close to rail, bus, McDonalds, Woolworths etc. The suburb is a sought after area with increasingly expensive houses and higher incomes. The building is easily the most prominent building is the 'Village' on a corner. Building is Heritage listed and well known to almost everyone in the area. The building has all permits and approvals, a 10+5+5+5+5 lease (less than 2 years into it). Tenant is experienced in the industry.
The purchase prices was approx $2.5 m including stamp duty etc. The tenant pays $240k p/a plus outgoings+ Gst. About 9.6% return. I borrowed the entire amount including on-costs. I used existing debt free resi properties as security and the pub to achieve LVR of 60%. No money of my own, just equity . Borrowing at 4.79% I.O for 3 years. Gives me positive cash flow of about $118K pa. No exciting stuff like straddles and puts etc. Just plodding along as I always do. Anyway, yes you can buy a pub without any money down and receive + cash flow from day one. The investment is very secure because of the nature of the building and its location. These deals are floating around all the time, looking at another one now. (Before the knockers start, I only invest in East coast capital RE markets, so no, I don't buy dodgy small country town stuff, and I don't get involved in running the business. I always give the lease a great weight in the valuation, but the RE must be worth it in intrinsically. I could re-lease in a instant if the tenant failed. Could also easily reno into another commercial use because of the high profile location). Settled late 2016.

 

Sounds like a great deal.

Can I ask a couple of questions @Glock?

With the liquor license do you have a clause that the ownership of it is transferred to you at the end of the lease or if the licensee goes belly up? I have a deal on my table at the moment and that is my stipulation as I don't want to be left with a tavern and no license at the end or if their biz goes bust.

I want to hope that you haven't cross collatoralised your other properties to this for security?

 

A really useful post. Basically, if one has 40% in cash or house equity, one could have a decent income, right? How often do opportunities like this arise? And can the same model be used for petrol stations?

 

Hi westminster. The Liquor licensing has a registration of an interest form to complete when settlement takes place. Your financial institution will also register an interest. Should it become necessary to terminate the lease, you lodge and application for an interim license as the freehold owner. Provide a statutory declaration upon retaking control. Your lease should be very specific in a number of areas and this should be spelt out clearly in the lease document. In this instance the building is a landmark in a capital city, so although I value the lease. The building had the value anyway. Comrade 1984 question regarding equity used to purchase property. I think a finance broker would be able answer more definitively. I found petrol stations to be a higher risk in a few areas so I haven't gone in that direction. If you have equity and cash flow I have always been able to borrow.

 

Comrade 1984, sorry I missed part of your question. I have the belief that the deal of a lifetime will present itself every week. First thing I had to do was change my way of thinking, and after a while deals like that present themselves all the time. So yes they are around. You should set the bar high for deals because it is easier to find them than keep financing new aquisitions. Glock

 

Sounds to me as if you have packaged the whole deal into the finance package.

A couple of resi properties, a commercial property, the lease, the liquor license.
I'm guessing a fixed and floating charge over the entity, plus a director/personal guarantee in there as well?

Anything I've missed?

Pretty vanilla commercial lend... Sounds like every bankers dream!

Have you taken a commercial bill? Or commercial loan?
Fixed or floating?
I'm also guessing that the loan term is 5 years with some level (50%?) debt reduction required over the 5 years?

For SANF I would have packaged things differently. But sometimes you gotta do what you gotta do.

Blacky

 

Hi Blacky Yes I like plain vanilla. Yes the terms are something like that, (slightly better than that), but I had equity sitting there not working for me so I offered security on a commercial loan (fixed rate). My banker was very good and put the package together. I think it is a good deal as it is only part of a larger portfolio with an overall LVR of about 40% but provides extra cashflow. Pubs can be a bit harder to finance but I think that the changing landscape in commercial will show they are actually a safe investment with the right location. I think we will see a big disruption in retail and office RE as well as a reduction in industrial demand. But this was my example of a plain vanilla and achievable way to buy a pub without using your own cash, just time and documents to gain $118K pa extra income.(I originally replied to an old post but it has been split off, probably because the original post was old. The original post was about some exotic methods to finance to buy a pub without cash)

 

Hi Glock, did the bank put in place any quarterly/semi-annual or annual covenants to meet due the nature of the business? and If so what? like DSCR? ICR? etc

 

Quarterly

Quarterly review to ensure the tenant is performing and I am not doing anything stupid. After first year it will drop back to a 6 month review. They dropped the requirement for a yearly re valuation. I am looking to refinance in the future to further develop the site. This would increase returns and diversify a bit. Might be able to get a better deal next time.

 

Quarterly is pretty full on...I would expect half yearly. I also dont understand why they'd require yearly valuations if you're using other properties for collateral. Sounds like some good future plans though @Glock

 

Hi Glock, i remember you form SS.

It's true these deal are out there, and i have seen few over the years, but there's a reason: HIGH RISK.
Only 1 out of 9 or 10 ended up being good in the long run without eventually being a big money pit.
It's a very fickle industry even though the bank was happy to take your unencumbered RE as collateral.
Maybe I'm paranoid but my suggestion would be lower LVR as much as possible asap.
The fickle is awesome when it happens on the upside.

 

Hi could you please explain what the downsides are and how bad they can be?

 

Most pubs go bankrupt at one time of another from an endless list of reasons.

 

You rarely see a well located Pub vacant for a long period of time

 

Excellent, love that you can add value