Investor- NO MORE HUMPTY DUMPTY on a brick wall

Hey guys and gals,

I did feel like Humpty dumpty sitting on a brick wall until i found this awesome awesome forum. Over the moon!!! I have no like minded property friends and I love property. So much so that for 1 year i felt totally unsupported and i didnt do anything. I just didn't know what or where to invest with all the mixed info. I was at a standstill with my investing though i have enough deposit saved for 2-3 cheapy properties but know from last mortgage broker assessment of my borrowing capacity (assessment back in Sept 2015) that I can only borrow another $430k. My serviceability holds me back. So i could probably buy one more, but maybe i need to get a new assessment from a mortgage broker(MB). Any good property tax accountant, that really get tax etc?
The ideal one for me would be one that can strategise.

I'm now back in the property game after a rude awakening after just one year of how little i can now afford. My purchasing power has dropped significantly!! Might just buy that car space to call home....lol ;-)

1. Are banks policies lending out more or less than since about Sep2015?

2. I'm debating whether to buy a small freehold commercial shop c.$380k on approx 250m2 in an upcoming area in a suburb about 50km from CBD (all infrastructure set up in area & more on it's way). Most shops except 1 or 2 are rented out in the strip where i propose to buy.
OR
To buy a residential property in the same area, like next door or close by but set on about 600m2 block. This block may also have future mixed use development or rezone to commercial opportunity too.

I believe both have development and mixed use potential in the future.
like build flats/townhouses/ mixed retail

###Which one would you choose and why?
Please explain to a novice like myself the ins/outs of investing in commercial real estate and what to look out for.
Would you need a conveyancer and solicitor that specialises in commercial property or do standard ones offer this service?
What's the standard LVR for commercial property?


3. Also, i have one IP, 10km west of Melb. It has the ability to get plans and put 2 townhouses on it for a $510k build. It's currently $100 per week negative cash flow but i don't have the funds to develop. It's in a sought after location in a beautiful neighborhood.

Mmm... please let me know your thoughts. I'd really appreciate them.

Oh and happy happy new year!!

 

What are the yields like on the two places you are looking at?

 

Hey there Beano,

here they are:

Option ONE
Residential property yields 3.3%

Option TWO
Small Commercial shop yields 9.1% (seems high??)
Currently has a tenant paying $41k rent pa
*Cost to purchase building approx $450k on 250m2 land
Im waiting to hear back REAgent. I googled similar commercial properties to arrive at this approx figure


*Note i calculated this by dividing annual rent by purchase price. This doesn't take into account expenses like utilities, rates, holding costs etc...


Thanks for helping

 

The commercial property... is the tenant paying outgoings such as council rates? If not that will chew into the yield a bit.

The residential property... that yield is rather low and will shine the torch on capital growth needs.

 

Thanks for replying Jacqui.

Im new to commercial. From.my very limited understanding of commercial property, the commercial tenant pays for all outgoings inclusive of rates. This might not be the norm though. I will have to dig deeper.

Option ONE - this property long term should increase quite a lot as it has all the key fundamental growth drivers. Infrastructure is already there and they continue to spend more to lift the area

BTW, i just calculated the yield on my IP in the west, its getting 2.8% which is the suburb's median yield. I will hold this westy property till i can build more equity in it.

 

Commercial can have excellent yield but if you are a noob to commercial then....
1. you need a bigger deposit - generally 30-40% and the rate and LVR you get from the bank may be determined by the strength of the lease or leasability of the site.
2. when it's empty it's EMPTY and will generally take longer to lease again then a residential IP
3. new commercial tenants will want a rent free period, possibly some fitout and other incentives
4. yields are generally higher to cater for this risk so think about considering in a 5yr period that it might be empty for one year
5. commercial tenants can be great as they pay for all the outgoings
6. banks like long leases on these, not just about to expire might not renew leases
7. commercial leases need to be drawn up my lawyers and can be your best friend. There is a cost for the lawyer but it's in your best interest as it's the piece of paper between you and bankruptcy
8. the value of a commercial property is generally in the strength of the lease on it and it's leasability and less about capital growth

 

To add to the above:
5a) tenants may pay all, some, none, specific outgoings. Iease may be fully nett, gross or partially net lease where the tenant may pay for increases in the outgoings is another variation.
7a) real estate agents can prepare leases up to 3 years total duration (including options). Lease terms over 3 years require a solicitor.
8a) Strength of lease - quality of the existing tenant, if any, bond/guarantees; certainty of rent reviews (fixed increases)
8b) leasability - location, quality of improvements, suitability, zoning flexibility; functional obsolescence
9 Retail leases are subject to the Retail Leases Act in each state (retailers are a special class of tenant, like residential tenants, & need specific legislation to protect them from big, bad lessors)
10) Commercial tenants can be required to pay the lessor's costs in preparation of the lease (retail tenants can't).
11) Solicitors shouldn't be used for the negotiation of commercial terms in the lease, they can draft them after negotiations are completed and HOTs are issued

 

You really need to take ALL costs off (Not tax or interest) to get to a net yield

 

Hi @BeachBabe

I would imagine that if funds and borrowing capacity presently available to you mean that developing your Western Suburbs property is not a possibility, then neither is purchasing a commercial property. No point confusing yourself with all the properties available for sale today if finance cannot be secured to acquire them. Similarly, acquiring another buy and hold would likely worsen your cashflow position.

I am not usually a fan of selling, but at $100 per week negative, it'll take you a while to be able to actively pursue further purchases. So for the sake of the exercise, it seems to me that the obvious options are :

• Bunker down and reduce some debt in order to be able to acquire again. By my calcs, paying down about $100k of debt would get your currently negatively-geared property to cashflow neutral. How long it takes you to save this amount depends on your surplus salary after living costs. Meanwhile you could potentially look to other purchasing entities that may have deposit funds available to keep you entertained in the meantime... such as a SMSF (Self Managed Super Fund); or
• Get the plans and permits to build but don't do the build - sell the site with the plans and permits, and review your position after sale proceeds come in and capital gains tax is paid or calculated; or
• Acquire a money partner and/or partner with a builder with a view to developing the site and either selling the lot, or each person keeps a portion of the outcome, or a combination of the two.

 

@Scott No Mates has WAY more knowledge than me on CIP and these are really good additional points.

 

Commercial properties can take a long time to rent, so factor in vacancies of up to 12 months or possibly more.

The fact that there are already empty shops in the strip should ring alarm bells. How long have they been vacant? Even if your tenants renew, they will use the empty adjacent shops as a bargaining point to lower the rent or inclusions.

Friend with a commercial property lost a tenant to a vacancy in their complex - the offer on the empty property was just too low for our friend to match. Ensuing vacancy of their property was nearly 12 months.

The existing lease will need close examination.
Marg

 

To reduce risk it pays to have good spread of tenants.
Generally assume 6pc to 9pc of the rent (overall) to be taken for vacancies
It is only when the tenant has invested a lot of capital and has a lot to lose that vacancies approach near zero.
In saying that residential i also allow for a week a year

 

Sure, if you own the whole complex or several properties.

Friend owns a single unit in a complex, so only one tenant. And original post referred to a single shop in a strip. Again only one tenant, so the effect of a long vacancy much greater.
Marg

 

Wowsers you and @scottnomates are awesome.!! What incredible knowledge you guys have. Thanks for shedding light on a topic i had zero knowledge on. I might leave the commercial till later in my investing stage.

Thanks once again to you both and others that have posted.

 

Just out of curiosity how much does the building and landlord insurance on commercial cost? ie. To cover a tenant who doesnt pay the rent?

 

Very few if any take out LL insurance - too costly & not worth it imho (your bond is 2-3 months rent on small properties longer on major leases, also personal guarantees).

Insurance cost vary widely - consult a broker- generally《1% of building replacement cost.

 

Scott is an expert in commercial.

 

H

Thanks Jacqui.

You raise some great points that trigger many questions from my end.

Note i have decided that a commercial property is too risky at this stage of my investing. Thanks for your input.

1. I mentioned that building 2 townhouses was not an option, as I had decided to direct these funds toward my next purchase, a positiveCF property to offset the $100 per week negative west property


I can borrow up to $430k (according to MBroker (about Sept2015), i will need to get a new Borrowing Capacity assessment.
My understanding was that generally speaking it's best to have say 2-3 properties increasing in value rather than paying down debt on this one property.

It costs about $530k total to build both.

2. Why do you mention to get plans and not build?
My plan was in 5-7 years time, building 2 townhouses, battleaxe style, selling one to pay down debt and keeping one. Maybe this is old school thinking.

A direct comparable house to mine, in basic original condition just sold for $860k.

A towhouse to the rear 2 x 1 x1, with completely separate access driveway just sold for $625k.

 

Merely as an option (and certainly not necessarily the most desirable or profitable option). Just an option if you are in a rush to expand your portfolio.

 

Yes, i definitely want to expand my portfolio. I have 3 locations i have my eye on but my borrowing capacity seems limited though i do have deposits saved up. I'm really uncertain which one to buy next that will set me up for the next deal, then the next and so on...what type of expert helps with strategising what the deal would look like, cashflows, if I'd better or worse off, so i can move more quickly to acquire a portfolio?