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My Commercial Purchase.

Discussion in 'Commercial Property' started by pinkboy, 27th Jan, 2016.

  1. pinkboy

    pinkboy Well-Known Member Premium Member

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    Location:
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    7 David Muir Street, Slade Point, Qld 4740 - SOLD Industrial/Warehouse Property #501728193 - realcommercial.com.au

    Last week I settled on the above property. My wife and I purchased this in our newly created SMSF.

    Its actually quite a story, so I will break it down as best as possible, without waffling on too much.

    My current lease at my business premises was finally coming to an end after 9 years occupation at December 22nd, 2015 (3x3x3 - with ratchet clause at market review dates, and 3% minimum increases. When I started the business, this was one of the only available suitable sheds that I could get into that still needed to be intensified use for my business practices. You get the idea - it has become rather expensive over the years), so I was putting the feelers out for a new premises.

    Up popped this little gem (I say that in the very nicest possible way, as its not pretty to look at, but its got good bones) in October '15, however after driving past the sign, I totally dismissed it, as I thought it would be pretty expensive. My mate who I ride with sent me an alert as it finally came up with a price on the ad - and when I saw it, I had to rub my eyes, as I thought they had got it wrong.

    This is where the fun starts. Called up the agent early November, inspected the property, and put an offer in. No go. Property is owned by ASX listed Arrium (ARI), the old OneSteel. Really hard to communicate between parties, because the listing agent had to go through an agent down south who then relayed onto company directors and then Chinese whispers all the way back to us through the agent...blah blah blah. Hard work. We finally settled on a purchase price and after many heated emails, got the contract countersigned December 2nd. Biggest snags to overcome, we had 21 days for finance, and 21 days to settle....over Christmas period.

    During this time we had set up our SMSF, but ATO wouldn't make it compliant, se we triggered an audit. Well, let me tell you, this was a lot of fun - NOT. ATO had us running around getting all this compliance guff, had to get all our personal tax returns, company tax returns, all right up to day dot before they would proceed to make compliant. We even had to do a 45 minute interview on the phone regarding our roles and responsibilities as trustee etc. We finally got that done by about December 21st, then we had to then start the process of rolling over our Superannuation from Sunsuper. Anyone who has rolled over to a SMSF will tell you its not as easy as just changing Industry Super funds. They have to issue cheques, then check them...anyway, finally got that underway.

    Fast forward to finance date 23rd December. We had been sweating bullets for a few days, and with 27 minutes to spare, Formal Approval. Phew. Even after the FA, lender still wanted a few documents here and there, so spent most of my Christmas break getting that all underway. Things like financial advice, accountant prepared debtors/creditors for the business etc. Before FA, we really went through the wringer, making sure everything was all in place, everything paid up to date, lease created etc. Got it all sorted, and Settlement day is approaching.

    While all this was happening, I was still having to play the lease negotiation game with my current landlord. We already don't get on very well due to numerous property related issues, neighbours, undrivable yard etc. He truly thinks Im an idiot by offering still absurd lease terms, when there is an abundance of places available. At the height of the lease where I am, Im paying $138/m2. He had offered me $100, then $95. I wasn't biting, as he was offering the space to a neighbor I exclusively do work for at $60/m2 on any term length. I knew, we talk daily. Anyway, the LL is a fool, and I gave my notice, and he was horrified. Good.

    Got all mortgage docs signed, all sent away....then nothing. No running around before settlement getting last minute stuff. No extra funds. Nothing. Super rollover cheques all cleared, all payments made 6 days before settlement, the cleanest settlement I have ever been involved with.

    Anyway, on with the numbers and some commentary:

    Purchase price: $850,000+GST (Vacant possession. Vendor would not sell under any other condition, so we couldn't create a lease and them sell as a 'Going Concern').
    Stamp Duty: $35,100
    Solicitor: $2,200 (conveyance) and ~$2,200 (pre contract advices, lease creation, various advices)
    Loan Establishment Fee: $9,350 (Valuation, Commitment fees, Lender solicitor fees etc).

    We purchased the property with 70% LVR, so $255,000 deposit plus we had to come up with the GST as well. So another $85,000. We will get this back in our SMSF after the March quarter BAS, so nice little buffer to play with there.

    Borrowed amount: $595,000
    Term: 15 years P&I with no penalty paid out after 10 years, and $50,000pa allowed in extra repayments.
    Interest rate: 6.3%, and as LVR lowers each 5%, the rate drops .2% until 50% LVR.

    Lease basics: $93,500pa (11% cap rate) + all outgoings + GST. Outgoings are $13,000pa rates, $4,000pa insurance, $3,000pa Land Tax. My lease payments will save me about $3,000/month from my current premises, and including member contributions above the lease, I will be about $3,000/month in front of payment schedule. So win/win for the purchase of a premises lease wise.

    Now, if this site was to be replicated today, it would be in the order of $2mil. Straight up, from the valuation, we had to insure the buildings for $925,000. Add land valuation ($385,000), 4,044m2 of 200m thick concrete hardstand ($650,000) and 2x cranes ($90,000), and that puts it up over the $2mil site replication easily.

    Just goes to show, that you make your $$$ when you buy, not when you sell. Anyway, that's my Christmas present for the next 10 years. Now we are so busy, we don't even know when we are moving yet! Will have to be in the next 5 weeks.

    The final spanner in the works is Ive been approached to lease the shed out. It has mega amount of power and the height of the shed is appealing to the prospective tenant. Im now looking at options of creating 2 or 3 container igloos outside on the hardstand. So these negotiations are currently ongoing as well. Site might turn out to be a nice little earner for us.

    pinkboy
     
    Last edited: 27th Jan, 2016
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  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Great work Adrian,

    Just goes to show commercial deals are definitely out there. Bought under market value, awesome return, well financed, well structured.

    If you occupy it yourself is there enough room left for sub leases?
     
  3. pinkboy

    pinkboy Well-Known Member Premium Member

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    Thanks @D.T. Currently in this process. I might be having to purchase some 40' containers and build several igloos for me to work out of, while the prospective tenant goes in the whole shed. They also are a fabricator, so will generate work for us as well.

    pinkboy
     
  4. moyjos

    moyjos Well-Known Member

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    Well done
     
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  5. headsonbeds

    headsonbeds Well-Known Member

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    Great sharing, looks like a great option. Interesting interest rate, It's interesting how commercial loans are tied to LVRs.
     
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  6. WattleIdo

    WattleIdo renovating Premium Member

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    I'm sure a shed that size will be useful to lots of businesses.
    An extra 3K/month is nothing to sniff at. Good move.
    Do you get a decent sea breeze there?
     
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  7. devank

    devank Look, lets just get on with this, ok? Premium Member

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    Wow... Thanks for sharing this journey.
     
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  8. pinkboy

    pinkboy Well-Known Member Premium Member

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    Especially my business. Plenty of room for 2.

    Yes, the extra $3k inside SMSF and extra $3k outside will be used mostly for shares. I had to sell down all I had to get this shed. 2.5 years ago I said I would never buy property again. Never say never now that an actual deal of a lifetime has come along.

    We do get a bit of a sea breeze there. My current shed is about 400m down the road. I also live 6km away.

    pinkboy
     
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  9. Scott No Mates

    Scott No Mates Well-Known Member

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    Great deal PB - the shed is too close to home to even work up a sweat ;)
     
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  10. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Great work @pinkboy - a very nice deal - and if it can be shared to produce even more income then just WOW!
     
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  11. Dazedmw

    Dazedmw Well-Known Member

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    I'm interested in this. I'll admit I have no knowledge of the market but based on the advert I was able to get close to the price based on my what it might be worth in the Melbourne market. However, I would have gotten the yield miles wrong.

    Is that a market rental? You were talking $60 a square metre as market for your old place, $120 a square metre seems like a lot even given the large hardstand.
     
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  12. chindonly

    chindonly Well-Known Member

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    Awesome Pinkboy!
    Can't believe the 11% cap rate, and you are saving rent!
    Amazing what you can find when you look hard enough.
    We had one at work that fell over during Christmas, but if it went through, we were buying for less than basic build cost - less than $1k a m2. Land free.
     
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  13. Chilliblue

    Chilliblue Well-Known Member

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    Congratulations on the great purchase
     
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  14. The Y-man

    The Y-man Moderator Staff Member

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    You'd think so looking at the signage from the previous tenant in the photos! :D

    The Y-man
     
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  15. Biz

    Biz Well-Known Member

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    Well done, that's a fantastic deal. You're right, you couldn't build it for the price.

    I am looking at maybe doing the same myself in the next couple of years. One of the things stopping me though is something you have brought up. You mention you are saving 3k a month by doing this but from what I understand the ATO monitiors SMSF's to make sure the occupants in these situations are paying "market rent" did you look into that at all? Not sure how far below you can go with what they determine market rent or how often they audit these things though. @Terry_w?
     
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  16. pinkboy

    pinkboy Well-Known Member Premium Member

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    No worries.

    True Market rent in my area is around the $85m2 mark for shed space. This is from looking at a couple of sheds available, and 2x solid leases I knew were signed in November for similar shed space. My LL was actually at first trying to negotiate with my neighbour and I with some spare shed bays next door to me for $85, and then started to get sketchy about me moving and straight up to cut his losses hit my neighbour up with $60 if I moved out. Space around here might take 6 - 12mths to tenant if vacant.

    This is how we established our lease, keeping in line with market rates.

    Shed space: 782m2 @ $85 = $66,470
    Offices: 20m2 @ $100 = $2,000
    Hardstand: 2500m2 @ $10 = 25,000
    Total: $93,500pa

    Interesting to note the valuation came back @ $106,000 net, but have only found this out after the fact. All figures quoted above are all in line with other leases. The hardstand is probably the most undervalued as there is over 3,000 m2 and you should be getting between $15-$20m2.

    Hope that clears it up for you.

    pinkboy
     
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  17. pinkboy

    pinkboy Well-Known Member Premium Member

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    As above, we worked on market rents from the most recent leases in the area. We are well within the range for the type of site this represents.

    The $3k saving per month is from my current leases, as explained in the original post, my rent had increased 9 years in a row having had to take up the options. Enough was enough! Also, I mentioned the interview. That was part of the process of the audit - to make sure we were purchasing real property, at real market rent, and not doing anything dodgy. Was very intense as my wife really wasn't up to speed with it all, and I had to guide her a bit.

    pinkboy
     
  18. Scott No Mates

    Scott No Mates Well-Known Member

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    I generally use the following to check rental (then adjust for location & site specifics etc)

    Hardstand - $20-30/m2
    Warehouse - $70-90/m2 (more for B+ & better)
    Office - $150-200/m2
     
  19. Hodor

    Hodor Well-Known Member

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    Very interesting. Thanks for sharing so much detail
     
  20. pinkboy

    pinkboy Well-Known Member Premium Member

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    Screenshot_2016-01-28-09-41-03.png
    Investors at Arrium must have got wind that the cheques have cleared! :D

    pinkboy