Recent commercial deal in Hobart

Im happy to run through one of my recent ones around the $1M mark if its of interest.

Purchased May 2016 price $1,070,000
Corner store on its own (410sqm of land) off the main shopping drag in one of Hobarts best suburbs in very close proximity to the CBD with surrounding houses in $600k-$800k mark and a relatively high disposable income. Current rent $84921 with lease running through until 31 Dec 2019 so nearly 3.5 years remaining. Personal guarantees a very busy little business with the shelves fully stocked, good reviews online. A smart person could probably work out what i bought and i could post photos but i don't feel that level of detail is necessary and out of respect for the tenant i don't, the numbers are the important bit.

Risk on the property??? Initially i thought if i lost the existing tenant you could get an upmarket cafe in there like you see around Brighton Vic where i live and sydney etc with tables and chairs outside and take home meals for at night, then i got down there and remembered its tassie, its freezing outside for 11.5 months of the year. But i sat out the front of the place for an hour and watched the flow of customers, its near the university it has a steady flow of traffic past it and back to the original point, its tassie the weather is frequently miserable, if you're on your way home from work its ******* down and cold and dark, you need something for dinner or a few extra ingredients are you going to woolies parking 100m from the door in the cold and the rain or will you pull up at this place with ample 15 min spots out the front ad pick up your necessities and be in and out 5 mins and pay the premium? Been a corner store since the 1920's and didn't look like it was changing anytime soon.

Settled August 2016 price $1,055,000 (discount for roof repairs required of $25k identified by building and pest and negotiated down by BA)
Oncosts (all costs excluding GST, no GST on purchase as "going concern")
BA $5900
Conveyancer $1550
Stamp Duty $42660
Deprec report $1000
Trust structure and Accountant $1500
Build and Pest $520
Valuation $1500
Bank charges $500
Roof repairs (estimate) $25000

Total purchase cost $1,135,130

Current rent $84921
less annual expenses estimates
Building Insurance $2500
Mgmt $4670
Accountant (Qtly BAS and annual return) $2500
ASIC $250
Maintenance estimate $2000
bank charges $500
land tax $NIL (paid by tenant)

Net rent $72,501

Actual net yield on purchase price including all expenses $72,501/$1,135,130
= 6.48%
Its only going through this exercise you get the real number and i hadn't done it before now and its easy at the time to look at the rent divide it by the purchase price $85k/$1,055k = 8% yield and think at the time you're a property genius.

Regarding the finance, this property was purchased with equity from other properties but mostly my PPOR is on the line. I tipped $58,000 into the deal and secured the property with a $50,000 deposit and put an additional $8000 into the company account to cover sundry expenses until i was collecting some rent.

Interest only on loan of $1,055,000 @ 4.2%
= $44,310
+ reset fees p.a. for Market rate loan facility $600
total $44,910

Net rent $72501
- interest $44910
= $27591 per annum profit

And i didn't realise it at the time but the sale included all of the plant and equipment, so fridges, coffee machine, display cabinets, shelving etc etc because i bought it off the original shopkeeper that leased it out to the current tenant so there should be some reasonable depreciation left. I don't have the report to hand as yet, but I'm hoping i won't be paying tax on the profit for a few years yet.

Cash on cash return?
$27591/$58,000 = 47.5%

But its at a 100% LVR and interest rate changes or a protracted loss of tenant and the strategy falls over very quickly. Im fortunate that i have a good cashflow business that allows for such problems if and when they come up, and they have, I've made plenty of mistakes.

Summary, I'm happy with the purchase, no regrets at all, ill probably hold it until i shuffle off and the rent will slowly increase over time and keep putting money into the account. Profits will be put back into the principal each three months as the loan rolls over until i need to live off them.

Hope the info helps

 

Thanks for sharing
Will you consider further CIP purchases

 

Hi MTR

I would but the "rinse and repeat", duplication aspect isn't as easy with commercial. Vals are expensive and increases are based on rent increases or drops in yield based on current market ... To answer your question I think I'm now happy to sit with current holdings and pay down some debt.

 

Why did you need to pay for a valuation on the commercial property if you purchased using equity from other properties?

 

Hi Simon

I borrowed 100% of purchase price for Hobart property. The Valuation came in at purchase price so i needed to fund the 30%. That 30% was taken from equity i have in my PPOR so its a cross-collaterisation scenario.

Hope that clarifies it for you.

 

Thanks for sharing the numbers.
Can u share which BA did u use?
QUOTE="Whiteman, post: 274411, member: 6057"]Hi Simon

I borrowed 100% of purchase price for Hobart property. The Valuation came in at purchase price so i needed to fund the 30%. That 30% was taken from equity i have in my PPOR so its a cross-collaterisation scenario.

Hope that clarifies it for you.[/QUO

 

Awesome, thanks for sharing Whiteman, and looks like pretty decent numbers as well

 

Was there a 5% increase per year and 4th year based on market appraisal on the rental contract?

 

5% pa growth is pretty unrealistic when inflation is running at 1% - that's why % rent works well.

 

Hi Oki Doki

I used Rob Zubin and found him to be very through and professional. The contract/offer was very well worded and negotiations before and after signing well handled. Felt comfortable all the way through.

Would use him again and no hesitation in recommending him.

 

I should add I found the property and engaged him to assist from there onwards.

 

Hi Retirerich

The lease I inherited as is and it's running at CPI increase p.a.

 

You could have most likely structured this without the x-coll.

 

Welcolme to the cashflow rich world of commercial!
Once you start down this path it's hard to return to residential
It feels great retiring debt with the surpluses!

 

$1,500 valuation cost is reasonable
My last commercial deal i did at a similar time was $4,800 (also 100pc funded from other properties)
If we only need one valuation i consider myself lucky!

 

Not an ideal structure! You can achieve a lot more practical result if you drew a new loan from your PPOR, releasing equity for the deposit and then have a standalone commercial loan against the investment. This separates your PPOR from the securities list for risk mitigation and can give you flexibility in lender use. Not the end of the world, servicing/policy permitting you can still untie this before it becomes a real potential problem one day.

 

That may well be so but i can see how cross collateral comes about (from experience)
The individual properties have insufficient equity to release ...but collectively they do
A simple demand like a registered valuation involves a lot of cost (due to the many properties and high cost of valuations on commercial properties )

 

Very interesting - thanks for sharing.

 

It takes more time, skill, market knowledge, research etc to undertake commercial valuations eg. A retail valuer needs 5 years additional retail specific supervised valuation experience to become a retail valuer.

Finding comparables for the capitalisation of income streams requires pulling registered leases from the LTO, paid searches and time.

Comparing house sales is a walk in the park by comparison.

 

Not surprisingly my commercial valuations are dated and only updated if forced too by the banks (when increasing loans and if another GFC comes along)