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What would you buy for 5 mil ?

Discussion in 'Commercial Property' started by Ace in the Hole, 15th Aug, 2015.

  1. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Any ideas from the experienced members on what type of property you would target with a 5 mil budget?

    I have started to look, but feel a bit like a newbie investor in relation to the commercial market.
    At this stage, I'm considering using a BA to source, negotiate price and terms, and also present potential value add options and negotiate management terms.

    Where does one start?
    I now understand what all the newbie resi investors feel like when asking their elementary questions.
    Have not had this feeling for a while, but commercial is a big step up from resi, so much danger to the unknown and I'm not planning on getting burnt on the first purchase.
    This is bordering the edge of my comfort zone, feels good.

    Thanks.
     
  2. Be Developer

    Be Developer Property Developer Business Member

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    Few options (top of my head)

    Commercial offices in parramatta LGA
    Child care centers
    Pub and club
    Motel
    Medical centers
    Warehouses in right location

    Seems like a good option at the moment.
     
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  3. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Thanks BD.

    Of those, pub, clob & motel would seem the most risky to me, but I'll consider anything at first until further investigation.

    I've only started to notice Parramatta, as have previously ignored it.
    Have I missed the boat there?
     
  4. Be Developer

    Be Developer Property Developer Business Member

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    Re; Parramatta

    "Missed the boat" hard to answer

    You can still buy quality assests there ..may not be at same price as yesterday... If you know what I mean.:)


    Hotel,motel an pubs are least risky....

    Aussie $$$ being down..we will have higer tourism ..international and domestic both.

    I can see tourism industry at greater benefit.

    There are few more reason...happy to have a chat.

    There was a poster on other site who knew in n out of motel investment, worth while talking to him.
     
  5. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Consider things with long ground leases. That means that you don't have to do the construction and at the end of the lease you either get a free building (depends on contract) or they demolish the whole lot and you are left with a vacant lot again.

    The risk with CIP is that you buy something that no one else wants after the tenant leaves - higher if it's something quite custom, ie pub, fast food. Less so if it's more generic like office space or high truss warehouse.
     
  6. FireDragon

    FireDragon Well-Known Member

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    Personally I will look for some retail / office blocks / petrol station with multi-unit development potential. You can achieve high growth during property booms.

    However, I probably won't buy this type of commercial properties now because the residential property price increased a lot in last 3 years. There was a retail property (a restaurant) on Hassall Street in Parramatta asking for 2.3M early 2012. 8:1 FSR corner block 450sqm land size. I didn't buy it as I don't think it can fully utilise the FSR due to car space requirement. The owner somehow managed to get DA approval for 30 units and sold for 5.5M last year (probably worth 20% more now).

    I was also looking at a 7-Eleven Petrol station in Kensington. The rent will increase by 3-4% per year. However there is a 20 years lease and I believe the land tax will be a problem if I can only develop after 20 years.

    If I have to buy now I will probably look for similar ones in other states.
     
  7. willair

    willair Well-Known Member Premium Member

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    Maybe not a Hotel I have seen least 2 that went bust over the past year on Brisbane area and went to a auction in the Brisbane valley a week or so ago and the two level brick went for below 600k freehold,club maybe not also,but Motel on the costal strip in Queensland or Caravan Park with large beachside land content would be something we may look at when the next project starts,i'm starting to like caravan parks when they are on the grey nomad hit list,most beachside locations are booked out for months,but that's only opinion ..imho/..
     
  8. Bran

    Bran Well-Known Member

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    Bunnings.



    ;)
     
  9. Chris White

    Chris White BUYERS AGENTS & PROPERTY MANAGERS Business Member

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    Buying a $5m commercial property

    There are many variables to consider when buying commercial property, for example;

    1. What yield do you want
    2. How much risk do you want
    3. Are you looking for upside

    So work that bit out first.

    Then get to know the fundamentals and what style of property suits your profile.


    Type of tenant:
    Properties with less established / known tenancies usually offer investors higher yields. Properties with blue chip tenants usually attract lower yields to reflect lower risk.

    It can take 6 to 12 months sometimes to replace a large tenant, depending on the fundamentals of the market at the time.

    Lease term:
    Investors usually expect to buy commercial property on a higher yield to compensate for a shorter lease term. (I.e. to reflect the risk of a potential vacancy should the tenant leave).

    On the other hand, if market rents have increased since the last rent review, there may be an opportunity to increase the rent at the expiration of the current lease term. In this case investors may be more receptive to buying the property on a lower yield and a shorter lease term, knowing that they can increase the rent in the short-term and therefore benefit from an increase in the property’s value.

    Supply & Demand:
    A commercial property may offer a higher "potential" face yield if there is a great deal of stock on the market (as weird as that may seem). Increased supply means tenants have more properties to choose from, which may cause rents to reduce and mean landlords having to offer more incentives to attract them. This scenario may reduce the value of your property.

    A higher face yield is not much good if you can't find the tenant shortly after though.

    Location of property:
    Properties in remote areas which lack proximity to infrastructure and transport nodes or have inferior exposure may be bought on higher yields (to reflect the risk of potential longer vacancy periods should the tenant leave).

    Age of the property:
    Older properties often require more ongoing maintenance and may therefore offer a higher yield to the investor to compensate for the extra costs. These extra costs can erode the investors return if they do not forecast them accurately in their due diligence period. A detailed inspection and expenses forecast by a facilities management company can help mitigate the risk of underestimating future costs.

    Lease structure:
    Often with commercial property the tenant will pay for the outgoings however, it is important to check (and have a solicitor check) the lease thoroughly to ensure that there are no surprises. Smaller tenants will usually not cover outgoings such as land tax, management fees and replacement costs of a capital nature (for example a/c). For strata properties also check who pays for the gardening, rubbish removal and toilet cleaning etc.

    Cost of vacant property:
    When a property becomes vacant you will obviously still have your interest costs to pay. To attract a new tenant you may also have to offer them incentives, such as a rent free period and/or a contribution to their fit out. Typically incentives can equate to 6 months per 5 year lease term. So if it takes 6 months to find a tenant, you may have to add another 6 months worth of costs to this to get the tenant in the property.

    Properties with higher rental returns (or yields) may or may not always provide the best overall return. In my experience a lot of commercial properties advertised for sale fail to mention a lot of the hidden costs and ‘
    upside’ too.

    Knowing how commercial property is valued is important so you can recognize value and upside.
     
    Aaron Sice, Blacky, mcarthur and 4 others like this.
  10. Handyandy

    Handyandy Well-Known Member

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    Hi Ace

    The key aspect of a CIP is the lease and it's terms as you can't go running to a soli for every CIP deal that you want to evaluate. Obviously the property still needs to stack up along other criteria such as the business, it's position, strata or free standing, hidden potential as far as renovation/ expansion possibilities.

    But we CIP we have also seen examples of hidden potential contained in the lease. One of these examples was Daz's deal when buying an office floor. The CIP was advertised based on a return. He found that there was hidden cash flow / income based on a misinterpretation of the lease. In this case the LL was absorbing some cost which under the lease could be recharged to the tenant. These costs were substantial and shifted the returns is his favour.

    As such I think you need to start by learning to read leases for properties that you think have potential. This becomes a much bigger DD then the property itself as we are generally pretty used to looking at the actual real estate.

    I would really classify a CIP investment as a passive investment and am sure that is what you are considering. As such you need to be careful not to 'invest' in a CIP where you suddenly need to operate the business to maintain the rental income.

    ( I only own the one CIP which we originally occupied. We have looked at mutilpe CIP since but have not purchased as yet. Currently regard longer term returns to low relative to the interest rate risks )

    Cheer
     
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  11. RPI

    RPI Property Lawyer, Town Planner Business Member

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    QLD Pub
    One that doesn't have the 3 bottle shop off sites allowed within 7k's. Good opportunity to increase value of pub by securing prime retail sites for bottle shop over time (watch and wait)

    NOT Brisbane CBD office space. Vacancies are terrible at present
     
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  12. John M

    John M New Member

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    Chris White has highlighted many of the things you need to consider when buying a commercial property.

    I've seen a lot of people get burnt with commercial property simply because they don't know the market in which they're buying. Commercial/industrial property is not nearly as simple and straightforward as residential property, and the market for commercial property can differ significantly between geographical locations. ie in Penrith, a 2,000sqm warehouse could easily be vacant for 12-24 months due to the low demand for properties of this size, whereas the same warehouse in Blacktown would have a vacancy period of 3-6 months. Also, the prices between these 2 areas vary by over 40%, even though they are only 25km away from each other.

    The only other tip I'd add would be to look at the underlying value of the asset. A lot of people buy based purely on a yield, but fail to look at what the asset is worth based on these 2 methods:
    - Replacement value (ie cost of the land + improvements)
    - Comparable method (comparing to similar sales)

    ie a property is leased for $250k pa net and you buy it at a 8% yield = $3.125M purchase price. However, once vacant the property may only be worth $2.5M, so if the tenant goes belly up, or vacates, or the building burns down and you need to rebuild it, you've overpaid. A lot of people think they're buying an income stream, but at the end of the day you're still only buying the land plus whatever improvements happen to be sitting on top of it.

    Best of luck with your search. In this market, it's incredibly tough to purchase investments sub $5M (we have over 50 investments begging for this exact thing) and yields are tightening.

    Cheers
     
  13. Perthguy

    Perthguy Well-Known Member

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    That's amazing @Chris White. I have put this thread on watch. Thanks! :)
     
  14. CU@THETOP

    CU@THETOP Well-Known Member

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    I would buy 10 Ferraris or 20 Porsches. Use one and keep the others in storage because they will be worth money in the future.

    On a serious note: mixed multiple tenancy retail/commercial- at least partially occupied. Keep some money in reserve though.
     
  15. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Is it really that hard to get a good deal under 5mil?
    Are you saying you have over 50 investors waiting for a deal, didn't quite understand that bit.

    Thanks to the other posters for your input.
    A lot of consideration is needed before jumping in.
    Not sure I want to pursue the commercial market in a hurry, can wait and watch for a while.
     
  16. Shady

    Shady Well-Known Member

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  17. Jamie_

    Jamie_ Well-Known Member

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    I wonder how long it would take to fill that lease when they leave in 3 years.
     
  18. Shady

    Shady Well-Known Member

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    That's Just it...They will leave, they're only using half the space now.
    It's located in the AMA building Christie Street St Leonards, full of medicos. All the GP's/Specialists from the Mater Hospital and Royal North Shore are looking for new(ish) space, they're moving out of old buildings like the North Shore Medical Center (66 Pac Hwy) as it's old and the outgoings are over $200/m2.

    That whole floor is spread over 10 lots, When they leave carve it back up into 60m2-120m2 medical suites, sell some and lease some. Rents in that building are about $450/m2 and sales rates are around $5000/m2 + $25k per car space.
    If you can buy it for $3000/m2 your on a winner, based on the strata area though (not the floor area). So something close to $2.5mil. These guys are keen to sell but maybe not that keen, It's been for sale for a while.

    They paid $3.25mil in 2003
     
  19. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    I will be following this thread with interest. Commercial is on my radar down the track.

    @Ace in the Hole - this early on, are you learning towards one lease or something with multiple tenancies to minimise a 100% vacancy risk?
     
  20. BurnettGroup

    BurnettGroup Well-Known Member

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    ----------------------------------------------------------------------------------------------------------------------------------------------------------
    There's 2 x very very important questions you need to ask yourself first and foremost....so be honest with yourself..!!!

    Is this a lifestyle decision, based on my current financial situation. ie; Im cashed up, but asset poor. I just want to look like the Jone's...!!!!

    Is this a business decision, that will, give me and my family a lifestyle choice further down the track..????

    $5mil will get you in the door of most commercial premises, but neglect your homework, you will leave via the same door just as quick. There are many obstacles and hurdles, that others here have neglected to point out. If I was in your shoes, I would start small and then use that as leverage for my next deal. Have at least 3 x income streams going at once. If you consider purchasing a 4th, by any method, then dump one of the lower income 3. There's not enough space here, to go into the nitty gritty, but consider something that everyone else has overlooked. The best deals are in front of your nose.

    HINT: A sandwich shop that always sold sandwiches will continue to do so, until the owner introduces fish and chips.