Forum Replies Created
Hi Lara,
Refer to 2nd post (Sydney strata office properties). http://www.prospergroup.com.au/blog
This is an example of the type of information / research that you need to obtain and apply to your Melbourne office scenario.
Suppy and demand!
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Good for your guys, for taking the plunge and investing.
I think what some of the forum people are alluding to with their comments are that one should focus more on the underlying asset, the quality of that asset and how it will likely perform in the future.
Often some investment groups highlight the tax benefits and 'home gearing & debt reduction strategies' as a means to sell their stock.
Always look at who is paying these people – is it the developer of the product or you? (i.e. are they really sales agents and representing the vendor of the property).
Tax benefits are a bonus – the performance of the property will make you the most money over time.
Well done and good luck.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
The objective of a commercial renovation or improvement is similar to residential property, i.e. the property should be brought up to an appropriate standard so it appeals to prospective commercial tenants and/or prospective purchasers and one should not over capitalize the property.
The requirements of commercial tenants will vary depending on how they will be using the property i.e. whether it is for an office, retail or industrial purpose. As with residential property the requirements and tastes of commercial tenants and buyers will vary, so you should stay neutral with the improvements, otherwise a tenant or buyer may walk in and want to completely change what you have done. The improvements should be from practical perspective and increase the potential of attracting more rent.
Market research will tell you what improvements will draw tenants and what the ceiling rents are for similar properties in the area. You do not want to spend money on things that will not contribute to being able to increase the rent. (We often ask local valuers in an area what the rental ranges are for various types of properties).
Some typical things that could increase the rent and improve the value of the property are;
• ‘Clean it’
• Mezzanine level (add more floor area & rent it out at a rate per sqm)
• Add an office
• Add internet and telephone connections
• Awning
• New floor covering
• A/C system
• Suspended ceiling
• Grease trap
• New plasterboard walls + paint
• Fit-out per tenants requirements
• Remove walls or add walls (partition walls are easy to add and remove)
• Create new entry and exit waysSometimes it is best to just tidy up the property and repair / replace the basics and offer the new tenant a fit-out in lieu of increasing their rent. (Or your existing tenants may ask you to spend money on the property in lieu of a rental increase).
For example
Say you offer to pay $50k in fit-out costs for an incoming tenant or existing one, and the tenant agrees to pay an increased rent of $25sqm x 250sqm (of floor space) = $6250 per year. At a capitalisation rate of 8% the increase in value would be $6250 ÷ 8% = $78,125. We would consult with a local valuer before spending a cent to gauge what the potential lift in value would be. (I.e. maybe the cap rate in that area is 7%, which would improve the value by more than $28k).
You may want to achieve an increase of more than $28k in value to make the exercise worthwhile however; this is an example. Of course you might also be able to depreciate the $50k in improvements which then starts to really improve your cash flow.
So even if your loan repayments were 10% x $50k = $5k per year you would be +ve cash flow on your expenditure + have further depreciation deductions.
Obviously if an existing tenant approaches you mid way through the lease requesting such improvements you would have to do an amendment to the current lease.
We recently negotiated with an industrial tenant to build them a further 500sqm of warehouse space at a costs of approx $500k.
This attracted a further rent of 500sqm x $110 per sqm = $55k. So will increase the value by $687,500 (55k ÷ 8%). So even after interest repayments we have increased the +ve cash flow and also increased equity.
Hope this helps.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
The objective of a commercial renovation or improvement is similar to residential property, i.e. the property should be brought up to an appropriate standard so it appeals to prospective commercial tenants and/or prospective purchasers and one should not over capitalize the property.
The requirements of commercial tenants will vary depending on how they will be using the property i.e. whether it is for an office, retail or industrial purpose. As with residential property the requirements and tastes of commercial tenants and buyers will vary, so you should stay neutral with the improvements, otherwise a tenant or buyer may walk in and want to completely change what you have done. The improvements should be from practical perspective and increase the potential of attracting more rent.
Market research will tell you what improvements will draw tenants and what the ceiling rents are for similar properties in the area. You do not want to spend money on things that will not contribute to being able to increase the rent. (We often ask local valuers in an area what the rental ranges are for various types of properties). Some typical things that could increase the rent and improve the value of the property are;
- ‘Clean it’
- Mezzanine level (add more floor area & rent it out at a rate per sqm)
- Add an office
- Add internet and telephone connections
- Awning
- New floor covering
- A/C system
- Suspended ceiling
- Grease trap
- New plasterboard walls + paint
- Fit-out per tenants requirements
- Remove walls or add walls (partition walls are easy to add and remove)
- Create new entry and exit ways
Sometimes it is best to just tidy up the property and repair / replace the basics and offer the new tenant a fit-out in lieu of increasing their rent. (Or your existing tenants may ask you to spend money on the property in lieu of a rental increase).
For example
Say you offer to pay $50k in fit-out costs for an incoming tenant or existing one, and the tenant agrees to pay an increased rent of $25sqm x 250sqm (of floor space) = $6250 per year. At a capitalisation rate of 8% the increase in value would be $6250 ÷ 8% = $78,125.
We would consult with a local valuer before spending a cent to gauge what the potential lift in value would be. (I.e. maybe the cap rate in that area is 7%, which would improve the value by more than $28k).
You may want to achieve an increase of more than $28k in value to make the exercise worthwhile however; this is an example. Of course you might also be able to depreciate the $50k in improvements which then starts to really improve your cash flow.
So even if your loan repayments were 10% x $50k = $5k per year you would be +ve cash flow on your expenditure + have further depreciation deductions. Obviously if an existing tenant approaches you mid way through the lease requesting such improvements you would have to do an amendment to the current lease.
We recently negotiated with an industrial tenant to build them a further 500sqm of warehouse space at a costs of approx $500k.
This attracted a further rent of 500sqm x $110 per sqm = $55k. So will increase the value by $687,500 (55k ÷ 8%). So even after interest repayments we have increased the +ve cash flow and also increased equity.
Hope this helps.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Deposit for commercial is usually 25% – 30%.
Units of 3 – 4+ are usually considered a commercial lend.
However, 80% LVR is possible for strong applicants. Also, strong applicants may finance up to 5 – 6 units as residential loans at residential rates.
Hope that helps.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Dear Sati,
Whilst the situation is not good you can learn valuable things from this experience that will likely put you in good stead to make better decisions in the future. All good investors have started somewhere and also made mistakes.This is obviously very damaging to your cash flow, I assume that selling the IP is not an option for you, i.e. that you do not have $30,000 in capital to repay the bank loan upon the sale.
If this is the case, improving the properties cash-flow may be one of the few options available to you.Would you receive a better rental if you rented the property by the room? A lot of people do this to increase their returns. You may find a local agent that will manage this for you, if not you may need to up skill yourself to do this.
Is the valuation low because of the condition of the property? I.e. if the property is very run down then this could dramatically reduce the valuation, especially in today’s market. What would sprucing the property up entail? What would it cost and would this improve the value to at least to a break even point. I would at least investigate this so you understand all of your options and also to improve your knowledge about the property.
After thorough evaluation if you found that by spending $10,000 or so, there was a good chance of selling the property to break even (after considering all costs), then maybe a family member might help you out. Obviously, this strategy would involve a lot of research and should not be chosen lightly.
Maybe people of the forum have some more positive tips for you??
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Not sure if you use the PIA software (property investment analysis) – from somersoft.com.au.
This will provide you with a cash flow analysis and various returns (IRR and NPV) which factors in the cash flow and assumed capital growth of the property.
You may find this useful in creating what-if scenarios and models.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Information was sourced from various places.
Financial Review – (on-line subscription)
ABS – Information is free
Mortgage & Finance Monthly Brief (subscription)
RBA website – Free
Various finance industry daily e-updates (subscription)
Industry seminars and updatesCan be dry reading however, it keeps your finger on the pulse.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
With all due respect, I personally would not consider consulting an industry superfund advisor for anything else other than advice on an industry super fund.
They may be excellent on advising on the respective C-Bus funds etc however, they are not financial experts and also are generally not well rounded in property and finance.
I have been a financial planner (not any more) and know the difference between proper strategic planners and super fund advisors (again, no disrespect intended).
We are in St Leonards and I am happy to give you a few names of financial planners that I know if you want to get in touch with me. (no hidden agenda's here, I do not get paid for any referrals).
In my experience 'Free' advice also comes at a cost.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Interest rates and the economy – property prices- Interest rates have been left on hold since March 2008. The immediate inflation figures and outlook is the leading indicator for monetary policy or the regulation of interest rates by the RBA.
- The cash rate is currently 7.25%.
- Economic growth (which drives jobs and demand) is expected to fall from 3.25% to 2.75%.
- Unemployment is tipped to rise from 4.25% to 4.5%. (Reflecting the slowdown in growth).
- Whilst the RBA has lifted its inflation forecasts from 3.5% to 4.5% by December 2008, the medium term outlook is then a fall to 3.5% – which supports claims that the cash rate should fall over 2009. This should see home interest rates fall and some life come back into the property market.
- NAB thinks the cash rate will fall from 7.25% to 6% over 2009.
- Economic forecaster, Peter Switzer states that the above forecast should come to pass so as long as the price of oil does not increase too dramatically. An increase in the price of oil may put further upward pressure on inflation (Goldman Sachs forecast that oil may rise to $US200 a barrel).
- Peter Switzer states that if oil ‘goes sky high’ that we can count on a recession and then interest rates would fall big time to avoid a long drawn out one. A recession is defined as two consecutive quarters of negative GDP growth.
- Despite rises in oil and the flow on inflation effects, the RBA has reduced the odds of a rate rise by the end of the year from 100 per cent to 70 per cent. This is mainly due to the slow in the economy and retail spending.
- The RBA supports Westpac’s statement that the worst is over with regards to the ‘Global Credit Crunch’ and rates should ease in 2009.
There are a few predictions are there.Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Having also purchased mortgagee properties, I think you will find that your lawyer is correct (and you would hope so!).
The bank will not negotiate with yourself and certainly not at a loss. They will have to go through their mortgagee in possesion process first.
Also, if the bank has not moved in on your friend (yet), they certainly will after you have this conversation with them.
Has your friend tried all possible avenues to refinance their way out of this? (even shared equity loans etc)?
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Interest rates and the economy – property prices
- Interest rates have been left on hold since March. The immediate inflation outlook is the leading indicator for monetary policy or the regulation of interest rates.
- The cash rate is currently 7.25%.
- Economic growth (which drives jobs and demand) is expected to fall from 3.25% to 2.75%.
- Unemployment is tipped to rise from 4.25% to 4.5%. (Reflecting the slowdown in growth).
- Whilst the RBA has lifted its inflation forecasts by December 2008 from 3.5% to 4.5%, the medium term outlook is then a fall to 3.5% – which supports claims that the cash rate should fall over 2009. This should see home interest rates fall and some life come back into the property market.
- NAB thinks the cash rate will fall from 7.25% to 6% over 2009.
- Economic forecaster, Peter Switzer states that the above forecast should come to pass so as long as the price of oil does not increase too dramatically. An increase in the price of oil may put further upward pressure on inflation (Goldman Sachs forecast that oil may rise to $US200 a barrel).
- Peter Switzer states that if oil 'goes sky high' that we can count on a recession and then interest rates would fall big time to avoid a long drawn out one. A recession is measured by two negative quarters of GDP growth..
- The RBA supports Westpac's statement that the worst is over with regards to the 'Global Credit Crunch' and rates should ease ion 2009.
Can you afford for rates to up? If not maybe consider a 50/50.
Cheers
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
G'day Neil,
I think that if you can cover that list comprehensively you are doing well. I dare say that the attendees may tell you what they want to hear about from time to time. People generally like to hear about case studies and examples – i.e. a presentation on funding a development should include working through a real life feasibility study etc.
It is definitely an interesting time in the finance market, brokers commissions are being cut by the banks and it is expected that 30% – 50% of mortgage brokers will be squeezed out of the market within the next 2 years.
Adding value to your clients and having a competitive edge will be the key to sustainability in this market. What is yours?
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
G'day Kate,
Should your offer be accepted and you need some amo to convince your husband, you could consider doing a CMA (comparable market analysis) of the property. I.e. What are recent sales in the street and within 200m of the subject property like? A CMA can be done using RPdata or Reisdex (as a casual user if you do not subscribe).
If you work out that you are picking up the property substantially cheaper than properties on similiar sized blocks in the street and also work out an approx renovation budget, you could present a business case to your husband – to help get him over the line.
If the total costs of purchase + costs of the reno is at least 10% under comparable sales (once the subject property is brought up to their standard) you are doing well and the exercise was worth it.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
G'day Daniel,
Have you considered any of the following options?
1. Using a Line of Credit to fund the cashflow shortfall – would need to invest in capital growth areas for this to be
viable.
2. Using a Cashflow Loan – reduced interest during the first few years.
3. Commercial Property – Higher deposit required however, still possible under $350,000 & be Cashflow+ve
4. Adding value to residential properties & selling or using equity increase as cashflow.Educating yourself is the best bet going forward. These strategies can be very effective (or dangerous) if the proper risk management strategies are not in place. Buying properties and waiting for growth could make you rich – it may just take 20 years or so.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi There,
The Australian average is approx. 20% of gross income spent on loan repayments – or approx 27% of net income, depending on your MTR.
Approximately 8% of folk are at or over 50% of their gross income. So if they earn $60k per annum gross, then their loan repayments are approx. $30,000 p.a. That would make the repayments at about 66% of their net income.
This is considered to be mortgage stress!
You would certainly qualify for a loan, I would just recommend doing a good budget.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Where are you looking to develope – there might be some nice people out there that will share specific costs with you for a given area.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi Dexter,
We act for investors all over Sydney (and NSW / QLD for that matter).
We are currently negotiating on a property in Campbelltown for a client.
Please feel free to contact me privately if you wish.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi Catsgrave
A quick scenario for you ………..
An investment purchaseCapital Costs Cash flow
Purchase price $250,000 I/O mthly loan payments $2,100
Deposit (5%) $12,500 Mthly rental income $1,041
Loan $237,500 Mthly cash shortfall $1,068
Costs $15,000Total funds required $27,500
Note: all figures are approximates only. I have not taken into consideration your personal circumstances. Costs include LMI, Stamp Duty, legals and other.
As you are currently saving $500.00 per month, it may be a difficult to increase your monthly commitments to an extra $1000+ per month. There are many other variables and options (to name a few)1. Family guarantor for the deposit (could eliminate LMI)
2. Use of the FHOG ($7000 cash + no stamp duty)
3. Renting rooms to boarders
I would suggest that the next step is to run the numbers properly with a broker. Feel free to contact us if you wish.Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
Hi Nathan,
I have a couple of Sydney based solicitors that I have been working with for a few years. They do conveyancing work for me all over NSW.
Although, not in Wollongong, I am sure they can help.
Please feel free to e-mail me for details.
Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone MeThe Property Investment Specialists
