G’day
I’ve been approached for help by a couple who want to start a child care centre. They have enough equity in their home to borrow $200K for start up costs, but need $300K for the building and need the place they have an eye on renovated as well – another $150K.
Expected return would be 12% p.a on $450K (this is the figure they quoted)
As this is my first commercial deal (depending on whether the risk/return factors stack up), any advice by those forumites experienced with this type of transaction would be appreciated.
Have a great day!
Marco
Get more out of Renting!
http://www.positiveproperty.com.auIf you have $150k you are better off buying a commercial office in St Kilda Melbourne with a 10% return all to yourself.
As to the childcare centre deal, how much of a return is that to you?Thanks for your response,
When you say that I would get to keep the return of 10% all to myself, are the repayments being paid out of this return?
(very) rough figures for the child care example are as follows:
Gross return: $54,000
Loan payments: $31,000
Nett return: $23,000I suppose I should mention that we would do a lease option, so sell price in 5 years is 20% above my investment.
Has anybody done something similar (on this scale)?
Marco
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http://www.positiveproperty.com.auSo Marc
you are going to by the building and lease it back to them at 12% with the option for them to buy it in 5 years, is that correct ?
So you will need a commercial loan and need to put in 30-40% and loan the rest is that right ?
on the surface it looks a good deal. But keep in mind that a lot of new business’s go bust in the first few years. This deal really depends on the quality of the business owners, do they know what they are doing ? have they ever ran a business ? have they ran a child care center ? do they have a business plan ? do they understand the regulations/laws relating to this business ?
My concern is- what is the situation if the business fails ? You have bought the building at 300k (assume it is still worth that amount) but you have put 150k into converting it to a single purpose building (ie the child care centre) you may risk loosing this improvements ?
just something to consider
all the bestregards westan
Hi Westan,
thanks for your feedback, yes you’re spot on re the lease option. I’ve been mulling this over and your comments are in line with my conclusions thus far. I’ll get back to the couple and see if we can make the deal a lttle more standard. I’ll check up on the other points as well.
Enjoy your weekend!
Marco
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http://www.positiveproperty.com.auMarco, isn’t it business owners who refurbish buildings to make it up to standard for themselves generally?
RE Child Care, I would definitely check if they have everything in place – approvals and standards are extremely stringent. If they have, then it might be a goer, and even if they fall over, there is always massive demand for childcare places, so someone may take it over – ABC (he’s on the Rich 200) own a ton of centres around the country – not that I would put my kids in them, they’re more out to make money than to keep the kids and staff happy. there’s quite a few loopholes I have found out – how a childcare centre can make almost double the money that it should – LEGALLY!!
Cheers
MelCheers Mel!
I’ve definately got more info now than what I knew about before. Appreciate everybody’s comments.
Yea, usually the lesee does foot the bill for reno’s, however if this were a standard deal I supose they would not have approached me in the first place, but thanks for picking up on it
Has anybody had experience with the childcare industry, and if so can you tell me more about it? For example, is there a governing body aside from relevant legislative requirements?
Cheers,
Marco
Get more out of Renting!
http://www.positiveproperty.com.auMarco, there definitely is, but I cannot think who it is at the moment. I’ll ask my Mum – she worked in Childcare centres for 15 years, that’s how come I know as much as i do (which isn’t really much![biggrin])
Do a search on google, or one of the gov websites – there is one that aggregates them all, but I can’t remember it….
Cheers
Mel
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