Hi all,
I am new to investing in commercial property (I’ll bet you’ve heard that one before). I have just found a commercial property for sale for $300,000 – nett annual return $30,000. I’ve contacted the agent and the only cost relevant to the owner is insurance at $1,000 p.a.
The rural town this property is located in has a population of over 5000 in the town and 15,000 in the general area (this figure also includes 2 other smaller towns). There are also a couple of housing estates “happening” in the area.
The tenant (a “no name” physiotherapy) signed a 5 year lease in Sep ’09.
So I guess, thought? Comments? Suggestions? VERY open to any feedback.
seems expensive commercial property in town of 5000
you probably can get a house with yield 9-10% in 5000 populationRates of return on commercial property vary widely ie I'd be expecting around 12-13%+ net for rural industrial property whereas it would be slightly less for retail (9-10%+) and somewhere inbetween for office space.
You will need to pay some consideration to the size of the property (nett lettable area) and hence the net rent $/m2. If the rate looks high, it is probably unsustainable (something stinks), if the land value looks high (after deducting the building cost), something stinks.
Do your thorough due diligence.
What happens if the physio goes bankrupt and you cannot find a new tenant? Rural towns are very risky.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Rural towns, usually long vacancy periods between commercial tenants.
Hope you don't mind my posing some questions to point out vital areas.
How many physiotherapy practices in the town / at the hospital ?
How many doctors ?
How far to the next physiotherapy practice ?
Why would the physio want to stay there and not some other premises in the same town ?
How long has the physio been practising in this town ? Anywhere ? Where before, for how long, why left ?
How many other suitable alternative physio premises are there in town ?
Go ask the chemist who are the good physios in town, you have a sore shoulder.
cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
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Scott No Mates wrote:Rates of return on commercial property vary widely ie I'd be expecting around 12-13%+ net for rural industrial property whereas it would be slightly less for retail (9-10%+) and somewhere inbetween for office space.You will need to pay some consideration to the size of the property (nett lettable area) and hence the net rent $/m2. If the rate looks high, it is probably unsustainable (something stinks), if the land value looks high (after deducting the building cost), something stinks.
Do your thorough due diligence.
Hi Scott No Mates
We have been in communication before …I'm also interested in buying a commercial property (this would also be a first). This one is in a big city prestigious building in a premium location and the cost is around $2m with a net yield of 9.5% which appears to be in the target area you have suggested. Based on the figures I have to date I'd appreciate your comments:
Part of the building for sale is 4 storeys with a basement, ground floor and 2 storeys up top. The total space is 536sq m comprising of ground floor (retail Govt operation 5 yr lease) 100 sq m (rent $63k), basement 140 sq m (rent $37k) with 2 years lease remaining (internet cafe business) and 2 top floor office spaces …295sq m (a Council reporting to Govt) has 2.5 years remaining lease (rent $116k).
So the total income is $216k and outgoings are $30k. They have all been long term tenants and the property is in excellent condition (so I'm told and will see tomorrow).
I can borrow the lot for this purchase at 7.61%…..so on paper I'd be making 1.89% per annum (net $37k). All have 4 or 5% fixed rent increases per annum over the term of the respective lease.
I'd appreciate your comments on whether you think this seems to be a good investment….I think so myself but as I'm really only experienced in residential investments I need feedback from those of you in the know. Am I right to assume that capital on commercial rises at least as fast as it does on residential properties or is this not necessarily so.
Also when you talk of due diligence ….who do I get to do it?????
Cheers
CarpeHi Carpe,
Due Dilligence – this is the investigations that you do (either yourself or through your consultants) to satisfy yourself of the nature of the investment.
In this case:
Solicitor (or property consultant who has a great understanding of commercial/retail leases)
Building Inspector/Engineer – to alert you of any structural or compliance issues (this may also include getting a report on building services eg airconditioning, electrical, telecoms, fire services water, etc)
Town Planner (possibly) to check compliance/development potential)
Conveyancer/Solicitor to review the Strata Plan & transfer of the propertyYou will also need a copy of the leases, a lease expiry profile etc to assess cashflow and risk (planning for vacancies/vacancy factor and required upgrades that may impact on availability of the tenancies).
Hi Buyseller.
You can get 9% returns in the Tuggerah Business Park, Central Coast…
As many people have mentioned above, i would be very hesitant to buy commercial property in a town of 5000.
Matt
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