All Topics / Commercial Property / 7% Return for Perth (Subi) Strata Title Office???

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  • Profile photo of investininvestin
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    @investin
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    I have never been near Commercial Property however when I see a Strata Title office for $575,000 (No GST applicable – to be sold as a Going Concern) with an annual income of $40,790 the return is a lot more impressive.

    The property is located in a prominent inner suburb of Perth in a busy area with good surrounding tenants.

    What kind of closing costs should be allowed for a commercial acquisition and what would be the financing requirements?

    Any other comments in regard to it being a Strata Title?

    Profile photo of Scott No MatesScott No Mates
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    there’s plenty of properties returning good yields. Check your pm’s

    Profile photo of Marie123Marie123
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    SNM

    Are you speaking about Perth specifically?

    Cheers.

    Profile photo of Scott No MatesScott No Mates
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    @scott-no-mates
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    These deals & much better are available in most capital cities, esp Sydney, Melbourne etc. East coast is probably a little less exposed to volatile markets & the resources boom. Pm for more or clicking on the blog link below.

    Profile photo of Michael 888Michael 888
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    @michael-888
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    Depending upon wording of lease, strata costs should be borne by the tenant. your closing costs should
    be as with any other resi IP. Stamp duty, legals and other sundry title fees. Stamp duty on mortgage and
    commercial fees (assuming you're using the comm asset as security) for borrowing usually have higher
    establishment loan fees and of course a higher interest rate. Check with your lender or MB.

    7 % is OK but not that special. I look for higher yields than that to hedge the higher risk with commercial assets.
    Check if all outgoings are paid by tenant including land tax (portion on single holding basis) and usual DD with lease, rent reviews, car parking, etc.

    SNM, I have PM'd you also.

    Profile photo of Scott No MatesScott No Mates
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    Thx Michael, check your inbox.

    Profile photo of tjunctiontjunction
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    Hi Scott No Mates,
    Can you PM me RE properties returning good yields too.
    Cheers, Toby

    Profile photo of Mick CMick C
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    @shape
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    investin wrote:
    I have never been near Commercial Property however when I see a Strata Title office for $575,000 (No GST applicable – to be sold as a Going Concern) with an annual income of $40,790 the return is a lot more impressive.

    The property is located in a prominent inner suburb of Perth in a busy area with good surrounding tenants.

    What kind of closing costs should be allowed for a commercial acquisition and what would be the financing requirements?

    Any other comments in regard to it being a Strata Title?

    7% is nothing special for commercial property…unless this is located in a very good location and chances of long term vacancy is low??

    Just be aware;
    1. interest rate for commercial deals is around 8.5-10% so this will eat into any returns at 7%
    2. There are a lot more fee’s involved + vacancy problems
    3. Strata is alwasy a lot higher compares to resi
    4. Insurance, maintenance and agent fees are all higher.

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
    Email Me | Phone Me

    Same Banks. Better Rates. Served With a Passion.

    Profile photo of Mick CMick C
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    @shape
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    In terms of financing…
    Commercial lending is very similar to residential lending, with only a few pitt falls to avoid + a few tricks to execute.
    In fact, a few lenders uses the SAME form or similar form for the commercial and residential lending.
    Main differences: Points the lender will look at;

    1. Rate is higher – starts around 8.5% variable ( not intro)

    2. Rental income is accepted at a certain % and it’s case by case …depending on the business your buying.
    – example-
    – Rental income from a shop front ( currently a bakery) – will take around 70% of rental
    – Rental income from a Office ( currently rented to a accountant) located in CBD – wil take up to 90% of rental
    – Empty shop front- will take 30% of potential rental
    The trick here is HOW you PRESENT the loan, very important.

    3. The security on offer; if your willing to use a residential property as 2nd security then rate would drop close to residential rate ( 7.15-7.8%)

    4. Lease term- How many more years are left on the lease and what sort of lease is it.

    5. Zoning – what uses does this property have?? can it be a car-workshop etc…
    Normally Mixed zones are the simplest to approve.

    6. Experiences. Depending how big the loan and deal is…the bank may only lend if your have experience or some sort of banking ( strong financial) for commercial deals. – But in your case, since the loan is under $500k this is not going to be a problem.

    In term of deposit; LVR must be under 80%, preferred to be under 65% LVR ….UNLESS you have another security for the lender to fall back on; can even be a 2nd mortgage ( ie no need to refinance to them)
    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
    Email Me | Phone Me

    Same Banks. Better Rates. Served With a Passion.

    Profile photo of Scott No MatesScott No Mates
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    tjunction wrote:
    Hi Scott No Mates,
    Can you PM me RE properties returning good yields too.
    Cheers, Toby

    Hi Toby,

    please turn on your PM's or send me one so I can respond.

    SNM

    Profile photo of Alistair PerryAlistair Perry
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    Hi JD,

    The info you have given isn't nearly enough to make even a guess at whether the property you are talking about is a good investment. Some considerations that would come into any decision would include:
    1. Is the current lease above or below market
    2. How long is it for
    3. Who are the tennants and are they good quality
    4. What is the security on the lease
    5. What clauses are their in the lease regarding escalations
    6. How old is the building
    7. What expenses does the land lord have to cover
    8. What is the condition of the building

    There are plenty more.

    Regards
    Alistair

    Profile photo of MosquiMosqui
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    @mosqui
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    Scott, can you send me the info too.

    thanks

    Mosqui

    Profile photo of investininvestin
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    @investin
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    APerry wrote:

    Hi JD,

    The info you have given isn't nearly enough to make even a guess at whether the property you are talking about is a good investment. Some considerations that would come into any decision would include:
    1. Is the current lease above or below market
    2. How long is it for
    3. Who are the tennants and are they good quality
    4. What is the security on the lease
    5. What clauses are their in the lease regarding escalations
    6. How old is the building
    7. What expenses does the land lord have to cover
    8. What is the condition of the building

    There are plenty more.

    Regards
    Alistair

    Alistair,

    Without having carried out any proper due dilligence as this was an example only, I can tell you:

    1. The lease is at market
    2. 2 year term with 2 year options
    3. Publicly listed natural resources company with strong financials
    4. Unsure
    5. Rent reviews annually
    6. Less than 5 years old
    7. Outgoings/GST payable by lessee
    8. Excellent condition and well maintained with good tenants

    When carrying out due dilligence on a commercial property is it typical to obtain the lease terms, etc when dealing with the agent (i.e upon expression of interest)?

    Profile photo of Scott No MatesScott No Mates
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    yes it is jd, how do you know what you are getting without the lease?

    Profile photo of Alistair PerryAlistair Perry
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    @aperry
    Join Date: 2004
    Post Count: 891

    Hi JD,

    I don't know what standard returns are on offices in Perth CBD at the moment. I'd suggest what you are looking at is a little low. The Perth office market is highly volatile, vacancy rates went from basically 0% to around 10% when the financial crisis hit and prices plumeted. It seems to have largely recovered now, but you would probably want a significantly higher return to buy over there as compared to buying something in Melbourne, which is a much more stable market. Having said this, everything else looks OK. I don't like tennants having options personally, its great for them but does nothing for you and 2 years is not very long.

    With regard to security on the lease, absolutely they should tell you what this is. Is it guaranteed by a $2 shelf company or the publicly listed entity. If there is a bank guarantee or cash in a trust account this is even better. The lease is only as good as the security against it, same as a loan, you don';t want it to be an option for them to walk.

    Regards
    Alistair 

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