Can Someone Teach me the Basics of Commercial Property?

[ENP]

I'm in the Auckland area. Live between Wiri in Manukau and Takapuna on the Shore.

I'll buy you lunch.

Preferably someone who owns a few commercial properties in Auckland.

[Orkibi]

There is a great book by empower education you can buy for around $30 which would teach you all the basics and more. Good read and its less then lunch and more then what you would learn in an hour chat with someone.

[Rosco]

main difference between residential and commmercial
- Residential is all about the property, the location etc
- Commercial is all about the tenant, the rent paid

Ideally you would jack up tenants, and have them signed and sealed, then buy an empty commercial building to move them into. Great way to gain equity, but quite hard to actually do.

Having multiple tenants in the one building or block reduces your risk.

If you are buying already rented commercial
- How safe are the tentants?
- if they go bust, would it be easy to replace them?
- How many years to go on the leases?
- If buying from a developer, make sure the rent is market rent and actually being paid. ie joe bloggs rents for $20k, but developer is renting the building and paying himself $30k to make the building worth more.

Ross

[Rosco]

If buying a commercial I look for a 10% return on cost in main city.

So buy empty for $1 million or build for $1million, then tenant pays $100k.

Valuations vary, but might be 7.5% ROI, so therefore worth $1.5 million.

Cashflow pays for expenses, and paying off loan. Nice $500k increase in equity in this example or 1.5 times

Ross

[ENP]

There is a great book by empower education you can buy for around $30 which would teach you all the basics and more. Good read and its less then lunch and more then what you would learn in an hour chat with someone.

This one?

http://www.empowereducation.com/products-page/books/commercial-real-estate-investors-guide/

[Orkibi]

Yes it has all the basic and more.. Some good tips too.

[Rosco]

I'm in the Auckland area. Live between Wiri in Manukau and Takapuna on the Shore.

I'll buy you lunch.

Preferably someone who owns a few commercial properties in Auckland.

Hi ENP,

I still like your idea of talking to other commercial property investors.

Hamilton used to have a commercial property investors meeting every 2nd months, and maybe Auckland Property Investors has something similar!

A book can help you, just watch if it is out of date.

Ross

[Glenn]

I understand what you are asking and wonder ....
I do the full range residential houses, blocks of flats, retail, industrial, warehouse with show room, and multi story offices in Wellington CBD.

To provide an intelligent answer to you by me or anyone else you have to say why you are asking.
Like are you saying to yourself can I make more money doing commercial.

[Davo36]

Rosco and I differ on what makes a good commercial property investment:

1) If you don't have a lot of money, or a really high income, you can't do the buy vacant, fill up idea he likes.
2) Even empty buildings are selling for heaps these days, so once again, the buy vacant, fill up idea doesn't pan out. Owner occupiers are paying more than investors in most cases just now.
3) This bit is nonsense:

- Residential is all about the property, the location etc
- Commercial is all about the tenant, the rent paid

4) What IS important is the property itself, the location etc.: Tenants come and go. If they do well they often move to bigger and better premises, if they do poorly they go broke. What you must have is a property than can be leased again and again to a wide range of tenants for the same rent or more as you are currently getting.

All the best ENP.

[Glenn]

Davo36 you are touching on what I was getting at.
Anyone asking about commercial should not be fed stuff that will make them stuff up.
Who on earth would start out with a punt unless you are a developer / builder.
As a few people out there keep repeating developers always go bust.
I have been gazing at my navel recently and wonder how I got to where I have without doing anything very clever. In hindsight I would have done a lot of things differently. Looking back I still do not think I could have known what the market was going to do capital gain wise and rent growth wise. But even more so I do not think what I and everyone else has experienced over the last 20 years will pan out like that in the next 20 years.
So giving someone some keys to the monster machine will not really get them to where they want to be in the future.

[Rosco]

Rosco and I differ on what makes a good commercial property investment:

1) If you don't have a lot of money, or a really high income, you can't do the buy vacant, fill up idea he likes.
2) Even empty buildings are selling for heaps these days, so once again, the buy vacant, fill up idea doesn't pan out. Owner occupiers are paying more than investors in most cases just now.
3) This bit is nonsense:


4) What IS important is the property itself, the location etc.: Tenants come and go. If they do well they often move to bigger and better premises, if they do poorly they go broke. What you must have is a property than can be leased again and again to a wide range of tenants for the same rent or more as you are currently getting.

All the best ENP.

I see lots of great properties, that are in great locations, that are empty!

Ross

[Davo36]

I see lots of great properties, that are in great locations, that are empty!

Ross

Yes and you've said that before too.

Not sure how to explain it any better... but I'll try:

- This is in Hamilton right? The CBD often has a really high vacancy factor, not sure why. Just seems to be too much property available compared to the demand for it. To make things worse, developers are building heaps in Hamilton right now. Are these empty properties showroom type ones? Or office premises? Or retail?

- So as an investor you'd just stay away from areas like this.

- Even good properties can sit vacant for say 6 months, even in good areas. This, to some extent, is the nature of the beast. The only things that one can do about this is a) Have a property that suits a variety of tenants and b) Have multiple tenancies. Offices are the worst in this respect. Shops and factories tend to be a big rectangle of some size with some offices down one end. So they tend to be able to be used by anyone looking for something around that size. Whereas offices are all partitioned up into differing numbers of rooms, size rooms etc. And people don't want to wait for them to be shifted - so they just keep looking until they find one that is close enough. And because there's usually lots of office tenancies available at any given time. This is anywhere in the country. So incentives etc. have to be offered which is a real pain as landlord.

- So as an investor you'd probably stay away from offices unless you really know what you're doing and have deep pockets like Bob Jones.

- Also, if you have noticed that leasing good properties is difficult in your area, why would you recommend buying a vacant one and tenanting it?

So ENP, someone like you should probably start off with a small, leased factory/warehouse unit. They're the easiest and cheapest to maintain, and the easiest to lease I would say.

[Glenn]

So ENP, someone like you should probably start off with a small, leased factory/warehouse unit. They're the easiest and cheapest to maintain, and the easiest to lease I would say.

The problem with small leased industrial properties is there has been terrible capital and rent growth over the last decade.
Again like you alluded to in an earlier post they are now dominated by owner occupiers which has messed up some of the basics.

Now sure industrial is the path most people follow as their first step but really the small ones can be a complete pain. It is hard work making money these days out of fixing cars, welding, and what ever.
Now sure the small retailers have been hammered by the destination malls and so forth but I think retail investments / food still have some life left in them.

Re your comment about Bob and office blocks. I know the feeling. A share of 14 floors in Manners street with iconic tenants and help we lost 7 floors. At least we got them all let then the ground floor retail went into receivership. Then the bank wanted some principle paid. That investment started out at 12% Net return and now the tap has been turned off for three years.
So I say fair enough to talk up your industry but there are reasons at times to stick to residential.

Thus said my 10% + net return over the portfolio over a couple of decades has been better on my wallet than residential sure and steady.

[ben9465]

I have experience in buying one industrial property. I bought a warehouse of an industrial paint company in Christchurch in 1998. I bought it from the company who had built it to there own specifications and leased it back to them on a 10 year lease . It cost $180 000 and rent was $18 800 I think about a 10.8% return net. I owned it 10 years and extended it twice for them, once to give more warehouse paint mixing area and once to give more office space(costing $60 000 in total) Each time the rent increased to give over 11% return on the additions. I got the lease renewed to a new 10 year lease when I did the office extension. I sold it just over 10 years After I bought it for $484 000. I never got one phone call to do fix anything in 10 years.

The key things I learnt were
1/ lending . In 1998 the banks would only lend 50% of value, interest rate was residential +2%, Principal had to be paid back over 10 years
2/ The Tenant pays rates ,insurance, minor repairs etc, there was no need for management just organizing reimbursement for insurance etc.
3/ It was unique in that it was a small property with the local arm of an international company who could not move out to another industrial unit because of regulations relating to the storage of highly flammable products.
4/ All the other small type industrial units that I looked at have changed tenants many times. I assume they have periods if vacancy , leasing costs etc that diminish the returns.
5/ My building was located in a secondary industrial area that Christchurch investors did not like . My building sat on the market for 2 months before I bought it. The owners wanted a bit much for the area it was in.
6/ Rental growth was non existent for the first 6 years (excluding the additions). At %11 return this didn't worry me.
So I was very happy its value doubled in 10 years and netted me 11% which subsidized my residential loss makers. And not one leaking tap complaint. Regards Ben

[Glenn]

I have experience in buying one industrial property. Ben

Thanks for sharing those facts Ben. So for the benefit of those who wish to start out.
Do you regard your outcome pure luck, skill, or what most people should expect when dipping your big toe into the dangerous muddied shark infested waters of commercial.

Glenn