Looking to Purchase a building in Frankton

[QRM]

Hi, we love residential and haven't purchased any commercial and to be very honest we know next to nothing about commercial investment. The property is currently vacant and needs a really good pull-through. It is large and has really good car parking. We are now in a due diligence phase, what do we need to know? Happy to take advice from people with experience and knowledge. Thanks

[Beano]

Hi, we love residential and haven't purchased any commercial and to be very honest we know next to nothing about commercial investment. The property is currently vacant and needs a really good pull-through. It is large and has really good car parking. We are now in a due diligence phase, what do we need to know? Happy to take advice from people with experience and knowledge. Thanks

Have you found a tenant for the building ?

[Scouser]

Hi, we love residential and haven't purchased any commercial and to be very honest we know next to nothing about commercial investment. The property is currently vacant and needs a really good pull-through. It is large and has really good car parking. We are now in a due diligence phase, what do we need to know? Happy to take advice from people with experience and knowledge. Thanks

Very much a 'it depends' answer. I own a small commercial property in Frankton and it seems a decent area and appears to have low vacancy rates, good road access, parking and plenty of other small commercial properties - all good things. Recent lease finished and it didn't take too long to get a new tenant on a significantly increased lease value though I'm not convinced property values are going up a lot as (unlike Auckland) it's not that difficult to add commercial properties to the Hamilton area I believe. However, yields are decent and any property should be cash flow positive even on high gearing.

Have you checked out the property web sites to see what's leasing/selling and for what at the moment? Trade Me/Real Estate web sites.

However, it is also dependent on the nature of the particular property. How large? What are you to configure it as? Office, Light Industrial etc.? I would avoid retail personally. Have you considered delaying fit out and doing it with your new tenant as they frequently want changes for themselves? I'm assuming you're purchasing as an investment. What part of Frankton? How good is road access? etc. etc. Just because an area is OK does not mean the particular property is OK. Also the standard checks - NBS? Any compliance issues? etc.

[Rosco]

V However, yields are decent and any property should be cash flow positive even on high gearing.

Just wanted to discuss this point.

Buy at say $1,000,000, 8% yield which I presume you would say is OK? $80k rent plus opex, GST.

Mortgage 100%, ie borrow all with security over other properties. Even at 15 years, repayments are $95,000 at 5% interest.

Plus would be a profit so tax to pay.


So why do you say, it would be cashflow positive? I think cashflow is one of the biggest issues with commercial property as you need to repay the loan quicker than residential, and normally banks require 10-15 year repayments.

Ross

[Scouser]

Just wanted to discuss this point.

...

Mortgage 100%, ie borrow all with security over other properties. Even at 15 years, repayments are $95,000 at 5% interest.

Ross

Either it's a commercial loan - in which case no way one would get 100% mortgage - so more like 65% max or it's using residential property as guarantee in which case there is no requirement to pay off over 15 years. I was working off the assumption it's a commercial loan on its own right. I suppose one could get to 100% by using other commercial equity but then one would need to keep to the ~ 65% max across the multiple properties and the equation about cash flow would be the same as I presume the other property(ies) would also have income.

[Rosco]

Some banks will go 100% to owner occupier for commercial

If have other commercial, then you are losing some of their cashflow to fund the new one. So still not cashflow positive

If 35% from residential
650k from commercial - total payments $61,680 at 5% and 15 years
350k residential- 25 years at 4% = $22,164

Total repayments still $83,844
Tax approx $8k - estimated, but roughly right

Rent $80k
Total going out, just over $90k. Still $10k short.


Ross

[Scouser]

Main assumption was not based on 100% loan - you are correct as I was being lazy on the idea of a 100% loan calculation and didn't check my numbers. Out of interest what would be the principal repayment over a year on the example above?

[Rosco]

Lots - $46k was interest so about $38k was principal.

Not saying the profit is bad, just that the cashflow can be a pain as all the cash goes to mortgage repayments, plus often short and then there is tax to pay.

If you have $350k of real cash, fine. But most people don't have cash and they are borrowing on something else.

Ross

[QRM]

Thanks Rosco, Scouser and Beano, we will check to see what percentage the bank will give us and see what the refurbishment will cost before we can crunch some numbers. I understand value of a commercial building is often dependent upon the lease, however, I believe a tidy up before leasing would be beneficial (if we did go ahead with the purchase). Once again, thanks for your comments.

[Scouser]

Out of interest was approached to see if I wanted to sell property (as I mentioned I might sell when it was vacant last year). Better price than I expected was mentioned and also did a very short check with another real estate agent and feedback was not a lot available under $1m and yields were being pushed down even further (and thus prices increase) because interest rates look to drop. Must admit I thought we had hit bottom on decreasing yields.