Residential Or Commercial - Which is right for you?

[Rosco]

Commercial property to me is all about the tenant. If you have a good tenant, then you have a good property. If you have a bad tenant, then they could stop paying rent or move out, which means you have a bad property that might cost you thousands.

To me the ideal commercial property scenario is where you find a good, solid tenant. Then find an empty building that you can buy that suits their purpose. Sign them up as a tenant, then go unconditional on the building. By doing this you often get a great initial gain, maybe 1.5 times (ie purchase for $1 million, but tenanted worth $1.5 million), and also the cashflow should repay the debt over 10-12 years. Hopefully the mortgage is repaid by the time the tenant moves out, which gives you a debt free property which is less risk as less costs going out if empty.

Ross

[Davo36]

Ross, I disagree with your first paragraph, and I'll explain why. The second paragraph is correct - but it's like saying buy a house for half it's value - everyone's trying to do it and basically very few people succeed.

Tenants are basically not important, the building is, and so is the amount of rent they're paying. This is because most leases allow tenants to assign their lease. So you could buy a building with a very large international company occupying it, thinking to yourself, wahoo, these guys are really stable. And 2 days later, they could move out and assign it to a local mum and dad company. And as the landlord, there's nothing you can do about this. As long as the new tenant is of good standing and is undertaking the same or similar business, you can't refuse the assignment.

So what you need to be very sure of when you buy a commercial building is that it can be rented time and time again, easily, for the rent that you are currently getting. So for instance, say it's rented at $50,000 plus GST plus expenses. If you lose the tenant, you want to be comfortable that you can rent it again, relatively quickly for at least $50k. THIS IS THE MOST IMPORTANT THING ABOUT COMMERCIAL/INDUSTRIAL PROPERTY I RECKON.

Taking this argument further, what you actually want to do is buy an under rented building. So for instance the tenant is paying $50k per annum, but it's really worth $75k. Then when the tenant leaves, or the next rent review comes around, you raise the rent to the market value i.e. $75k and you've just made a few hundred thousand dollars... And this is doable.

But to be able to do it, you need to know what rental rates should be for the properties you're looking at. And this just comes with experience. You also need to buy a building that is easy to lease. So it needs to be in a good position, have good car parking, be attractive, appeal to a variety of businesses etc.

So it all comes back to the rent and the building IMHO.

[Rosco]

And as the landlord, there's nothing you can do about this. As long as the new tenant is of good standing and is undertaking the same or similar business, you can't refuse the assignment.

But to be able to do it, you need to know what rental rates should be for the properties you're looking at. And this just comes with experience. You also need to buy a building that is easy to lease. So it needs to be in a good position, have good car parking, be attractive, appeal to a variety of businesses etc.

In your first part, there is something you can do as a landlord, and most landlords do it. The first tenant is still guarateeing the rent, so if the tenant they have assigned the rent to doesn't pay, then the landlord can chase the original tenant.

There are lots of empty buildings in Hamilton, that are a great location, reasonable carparking, quite attractive, appeal to a variety of businesses and available at reasonable rental rates. So having all the factors you state hasn't helped a lot of Hamilton commercial landlords. The problem for them at the moment is that there are more buildings than tenants, so that tenants can be very picky. Also a lot of commercial tenants want to buy their own property.

Ross

[Davo36]

Yep the tenant is required to guarantee the rent if they assign to another business. But what do you do if the new tenant is behind by 2 weeks? 4 weeks? 6 weeks? Ring up the original tenant and demand payment? What if they say no? Or tell you to try harder with the new tenant?

I've been in this situation and basically the old tenant just doesn't want to know, they certainly don't care. They hope that you will get sick and tired of the new tenant and kick them out, cancelling the lease, thus letting them off the hook. So what this means is that you then have to sue them to get them to pay up. In the meantime the new tenant has buggered off, leaving the place empty and in a mess. If you then find a third tenant to take the premises, you can then only chase the first tenant for the amount owed from when the tenant they assigned to left to the point when the new lease with the 3d tenant commences. And it is almost certainly not worth it to do that - unless it's a very big tenancy.

So what I'm saying is that even though technically they are liable, getting any real money out of them without spending a fortune on lawyers fees to do so may be very hard. if you're Bob Jones you'd do it because a) You can afford to, b) The amount owed is likely to be substantial and c) You're not going to let some tenant get away with owing money! But for your smaller investor, what you end up having to do, is find a new tenant, sign them up and start from scratch.

Secondly, regarding the issue of lots of empty buildings in Hamilton. Well by position I also meant location. You'd have to be pretty dumb to buy commercial property in Hamilton unless you were getting an absolute bargain. Why? Because it's hicksville, that's why. Any commercial investor with any brains would only invest in the main centres. And even then, really only Auckland and Wellington. Other spots are basically for hobbyists because you're never going to make any money there.

Of course if there's a major downturn like there was in 1987, then all bets are off. There will be lots of vacant space up and down the country, so then it's up the landlords to get creative and find tenants by any means possible. Some of them even started up their own businesses to fill their properties!

[SwissKiwi]

Hello lads - surely a clause can be added that assigning of a lease is subject tn the approval of the landlord?
?
or is it the old 'shall not withhold without good reason' situation? -

[Tan]

Hello lads - surely a clause can be added that assigning of a lease is subject tn the approval of the landlord?
?
or is it the old 'shall not withhold without good reason' situation? -

Yes, it is worded as 'without good reason'

[Tan]

yeah i've noticed too that retail and office commercial properties have been more empty recently. Industrial commercial property could possibly be better to invest in, no?

Industrial traditionally makes it through downturns better.

[SwissKiwi]

Yes, it is worded as 'without good reason'

Thing is - why not reword it and just say 'at the landlords sole discretion'

[Davo36]

SwissKiwi, yep you can put anything you like in an agreement really.

But of course you have to get the tenant to agree to it.

So while you there's nothing to stop you from putting something like that in a lease (or rather, removing the existing right to assign), many tenants would just not agree to that.

They're signing up for maybe 6 years on a place, anything could happen in that time. They or their partner, or children could get sick, their business could go down the tubes, they could get a better business idea they want to pursue and so on. So many people like to have this 'out'. And I can just hear the solicitors acting for the tenant telling them not to give up their right to assign the lease...

Having said that, I imagine there are cases where it is done. This would be where it's a very large tenant commissioning a new building, or a very specialised building and/or fitout. Or something like that where the landlord is going to a lot of trouble to secure a particular tenant and doesn't want to be left holding the baby should the tenant want out.

[InvestmentGuru]

Start young that's what everybody says... residential first, learn the laws and rules, follow and then grow

here we come commercial.

[mattinvestor]

I would think that it would be best to buy a residential property, and try to flip it. If all goes well, you could put the house back on the market & profit from it.

[mattinvestor]

Well, for me, I have not seen too much improvement with the residential real estate market. On the other hand, it seems that commercial real estate has hit it bigger than ever. What do you think is better? I think it’d be better for me to invest in commercial.

[JonnoM]

Given the fact that you can better leverage your money with residential and it is easier to learn, this is often best for beginners.

Comm/Ind property can provide fantastic returns for those who have a lot of capital, and for those who know comm/ind property very very well. A mistake in comm/ind. can be VERY expensive.