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industrial RE number crunching

Discussion in 'Real Estate' started by Jen, 8th Jan, 2006.

  1. Jen

    Jen Member

    Joined:
    21st Oct, 2005
    Posts:
    23
    Hi Everyone,
    I hope this request isn't too simplistic, but would someone mind advising me on how I go about crunching numbers when looking at industrial sheds?
    An example I looked at is: asking price $115K + GST. Rented @ 135/week with 18mths to go (rented to a relative of previous O so not sure about any contracts - certainly only for 18mths at this stage) The factory is strata titled with $1000 BC fees/yr which includes insurance. The shed is easily rentable and may attract slightly more rent.
    At this stage, I'd like to learn how to work out if a deal is going to put cash in my pocket so that I can have an idea of what is my acceptable offer price, but I have only ever dealt with residential RE & don't understand commercial/industrial investing.
    Any help is very much appreciated
    Jen
     
  2. gekko_99

    gekko_99 Member

    Joined:
    31st Dec, 2005
    Posts:
    7
    Jen,

    This would be the way that I would attack it:

    Gross Rent $7,020

    Less Non Recoverable Outgoings
    Land Tax $0
    Council Rates $0
    Body Corporate $1,000
    Repairs & Maintenance $0

    Total Outgoings $1,000
    Net Annual Income $6,020

    Asking Price $115,000
    Yield % 5.23%

    The return looks a bit tight but maybe its under rented. If your borrowing $115k at 7.0% then your out of pocket 1.77%.

    Make sure the rentals are market value otherwise adjust for this on lease expiry (rental shortfall per mth x no. mths to expiry).
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Jen

    Be sure from your financier first about what LVR they will allow for an industrial shed in that area. Remember one of the greatest benefits of real estate investing is the extent of borrowing that you can get. If the best LVR the bank will give you is 60% or less and there's a high vacancy risk then maybe you'd be better of with some high yield shares/fund/property trust and a margin loan than this fairly low yield.

    Building on gekko's comments, at the risk of telling you how to suck eggs :p investing is all about pricing risk. To me the return seems too low to justify the risk (i.e. the variability of return).

    Just my 2.2 cents worth.

    What do others think?
    N.
     
  4. Jane

    Jane Active Member

    Joined:
    16th Aug, 2005
    Posts:
    36
    Hi Jen

    Ask the agent what capitalisation rate they are using. This determines the yield and, in commercial real estate investing, this determines the price. Do some research with other agents and ask their opinion of what cap rate to use. The higher the cap rate the riskier it is. I believe that lenders will also want to see your figures on this.
    Having said that, in discussions with others, the commercial cycle is at the end of the cycle, ie prices have peaked so it might be worthwhile hanging on for a while.

    Other questions as per usual: what else can you do with the property? Subdivide, change of use.?
    Is it in like minded area, amongst other industrial properties with good access and facilities?
    How much competition is their in the area from other landlords of similar types of properties?

    Just a few quick notes that I hope help you.


    Jane
     
  5. Jen

    Jen Member

    Joined:
    21st Oct, 2005
    Posts:
    23
    Sorry guys not to reply. I naively thought that no one replied to my post because I didn't get the e-mail I'm used to with Somersoft!
    thank you all for your advice. The return is low. I like this area as although it is a small town of about 7000, it is booming residentially and there is already high demand for rental of industrial sites as they are in short supply. Because they are fairly affordable, I thought it may be a good area to dip my toe in and learn about this type of RE but I also don't want to get burnt (obviously)
    How can I learn about this style of investing? Are there any particular books or web sites?
    thanks again,
    Cheers,
    Jen
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
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    Location:
    Sydney, Australia
    Jen - you need to turn on automatic subscriptions in your user control panel - look in the options section. I've now set this to be on by default for all new members, but existing members will need to turn this on themselves.
     
  7. Jacque

    Jacque Team InvestEd

    Joined:
    16th Jun, 2005
    Posts:
    1,885
    Location:
    Sydney
    Hi Jen
    Try Roth and Lang's HOW INVESTING IN COMMERCIAL PROPERTY REALLY WORKS and see how you go.
    Good luck!
     
  8. Jen

    Jen Member

    Joined:
    21st Oct, 2005
    Posts:
    23
    thank you Sim & Jacque. :)