Buying Commercial Property
Discussion
Hi - Looking for some guidance on purchasing commercial property. An opportunity has arisen to purchase some commercial property that is currently on a 10 year lease to a business with a fairly healthy income. Having only ever worked with residential property I am struggling to find any details of the general LTV rate for mortgages.
Everything i find is for businesses looking to purchase their property to work in. Is anybody able to advise on this? Is it the same as BTL residential property where you need a 40 percent deposit etc.
Thanks!
Everything i find is for businesses looking to purchase their property to work in. Is anybody able to advise on this? Is it the same as BTL residential property where you need a 40 percent deposit etc.
Thanks!
Commercial lending is very normal - and LTV ratios typically reflect residential - it varies from product to product and also the perceived risk attached to the individual investment.
The answer is to talk to your local branches of high street lenders, its all pretty common fodder, they will probably direct you to one of the commercial team at a larger office (depending on where you are) and they will be able to tell you what products they have that may work for you. Rates are governed by the same things - term, LTV etc
However, expect product and arrangement fees, including valuation, to be a good chunk higher for a commercial property over a residential one (for example £1500+ rather than £500 for a valuation).
The answer is ring or talk to a banker in person. They will have products to help.
The answer is to talk to your local branches of high street lenders, its all pretty common fodder, they will probably direct you to one of the commercial team at a larger office (depending on where you are) and they will be able to tell you what products they have that may work for you. Rates are governed by the same things - term, LTV etc
However, expect product and arrangement fees, including valuation, to be a good chunk higher for a commercial property over a residential one (for example £1500+ rather than £500 for a valuation).
The answer is ring or talk to a banker in person. They will have products to help.
supercommuter said:
An opportunity has arisen to purchase some commercial property that is currently on a 10 year lease to a business with a fairly healthy income.
Residential - one tenant moves out, millions more are looking for somewhere to live.The state of the economy doesn't really affect the number of people looking for a home.
It doesn't matter if one residential tenant is a car mechanic and the next is an accountant.
Security of tenure is rare these days.
Commercial - one tenant moves out, where's the next one coming from?
The state of the economy has a huge impact on the number of businesses looking for premises.
If a car mechanic goes bust you'll never re-let the garage (or whatever) to a firm of accountants.
Does the business tenant have security of tenure? Do you care?
Ozzie Osmond said:
supercommuter said:
An opportunity has arisen to purchase some commercial property that is currently on a 10 year lease to a business with a fairly healthy income.
Residential - one tenant moves out, millions more are looking for somewhere to live.The state of the economy doesn't really affect the number of people looking for a home.
It doesn't matter if one residential tenant is a car mechanic and the next is an accountant.
Security of tenure is rare these days.
Commercial - one tenant moves out, where's the next one coming from?
The state of the economy has a huge impact on the number of businesses looking for premises.
If a car mechanic goes bust you'll never re-let the garage (or whatever) to a firm of accountants.
Does the business tenant have security of tenure? Do you care?
It is a warehouse style property with roller front doors with multiple car ramps etc that has been trading for some time. The business is well known. They have a 10 year repairing and insuring lease on it.
The nervousness around finding new tenants is what bugs me most....
As suggested previously i will call a high street lender and see what the mortgage options are.
Thanks both for your responses.
Security of tenure is a big issue as well as mentioned above.
However, to counter an above point - if its a sold property with a reputable tenant with a strong trading history, you're probably talking 7%-9% as a yield (hard to be specific without detail).
If its a solid investment it will generate interest - by all means offer right at the low end of your estimate, but don't offer half. That'll just piss people off - these guys aren't guessing when they set the price.
However, to counter an above point - if its a sold property with a reputable tenant with a strong trading history, you're probably talking 7%-9% as a yield (hard to be specific without detail).
If its a solid investment it will generate interest - by all means offer right at the low end of your estimate, but don't offer half. That'll just piss people off - these guys aren't guessing when they set the price.
supercommuter said:
Jockman said:
Another difference I found with commercial property is the valuation. Many are unique so it's a guess.
If you find one, offer half the asking price.
This one is up for £340kIf you find one, offer half the asking price.
It has been up for a while. £170k might be a bit cheeky!
Vocal Minority said:
Security of tenure is a big issue as well as mentioned above.
However, to counter an above point - if its a sold property with a reputable tenant with a strong trading history, you're probably talking 7%-9% as a yield (hard to be specific without detail).
If its a solid investment it will generate interest - by all means offer right at the low end of your estimate, but don't offer half. That'll just piss people off - these guys aren't guessing when they set the price.
Agree that this is more complicated than a straight purchase as there is a tenant. It would be useful to know the agent's valuation of the asset itself and how much premium is being added (if any) for the tenant in situ.However, to counter an above point - if its a sold property with a reputable tenant with a strong trading history, you're probably talking 7%-9% as a yield (hard to be specific without detail).
If its a solid investment it will generate interest - by all means offer right at the low end of your estimate, but don't offer half. That'll just piss people off - these guys aren't guessing when they set the price.
OP why has this property been on the market so long?
Vocal Minority said:
What's the income OP?
Interesting that its been around a bit if the income is solid, whats the location like?
£20k income so the yield at asking price is only about 5.8%Interesting that its been around a bit if the income is solid, whats the location like?
Edited by Vocal Minority on Friday 19th August 15:29
I was hoping to pay a lot under asking price to bring the yield up to around 7.8%
Area is a busy trading area. It is not isolated in any way.
ETA: I say it has been up for a while - by that I mean about a month. I am not in the position to say things like that i guess - as i don't know how long this type of property stays on the market for!
Wow - 5.8% is pretty strong! I assume it is a relatively modern unit in the south east from that description?
And 1 month is pretty fresh on the market.
They key to it is, if you want 7.5% - 8% so in the ball park of 240,000 - 250,000 or something like that - then put in an offer.
At the end of the day, you bid what it is worth to you - because always remember, you aren't buying a building, you are buying an income.
If 5.8% is rich for your blood, then don't offer it, find something else to invest in.
It's really easy to get suckered into a competition to 'win' and compromise on your ultimate objective
Let's put it this way: do you want that particular building, or do you want 7-8% on your investment.
If it's the former, consider stretching yourself. If you want the latter - offer that, and if someone else offers more - 'she aint wurf it bruv'
It's surprisingly easy to want the latter, but get drawn into a competition for the former the objective you actually isn't that interested in.
And 1 month is pretty fresh on the market.
They key to it is, if you want 7.5% - 8% so in the ball park of 240,000 - 250,000 or something like that - then put in an offer.
At the end of the day, you bid what it is worth to you - because always remember, you aren't buying a building, you are buying an income.
If 5.8% is rich for your blood, then don't offer it, find something else to invest in.
It's really easy to get suckered into a competition to 'win' and compromise on your ultimate objective
Let's put it this way: do you want that particular building, or do you want 7-8% on your investment.
If it's the former, consider stretching yourself. If you want the latter - offer that, and if someone else offers more - 'she aint wurf it bruv'
It's surprisingly easy to want the latter, but get drawn into a competition for the former the objective you actually isn't that interested in.
Also - as a little trick
When calculating a return, always factor in the SDLT and acquisition costs.
You want a return on every penny you spend.
So - as a worked example - you want 10% and there is a £20,000 income
So you bid £200,000 - but remember to take the legal fees say £5,000 and agents fees say £5000, and then stamp duty, which will be 2% of £50,000 - so say £2000 (it wont be exactly as it is based on what you bid, but just to demonstrate the point)
So to get 10% on £20,000 you need to actually bid £188,000...
The numbers will be just for example - and the maths isn't perfect, but it demonstrates the principal.
When calculating a return, always factor in the SDLT and acquisition costs.
You want a return on every penny you spend.
So - as a worked example - you want 10% and there is a £20,000 income
So you bid £200,000 - but remember to take the legal fees say £5,000 and agents fees say £5000, and then stamp duty, which will be 2% of £50,000 - so say £2000 (it wont be exactly as it is based on what you bid, but just to demonstrate the point)
So to get 10% on £20,000 you need to actually bid £188,000...
The numbers will be just for example - and the maths isn't perfect, but it demonstrates the principal.
Vocal Minority said:
Wow - 5.8% is pretty strong! I assume it is a relatively modern unit in the south east from that description?
And 1 month is pretty fresh on the market.
They key to it is, if you want 7.5% - 8% so in the ball park of 240,000 - 250,000 or something like that - then put in an offer.
At the end of the day, you bid what it is worth to you - because always remember, you aren't buying a building, you are buying an income.
If 5.8% is rich for your blood, then don't offer it, find something else to invest in.
It's really easy to get suckered into a competition to 'win' and compromise on your ultimate objective
Let's put it this way: do you want that particular building, or do you want 7-8% on your investment.
If it's the former, consider stretching yourself. If you want the latter - offer that, and if someone else offers more - 'she aint wurf it bruv'
It's surprisingly easy to want the latter, but get drawn into a competition for the former the objective you actually isn't that interested in.
Sound advice. I am chasing the yield not the building. It was a potential step into commercial property. I am unsure to be honest. It is a lot to have tied up in one business building. Although there is potential to turn it into smaller units in the future and increase yield further. There is also yard land as well....the more i say it, maybe i am chasing the building.And 1 month is pretty fresh on the market.
They key to it is, if you want 7.5% - 8% so in the ball park of 240,000 - 250,000 or something like that - then put in an offer.
At the end of the day, you bid what it is worth to you - because always remember, you aren't buying a building, you are buying an income.
If 5.8% is rich for your blood, then don't offer it, find something else to invest in.
It's really easy to get suckered into a competition to 'win' and compromise on your ultimate objective
Let's put it this way: do you want that particular building, or do you want 7-8% on your investment.
If it's the former, consider stretching yourself. If you want the latter - offer that, and if someone else offers more - 'she aint wurf it bruv'
It's surprisingly easy to want the latter, but get drawn into a competition for the former the objective you actually isn't that interested in.
I am going to sit and have a think. Thanks for all the advice!
ETA: Modern in South West. The rent is a little low if you ask me.
supercommuter said:
Sound advice. I am chasing the yield not the building. It was a potential step into commercial property. I am unsure to be honest. It is a lot to have tied up in one business building. Although there is potential to turn it into smaller units in the future and increase yield further. There is also yard land as well....the more i say it, maybe i am chasing the building.
I am going to sit and have a think. Thanks for all the advice!
ETA: Modern in South West. The rent is a little low if you ask me.
Well best of luck with whatever you decide old chap - if you do see the potential in it, there's no harm doing sums. Just remember to price everything up and remember to pitch your return against every item of expenditure. Do it at todays values and assume growth at your peril!I am going to sit and have a think. Thanks for all the advice!
ETA: Modern in South West. The rent is a little low if you ask me.
Property law, especially with regards to lease renewal, is considerably more nuanced than you may get with a resi investment. And the holding costs if vacant can really spiral. Professional advice really is your friend on these issues.
However, so long as you make sure you cover all of the angles and plan well property is a relatively stable and productive investment. Reasonable return without the rapid volatility in capital values of stocks and shares. Though obviously less liquid and far from immune to market forces (but that goes for anything really)
If it's your first time, honestly, instruct a surveyor who knows the market well - it maybe the best couple of hundred quid you spend in the long run. Seriously.
Best of luck, and remember to base all decisions on what YOU want out of it.
Edited by Vocal Minority on Friday 19th August 17:06
Spotted this in your approximate area and on the assumption that you prefer owning in your area. Nice sounding figures.
http://www.rightmove.co.uk/commercial-property-for...
http://www.rightmove.co.uk/commercial-property-for...
You may struggle to borrow money against commercial property if you cannot demonstrate a track record, unlike BTL most lenders will only offer 5yr money on Cap repayment rather than interest only terms which wipes out any income.
The problem as mentioned above is the cost of holding commercial property if it goes empty, Rates, Agents Dilapidations insurance legals etc etc, light industrial units nearly always take at least six months to re-let and if your workshop tenant goes bust and a laundry want to rent it someone's got to get it in a lettable condition or give a long rent free period.
This sort of stock should be bought on a yield of 10% but thanks to low interest rates and people bunging them in SIPPS those returns aren't there at the moment.
The problem as mentioned above is the cost of holding commercial property if it goes empty, Rates, Agents Dilapidations insurance legals etc etc, light industrial units nearly always take at least six months to re-let and if your workshop tenant goes bust and a laundry want to rent it someone's got to get it in a lettable condition or give a long rent free period.
This sort of stock should be bought on a yield of 10% but thanks to low interest rates and people bunging them in SIPPS those returns aren't there at the moment.
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