Existing Small Commercial Property Purchase and Re-lease
 

As outlined in Tenants are God No 1. t, that project started with finding an under-valued commercial property; however, here it started with the tenant. I was a commercial property consultant when I purchased this property in 1999, and so I actively avoided owning commercial property. The logic was that I didn’t want to be in a position of conflict with my clients, however it was also because commercial required more equity than residential – between 60-70% instead of residential that at that stage was 85% before mortgage insurance was needed. 

My best friend ran a large bedding retailer and his warehouse lease was expiring, so he asked me to help find new space. I presented the options but also explained that for the same rent he could own his own property – no surprises considering my bent towards long term property ownership. Furthermore, I also explained that a few of the options presented could be good long-term strategic holds likely to increase in value, or properties that leased with a long-term quality tenant would be worth more than if vacant, as they were when being offered for sale. 

After working through a shortlist, he decided to purchase a warehouse just over 215m2 for $170,000 where a market rent was $100psm net for the space, and hence $21,000 per annum net was agreed. At the time, valuations were assessed on a capitalisation rate of 8% and so the $170k purchase was valued at $262,500. Yup, a lease – or more to the point – a sustainable income stream increased the value by almost $100,000 in an instant, which was a 55% return on purchase price. Furthermore, the bank advanced the full amount of the purchase to allow the purchase price, including stamp duty, to be fully paid from the new loan as it was less that the 70% loan-to-value ratio of the valuation they were prepared to extend against.