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New Retail unit should we go for it

A

aqorps

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May 6, 2009
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Hi All,

I`m new to this forum so let me introduce myself ... I find lot of Experienced people here and look forward for your insight

I`m in late 30`s Married / kids/ Decent job . and no debt( I mean credit cards...
).
Family income 105k + 20k(part time optional ...if things go out of control I can go for it.)
320k house with 280k Mortgage (variable p-0.9 on 3rd year /35 yr..)
Waterfront land ( 1 Acre) worth 100k with a 30k loan.
Net monthly savings after all expenses 3000pm at present.

Let me introduce my partner too....

In late 30`s Married /Kids and same decent job and no debts( what so ever..)
Family income 100k.
Savings at present 40k.( cash and RRSP`s).

Credit Score for both of us Above 750 at present.


Now we plan to go in partnership/ incorporate... ( To be decided...) to buy this Commercial retail unit expected to complete in nov 2009.
1096 sqft @ $230/sqft( Pre construction price) - Discount = 250000+ Closing cost.
Expected Lease rate 18-20/sqft and Expected TMI =5.0/sqft.

Downpayment 20%( Savings ...)
Mortgage for 200k @ 5.0 Fixed or P+1.75 Var. (25 year Amort).

Now We find this interesting as its next to No Frills / School/ Mall , etc, etc....Leasing won`t be a problem.
Myself living 10 mins from the property in this Small Rapidly growing town (Orangeville,Ontario )

We desperately need your critics / advice / suggestions/ comments on this Option.
and we Thank you all for your time .

Regards.
 
an OK deal .. but NOT good enough for a small town .. where the CAP rate shoudl be 10% at least for a small commercial .. and 18/230 in less than 10% !

The yield (i.e. CAP rate) of the asset must exceed the mortgage interest rate by at least 2% for it to make sense in residential properties or 4-5% in small commercial which is the case here !!

I doubt very much you get an 80% mortgage .. more like 50-60% tops .. at perhaps 6-7% with a 15 year amortization ! [ who told you 80% at P+1.75% ?]

Assess if the risk of vacancies, the cost of the first mortgage and the low loan-to-value i.e. the cash required is a decent enough cash-on-cash ROI for you !

Consider also to buy RioCan (REI.un) or BoardWalk (BEI.un) or Norther Property REIT (NPR.un) or INNvest (INN.un) .. or our syndicated investment or any other real estate (such as an apartment building or a storage facility of an older office building) with a 12%+ to 20%+ yield with NO WORK !!
 
QUOTE (thomasbeyer2000 @ May 12 2009, 06:13 PM) an OK deal .. but NOT good enough for a small town .. where the CAP rate shoudl be 10% at least for a small commercial .. and 18/230 in less than 10% !

The yield (i.e. CAP rate) of the asset must exceed the mortgage interest rate by at least 2% for it to make sense in residential properties or 4-5% in small commercial which is the case here !!

I doubt very much you get an 80% mortgage .. more like 50-60% tops .. at perhaps 6-7% with a 15 year amortization ! [ who told you 80% at P+1.75% ?]

Assess if the risk of vacancies, the cost of the first mortgage and the low loan-to-value i.e. the cash required is a decent enough cash-on-cash ROI for you !

Consider also to buy RioCan (REI.un) or BoardWalk (BEI.un) or Norther Property REIT (NPR.un) or INNvest (INN.un) .. or our syndicated investment or any other real estate (such as an apartment building or a storage facility of an older office building) with a 12%+ to 20%+ yield with NO WORK !!

Thanks a lot for the Quick reply, very much appreciated,

Further The broker has given the Verbal Mortgage Quote ( Waiting for written Quotes...lets see How the numbers unfold and We`ll get back....).

As far as Lease rate in the Area is $20/sqft but we are taking 18 (a more conservative no....)

What we also see here is in 25 years the property is ours. and We expect Commercial Retail units to beat Inflation by 2%.... Now how close we go that`s speculation.

Rio Can is top on my priority list ... I`m waiting for the next Bottom ( If this come out to be a Dead cat bounce...
..... ).


Further We are too new to Investing ... Esply at crunching numbers...We need some more time I guess and lot of inputs.

We really appreciate your help on our way to investing... We will also look into other optins you mentioned.

Thanks and Regards,
 
QUOTE (aqorps @ May 12 2009, 07:51 PM) ... ( If this come out to be a Dead cat bounce...
..... ).


Further We are too new to Investing ... Esply at crunching numbers...
don`t count on a huge retreat in stock market ..

this deal MAY make sense IF you can get a 75% mortgage at 6% or better and if you know that vacancy and rent collection issues will be LOW or 0 ... will they be ?

one commercial tenant goes bankrupt or doesn`t pay .. then what do you do ? do you have tough enough a lease and will to seize tenants car and personal property ? commercial landlording takes some skills .. do you have those ?
 
QUOTE (thomasbeyer2000 @ May 12 2009, 10:26 PM) this deal MAY make sense IF you can get a 75% mortgage at 6% or better and if you know that vacancy and rent collection issues will be LOW or 0 ... will they be ?

one commercial tenant goes bankrupt or doesn`t pay .. then what do you do ? do you have tough enough a lease and will to seize tenants car and personal property ? commercial landlording takes some skills .. do you have those ?

Very well said, I know there will be vacancy and rent collection issues but as long as I`m able to pay that from my income ( for those bad days....), I won`t loose it to the bank, also I`ll have to learn commercial landlording skills so here I`m among you all experienced heads....

I hope to get 80% mortgage @5 % lets keep the fingers X`d and I`ll update as the time goes by. I`m ready to spend time and effort to learn and I have always done that in every project I undertake ...

Thanks and regards.
 
QUOTE (aqorps @ May 12 2009, 11:07 PM) I hope to get 80% mortgage @5 % lets keep the fingers X`d and I`ll update as the time goes by. I`m ready to spend time and effort to learn and I have always done that in every project I undertake ...
80% at 5% .. hardly for commercial. Let`s assume you get 70% at 6% AT BEST .. more likely less and higher interest rate .. does it make sense then ? But keep us updated here. Get a commitment in writing from a lender .. not a realtor`s opinion !

get a lease that is highly favourable to landlord (i.e. you) ! Key to success in commercial real estate .. coupled with personal guarantee of tenant.

How many tenants ? One ?
 
QUOTE (thomasbeyer2000 @ May 13 2009, 07:38 AM) 80% at 5% .. hardly for commercial. Let`s assume you get 70% at 6% AT BEST .. more likely less and higher interest rate .. does it make sense then ? But keep us updated here. Get a commitment in writing from a lender .. not a realtor`s opinion !

get a lease that is highly favourable to landlord (i.e. you) ! Key to success in commercial real estate .. coupled with personal guarantee of tenant.

How many tenants ? One ?

I`ll keep in mind , Yes One tenant only, as its one unit (1096 sqft.)... Thanks for the advice.

Regards.
 
Hi,

Further I was talking to the Agent and found 5% gst would be payable/ added .... also he said if you have a GST No: it would cancel out ( I guess he said it would just be a paper work) ... Now in case we don`t incorporate and don`t have a GST No. How do we deal with this.

I know when we buy anything we pay GST.... but is this amount added to the mortgage/ or its a closing cost. As I remember when I bought the residential property or the other waterfront I didn`t pay any GST.

Just trying to learn Commercial Real estate.... I desperately need advice. Thanks in advance .

Regards.
 
QUOTE (aqorps @ May 15 2009, 07:19 PM) Hi,

Further I was talking to the Agent and found 5% gst would be payable/ added .... also he said if you have a GST No: it would cancel out ( I guess he said it would just be a paper work) ... Now in case we don`t incorporate and don`t have a GST No. How do we deal with this.

I know when we buy anything we pay GST.... but is this amount added to the mortgage/ or its a closing cost. As I remember when I bought the residential property or the other waterfront I didn`t pay any GST.

Just trying to learn Commercial Real estate.... I desperately need advice. Thanks in advance .

Regards.
yes, GST is payable. And usualyl it is not used to calculate the mortgage.And yes you have to register for the GST #, either as a person (NOT RECOMMENDED !!) or you have to incorporate which is the norm for commercial !

this is an average deal .. no need to rush .. there are HUNDREDS of deals out there !!

get some training on commercial landlording and especially LEASES first .. then wade carefully .. as this is a TOTALLY unregulated field, unlike residential !!!!!

if you get an 80% loan (which I doubt btw) it is a loan with a 100% personal guarantee, thus really a personal loan secured by real estate !

Did you run this by a commercial mortgage broker or lender yet ?
 
QUOTE (thomasbeyer2000 @ May 15 2009, 08:19 PM) yes, GST is payable. And usualyl it is not used to calculate the mortgage.And yes you have to register for the GST #, either as a person (NOT RECOMMENDED !!) or you have to incorporate which is the norm for commercial !

this is an average deal .. no need to rush .. there are HUNDREDS of deals out there !!

get some training on commercial landlording and especially LEASES first .. then wade carefully .. as this is a TOTALLY unregulated field, unlike residential !!!!!

if you get an 80% loan (which I doubt btw) it is a loan with a 100% personal guarantee, thus really a personal loan secured by real estate !

Did you run this by a commercial mortgage broker or lender yet ?

Thanks for a prompt reply, further I`m waiting for written quotes .... just to test waters lets see where we stand , probably ( I might be wrong pls correct it) I guess any commercial lending has to be backed by the property itself, we`ll try not to guarantee with personal assets( don`t have much either...).

What other deals/options you might suggest.... I`d like to keep options in or around Orangeville Area. We have another Retail Plaza coming up next to the Hospital but its for lease only (not for sale...)
Further I`d like to stick to buying and Leasing options only as, I feel that doesn`t involve too much of a active participation as compared to run`g Gas stations /conve../ or a retail unit.

I know there `ll be tough times but I can handle that....

Also as you advice for incorporating as this being a commercial unit, would it be ecnomically wise to incorporate with just one unit.( where do I educate myself .....) and advice I`d appreciate it.

Regards.
 
QUOTE (aqorps @ May 15 2009, 09:02 PM) ... I guess any commercial lending has to be backed by the property itself, we`ll try not to guarantee with personal assets( don`t have much either...).
Assume that you will get at best 50% loan-to-value mortgages without a personal guarantee, if at all. In Canada, most commercial mortgages over 50% LTV come with a full or at least partial personal guarantee !!

QUOTE (aqorps @ May 15 2009, 09:02 PM) ...I`d like to stick to buying and Leasing options only as, I feel that doesn`t involve too much of a active participation as compared to run`g Gas stations /conve../ or a retail unit.
in theory yes .. in practice: no .. namely once the tenants cheque`s start bouncing .. THEN the work starts: get rid of tenant and his equipment, maybe take him to court, re-furbish property, re-lease .. while staying solvent .. so a 12 month mortgage+tax+condo fees payment reserve fund is recommended in commercial (as opposed to 3 in residential) !

QUOTE (aqorps @ May 15 2009, 09:02 PM) I know there `ll be tough times but I can handle that....
hopefully .. assuming enough cash is available to pay the bank for 4-10 months + re-furbish space

QUOTE (aqorps @ May 15 2009, 09:02 PM) Also as you advice for incorporating as this being a commercial unit, would it be ecnomically wise to incorporate with just one unit...
yes .. as an incorporation costs only $500 .. also may be required to get a mortgage ... and is recommended for liability purposes !
 
QUOTE (thomasbeyer2000 @ May 16 2009, 09:32 AM) Assume that you will get at best 50% loan-to-value mortgages without a personal guarantee, if at all. In Canada, most commercial mortgages over 50% LTV come with a full or at least partial personal guarantee !!


in theory yes .. in practice: no .. namely once the tenants cheque`s start bouncing .. THEN the work starts: get rid of tenant and his equipment, maybe take him to court, re-furbish property, re-lease .. while staying solvent .. so a 12 month mortgage+tax+condo fees payment reserve fund is recommended in commercial (as opposed to 3 in residential) !


hopefully .. assuming enough cash is available to pay the bank for 4-10 months + re-furbish space


yes .. as an incorporation costs only $500 .. also may be required to get a mortgage ... and is recommended for liability purposes !


Thanks Thomas for taking time to answer in detail.

Then I guess I`ll have to opt for personal guarantee coz 25% is the max we wanna put down.

Thanks again.... thats what I thought with our present status we can survive even if we don`t lease for 3 years.... rest lets see how things turn out

Also our final plan is get 10-12 units slowly all with 20-25% down and then pay them off in 25 years keeping this as our retirement income once the mortgage is paid off then we breath in peace.

I know in theory this seems easy but ......if things are`nt feasible threotically... it would be tough to prove them practically.

I`m ready to put this theory in practice.
We both are presently saving $7500pm cash after tax ....No point keeping this money in bank.

We plan to buy one unit every 18 months to begin with and then once the things get rolling speed up

Also we are planning to take a course on commercial realestate investing ... If you could guide us in what course to go for ...ACRE is what I read here.... any suggestions.

We really appreciate your detailed respone please accept our regards Thomas.

anyone else got something to share/ guide/ suggest......

Regards.
 
QUOTE (aqorps @ May 16 2009, 05:35 PM) ...

Also our final plan is get 10-12 units slowly all with 20-25% down and then pay them off in 25 years keeping this as our retirement income once the mortgage is paid off then we breath in peace..
20% down is NOT common in commercial .. nor is 25% .. more like 35% or more these days .. again take it to a commercial lender or broker !!
 
QUOTE (thomasbeyer2000 @ May 17 2009, 09:39 AM) 20% down is NOT common in commercial .. nor is 25% .. more like 35% or more these days .. again take it to a commercial lender or broker !!Thanks Thomas ...let`s see what quotes we get finally but in the meantime I`ll post what response we got by mail from the lenders...

Cheers. Sorry for the late reply, however, I just wanted to let you know I would be very interested in financing this Commercial Unit. [/color] I received the docs you scanned and forwarded to me. I do require a little bit more info, namely the client’s 2007 and 2008 Notice of Assessments, as well as the Purchase Agreement of the unit . Also, where would the 20% down payment be coming from? Business Savings? Personal Savings? Personal Credit (i.e. a personal line of credit)? There are a couple of ways we could finance this deal: a) Canada Small Business Financing Loanfont-family:Arial"> – This would be a good way to finance the unit, especially if the unit would be owner occupied and the business would be running out of the unit. I like to think of it as the business equivalent of an insured mortgage. Currently, we could finance up to 90% of the purchase price of the unit. Our standard variable rate pricing for a CSBFL is P + 3.0% (it includes an administration fee of 1.25%). There would also be a fee of 2% of the loan forwarded to the government (this could possibly be included in the loan itself.) The benefit of this loan is the fact the clients only personally guarantee 25% of the loan. Approval would be based on the client’s capacity to support the debt via their business financials and NoAs. Most likely a commercial appraisal would be required and the debt would be registered against the property. b) Business Mortgage – This is a second option. The max we finance on a business mortgage is 75% of the purchase price. Currently the rate we would offer would be in the range of approx P + 1.75%/P + 2.0%. There is a set-up fee of approx $100. Here too, a commercial appraisal would be required and the debt would be registered against the property. In this case, the debt is personally guaranteed for the full amount of the mortgage. Again, approval would be based on the client’s capacity to support the debt via their business financials and NoAs. c) height:100%">Business Loan Secured with Client’s Personal Residence(s) – In this case, clients use the equity in their house(s) against which we would secure a loan for the amount of funds needed to purchase the unit. As a result the debt is on the personal residences and the commercial condo is free and clear. Currently the rate we would offer would be in the range of approx P + 1.00%/P + 1.5%. There is no set-up fee. The advantage is that the debt could be held by one owner or split between both owners. However, if the houses are owned jointly with spouses, spouses would need to obtain Independent Legal Advice acknowledging they are aware of what is happening. There would be fees to appraise the personal residences and registered the collateral charges on the properties. I hope this helps and trust this provides your client some options. If you or your co-broker have any questions or concerns do not hesitate to get in contact with me. Note that I will be out of the office tomorrow and Wednesday, returning Thursday at noon.
.... Could be we are completely missing the boat... or ....

Regards.
 
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