good deal or not

cousin of mine rang me over the weekend to say he had bought a commercial unit at an auction last week

he paid 70 k for a 650 square foot property with a sitting tenant paying 7800 per annum exclusive of rates etc , property is in a medium sized town , between stamp duty of 6% and solicitors fees , he claims the total cost will be 76000 euro , so a yield of just above 10 %

i know the above would be viewed as a good return on a residential property in a town but whats the expected yield with commercial , im currently getting 10% on a commercial property i own in ennis

i know diversification is a problem etc but do experts believe commercial should be delivering substantially higher yields in order to compensate for the fact that vacancy rates are much higher , i was talking to an auctioneer in ennis not so long ago and he claimed the unit i own is slightly over rented as there are a few neighbouring units in the estate which are vacant for years

effectively what im asking is do you need to value commercial property very differently , how much of a yield margin do you need over residential ?

galway_blow_in said:

effectively what im asking is do you need to value commercial property very differently , how much of a yield margin do you need over residential ?

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Normally, yes. The main benefit is it can be much easier to evict a tenant.
The margin really depends on location and property type. There's a much different risk with a lock-up unit / yard Vs say a purpose built medical facility in a large town.

RedOnion said:

Normally, yes. The main benefit is it can be much easier to evict a tenant.
The margin really depends on location and property type. There's a much different risk with a lock-up unit / yard Vs say a purpose built medical facility in a large town.

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well for 70 k your wont get a medical facility in a large town

he bought a unit with a barber as tenant

Apologies, I was answering what i thought was a general question about commercial yields - I probably picked a bad example given the 70k price.

RedOnion said:

Apologies, I was answering what i thought was a general question about commercial yields - I probably picked a bad example given the 70k price.

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no not at all , its a good point

it appears a decent yield to me but he was told by someone that it was expensive due to neighbouring units being vacant , got me thinking about my own situation where some of the neighbouring units are vacant a good while , ive never had to discuss rent as the rent review took place a year before i bought , chances are i wont ask for any more money next time round

Generally, I think lower value properties (residential or commercial) should command a higher yield.

For context, there are several properties available on the open market today, with nationally recognised tenants on long leases, that would product a net yield over 10%. Ok, there's a bigger investment involved, but I'd think less risk. Some of these are the scale that would attract investment fund money - for example there is a block of retail units on Childers Road at the moment where over 10% is possible.

Your main risk is vacancy or non-payment of rent. If you've got an established tenant, paying his rent on time, 10% isn't a bad return, especially where there's no borrowing involved. I'd rather 10% from a paying tenant that I can evict quickly if he stops paying, than a possible 7% on a residential where it can take 18 months to evict somebody.

RedOnion said:

Generally, I think lower value properties (residential or commercial) should command a higher yield.

For context, there are several properties available on the open market today, with nationally recognised tenants on long leases, that would product a net yield over 10%. Ok, there's a bigger investment involved, but I'd think less risk. Some of these are the scale that would attract investment fund money - for example there is a block of retail units on Childers Road at the moment where over 10% is possible.

Your main risk is vacancy or non-payment of rent. If you've got an established tenant, paying his rent on time, 10% isn't a bad return, especially where there's no borrowing involved. I'd rather 10% from a paying tenant that I can evict quickly if he stops paying, than a possible 7% on a residential where it can take 18 months to evict somebody.

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im getting 10 % on a unit with a tenant who have twenty electrical stores around the country ( wholesale electrical ) , they are in situ nearly twenty years in the unit i own

only thing about your comparison with a residential tenant , if you have to sell a commercial unit , you would likely struggle to get what you paid for it as an empty commercial unit is not viewed favourably , contrast this with the vacant residential unit and demand is big

i suppose there are pros and cons to both