How to buy your first factory

Blog post courtesy of Peta Stewart Conveyancing

We’ve been talking a lot about commercial property investments lately, and that’s because it’s a buzz market at the moment. As part of that, I’d like to really look into factory purchases.

It’s a case of one door closing and another one opening with industrial investments. As Australia’s manufacturing sector cools off a little due to the automotive and mining shifts, small, well-appointed factories are now full steam ahead. So rather than a hands off approach to these kinds of investment properties, it’s more of a case of finding the sweet spots.

Just like any other property purchase for self, business or investment, it’s important to know how to make a solid decision, away from emotion, that will get you a strong return.

If you want to buy a factory, here is a list of things to have on your shopping list.

1. Finance

A first time investor needs to have the financial backing to get over the line. For small markets, like rural areas, outer metro suburbs and small cities, like Adelaide, you need to expect to pay between $200,000 and $600,000 for a viable factory property.

If your investment is in bigger markets, such as Sydney, or a strong industrial sector in Melbourne, expect to pay at least $600,000 to $1.5 million for a feasible factory purchase for a first time buyer.

As well as this, you will want to have available a sizable deposit to get the bank behind you, as much as 40 per cent of the purchase price is a good sum.

While this sounds tough, there are plenty of good purchase opportunities out there, coupled with low interest rates, you will be looking at a positive income from day one if your purchase is well measured.

2. Location

An especially important factor when it comes to your factory location is zoning. You need to be sure new and existing tenants can operate without disruption from council or neighbours. Check neighbouring land use and occupancy for long-term gains in your favour.

The other important factor with zoning is future possibilities. An investment will certainly pay off in an area that is likely to be rezoned or redeveloped to include better public facilities and transport. A move like this can allow your purchase (or the land your building stands on) to be transformed into something bigger, better and more profitable such as retail, community or residential buildings.

The only way of estimating this is thorough research, and then more research.

When considering possible zoning options, think about the flexibility and future use of your factory purchase, land size and building type.

The best bet then is inner city locations, which are more likely to offer demand in other sectors. While many industrial buildings have already caved to pressure, there are still some inner suburb gold mines to be had, despite many industry buildings being squeezed out. Those that stand strong will be great investments, the close proximity to the city means good transport options and access to services.

3. Home turf

You want to bring as much prior knowledge with you as possible. That means you understand the market in a certain location, you know the patterns for renting there and the benefits to broadcast to attract and keep the right tenants. You know the strengths and weakness of the business, the market and the location and the future possibilities. Once you have that knowledge stay put. Every region presents different risk, so apply your expert local knowledge to your local area and buy a factory in the area you know best.  

Getting off the known map to buy your first factory is a dangerous endeavour. Stick close to home and play to your strengths.

4. Cleanliness

As with any purchase make sure you get the full professional checks completed with a third party before you convince yourself you’ve found the one.

Have the building examined for structural issues and make sure your property is free of contamination. Checks include investigating underground fuel storage, which may be out of use and not listed as part on the property sale, as well as any previous factory uses that might involve chemical spills.

Soil checks are worth every cent if it saves you the hassle and expense of hazardous waste removal.

5. Forget the lease value

While a current tenancy might dazzle you with thoughts of lease guarantees and rental income, this is just a bonus payoff. It’s important not to get distracted and make a quick decision based on lease value alone.

The bigger value lies in the ongoing property investment. You will expect to hold the land a lot longer than the tenant who rents it. Research what the likely outcomes will be if the building is vacated; what is the supply and demand like, how versatile is your building for other industrial uses, what is future capital value likely to be?

Once you are satisfied that your building is a worthwhile investment even without a tenancy guarantee, then you can look to the lease terms and agreements to get a gauge on your return on investment.