From $1.6M to $1.89M in 12 Months: The Cold Storage Deal That Keeps on Giving

Andrew:: So I bought four industrial sheds on one title on just under an acre of industrial land up at Hervey Bay, an eight and a half percent net yield after all the outgoings, and over $2 million below the replacement cost of that asset. So I was able to revalue it in about 12 months time and redraw some extra equity for my next purchase.

Hi, I'm Andrew Wright, principal of Professional Southport, and this is the Andrew Wright Property Podcast. I've built a multimillion dollar property portfolio delivering a seven figure annual rental. And led my real estate team through thousands of sale and lease transactions. In each episode, I share real deals and strategies that will help you find, fund and operate profitable property deals.

The aim of this show is to provide education and build a community of like-minded investors who can collaborate, share insights, and help each other in each other's journeys. You can make excuses or you can make money, but you can't do both. So come and join us.

Adam:: Hello and welcome back to the Andrew Wright Property podcast. Today we're talking industrial sheds and cold storage and why these assets are in demand, what makes cold storage so sticky. And of course, Andrew's real deal this time in Hervey Bay where he bought well below replacement cost on an 8.5% net yield.

We'll cover the numbers, lessons and the exact moves Andrew would repeat and avoid. Andrew, welcome to the podcast.

Andrew:: Adam, how you going?

Adam:: I'm very well. Look before we even start, you've got some exciting news from just this week, haven't you?

Andrew:: Yeah, I have. Just this week, I've helped my son and my daughter get into their very first property. So I'm just super excited about that. I've been helping them get educated around property for a few years now. They've both saved over $50,000 in cash at age 19 and 21. But even with that 5% scheme now with the government, their serviceability, even though they got the 5% deposit to buy a million dollar property, their incomes don't even allow them to borrow from the bank.

So rather than go down that track, we've just successfully done a joint venture between my two kids and I to buy 10 acres of industrial land. And I'm just so excited that I've helped them get into the property market maybe three or four years before they otherwise would have if they did it by themselves.

Adam:: This is what we're doing with this podcast, isn't it? What I love about this is that so many people when they think property investment are just residential, residential buying, investment property buying. What you are showing us and teaching is you can do so much better by looking further afield and into different asset classes.

Andrew:: Well, I'm hoping the listeners to the podcast get the same benefits. And what I feel I'm really getting a lot of satisfaction out of is not just helping kids, but hopefully helping the listeners here learn about opportunities to make money.

And in this particular deal, it's not just a commercial property, but it's a property development site. And we're learning, I'm teaching my kids how to force capital growth on an asset instead of just buying it and holding it.

So what we're going to do over the next 12 months is get development approval for a roadhouse or a service station and a large truck parking depot. I mean, 10 acres is a fairly big block of dirt. We know you love your truck parking.

And I'm just so excited that I can force some capital appreciation for my kids and teach them that process. And it's not just about finding the deal, it's about how we finance it. Now, we've talked about this before, the banks don't lend on or don't like lending on empty property.

I've done a deal on this site and taught my kids the process. We've actually got the seller to be the bank. It's seller finance. And it's a 5% interest rate for two years. Cheaper than the bank. And I'm teaching my kids not just how to become property developers, not just how to invest, but how to think creatively about how to finance a deal.

Adam:: I want to throw this out there. I wouldn't mind doing a pre-episode, like let's leave that there. If you're happy with this, I want you to do a short episode on what the plan is and let's just expand that right out. Then we'll do a follow up in 12 months to see where it goes. This will be so interesting for our listeners.

Andrew:: Can I just add one more thing? The other thing I'm teaching them there is just pure persistence. I want the viewers and the listeners here to understand, I have probably been rejected more than 20 times in the last two years, making offers subject to vendor finance. In other words, look, I'll buy this, but I can't finance it. Will you be the bank and provide the finance for me and I'll pay you off in two or three years time? I've had 20 rejections in a row. And this is number 21. Persistence. Finally got a yes.

And it's not as though, oh look, this deal sounds great. How easy is it? No, you gotta put in the work. So I've had 20 no's before I got a yes. And I'm teaching my kids that as well.

Adam:: Fantastic. Alright, now let's get into it. I'm excited about this one because if you have been listening, we did do an episode about truck parking and depots. Today, something different — industrial sheds and cold storage.

Before we go into the deal, tell me a little bit about this asset class. Why is it in demand? Why did it hit your radar?

Andrew:: Look, I listened to two or three podcasts a day, and I just kept on hearing so much of the American trend towards industrial real estate since COVID. The structural change in shopping from people buying stuff online, moving instead of going to shops through COVID, they started buying stuff online. And that's pretty much forced the demand for companies to have industrial spaces to house all of the stuff that they're selling online.

And I think that's continued over the last five years. That move from retail property outlets to these big warehouses that store this sort of stuff has just continued. Very limited supply of industrial stock all around Australia — vacancy rates probably less than 2%. And in cold storage facilities in particular, which is refrigerated warehouses where food is kept so it doesn't go off, the vacancy rates are less than half a percent.

Adam:: So there's a shortage of it?

Andrew:: There's a shortage of it that keeps rents up. And also the tenants in those sort of facilities will generally stay a lot longer because it's just so hard for them to either find another suitable property or to actually go out and build one. It's probably about more than double the cost per square meter of a normal shed to build a cold storage facility.

Adam:: With these vacancy rates, this obviously makes this asset class have a much higher chance of a reliable cash flow.

Andrew:: Absolutely, yes, because the leases are typically longer. When you get cold storage, it's a very specialized, custom built facility for a certain type of food distributor — might be seafood or meat. In my case, my tenant is Bega Dairy that do milk products.

Because of the specialized nature of that asset, generally they'll sign longer term leases. Most of the leases are indexed to CPI or inflation and they stay a lot longer. And as I said, the rents are probably about double what a normal rate per square meter would be for a normal shed.

Adam:: Let's unpack the deal then. Where is this place? Where did you find it? Talk me through the numbers and how this all went down.

Andrew:: Okay. So first of all, sometimes when I'm buying stuff, there's some sort of emotional connection. We talked about properties in Ipswich before, I went to school there. This one's in Hervey Bay. I was born in Hervey Bay. So when you're looking at deals, some of these little things might just sort of influence you as to whether you want to go a bit further. Obviously the numbers need to stack up, but I love Hervey Bay.

I saw it online. It was not advertised on Real Commercial. Real Commercial gets the dominant percentage of buyers of commercial listings and transactions. But I also check another website called commercialrealestate.com.au, which is run by the Domain group.

Quite often when you get sellers that are not committed to spending a lot of money in marketing, or real estate agents that don't wanna spend extra money advertising on Real Commercial, they might actually only advertise it on commercialrealestate.com. Sometimes they even only advertise it on a residential platform like realestate.com.

Adam:: So the people looking in the right places aren't necessarily seeing it.

Andrew:: That can quite often create opportunity. With this particular deal, once again, it was a residential real estate agent that had just become a commercial agent, and my analysis was that either they or the owner just mispriced this property.

It was advertised at eight and a half percent net after all the expenses, which is just a ridiculously good deal. It had four separate tenants to diversify the tenancy risk — you're not just relying on one tenant. I've still got three if one moves out. It was on nearly an acre of industrial land. Four sheds. The guy spent 200 grand just putting concrete on the land, let alone the sheds.

Adam:: How long had he had it for?

Andrew:: A long time, like 17 or 18 years. But the quantity surveyor's report calculated that for insurance purposes, the replacement cost of those sheds was $3.8 million. And the asking price was $1.6 million.

The net return is 8.5%. There was still a WALE of about three years — Weighted Average Lease Expiry. So the four tenants, on average, had three years left on their leases. Which meant there wasn't gonna be a vacancy tomorrow. If none of them renewed their leases, there's three years of rent left to come in.

Adam:: I want to spend a bit of time on replacement value. What do you use that metric for?

Andrew:: Every single day I look at deals online. And every single day, if it's a commercial asset, I'll have a look at the income of the asset, what the fair cap rate would be for that asset. And I multiply the income by a fair cap rate to come up with what I think it's worth.

But every time I do that, I apply a second formula to make sure I'm not making a mistake. I look at what we call the replacement cost of the asset. It's two components: what's the land worth, and if I were to build that property today from scratch, brand new, how much would it cost me to build it?

So then I have a look at the age of the asset and think about how much depreciation may have happened on that building and what's a fair current value compared to replacing it brand new. It just gives you a metric to make some analysis as to whether you're getting a good deal.

Obviously if you can buy a property a fraction, just a little bit more than the land value, you're not gonna be paying much for the building. And having that metric cross-referencing it to the cap rate just makes sure you're not making a mistake when you're buying something.

When I saw that one advertised at eight and a half percent net return, you know you're getting 2% net on a house probably. When you see eight and a half percent, four and a half times higher net return, you've got four tenants and not one, it just looks so good.

So what's important to do is when you see any property advertised online with a high gross or net return, you've gotta immediately go through a little checklist to make sure you're still not paying too much.

The first thing you look at is, okay, is there a problem with this property? Is there a lot of deferred maintenance? Do I need to spend 200 grand replacing an old rusty roof? Which means that extra yield is not worth it because you've gotta spend a whole heap of money improving the property.

The next thing I'll have a look at, is there a tenancy risk? Looks all right now at eight and a half percent, but are two or three of the tenants about to move out and you've got hardly any return?

And the third thing is quite often you'll find these types of properties that have a very high yield are located in a flood zone, which insurers don't want to insure, banks don't wanna lend on.

If you can cross through that little checklist and say, well, it's not in a flood zone, the tenants aren't moving out, there's no deferred maintenance, I'm not gonna be up for hundreds of grand replacing or improving the structure — this is just a good deal. Eight and a half percent net.

Adam:: So the four sheds — how many of them were cold storage?

Andrew:: Just the one at the front. It's roughly 500 square meter shed at the front. The second one's another 500, and then there's two smaller sheds down the back.

The front shed was rented to Bega Dairy. The cold storage facility. They'd been there 17 years. The rent was roughly 70-something thousand plus all the outgoings.

The shed behind was Direct Diesel, they're a diesel mechanic. About 35 grand a year of rent. And two smaller sheds at the back — one's a boat builder, and the fourth one's been there quite a while.

Four different tenants, about $141 grand a year rent plus outgoings recoverable under the leases, about $30 grand of outgoings. So 171 grand of income, 141 rent plus 30 in outgoings, on $1.6 million. Nearly 11%.

When I see more than 10% gross income, I start getting excited and thinking, okay, what's wrong with this thing? Is it in a flood zone? Is the roof about to fall in? If I can go through that checklist and there's nothing wrong with it, I'm gonna buy it.

I made an offer. I actually tried to make a sneaky offer of $1.5 million initially, and the agent said, look Andrew, it's just come on the market. The owner's priced it well. He's not really wanting to negotiate. I just went straight back. Okay, I'll do the deal at $1.6 million. Give me 14 days due diligence, I want to go and have a look at the place.

I had 14 day due diligence, 30 days finance. I did manage to get a 90 day settlement to give me a bit more time to get the money sorted out.

Adam:: Let's talk finance. How did this one play out?

Andrew:: This one was basically selling some more of my crappy share market investments to come up with a 40% deposit. During the course of that 90 days, that particular holding went down further as well. I've got the kiss of death on them. I actually had to drag out, get a revaluation of another property in Gatton to drag out an extra hundred grand from that just to make settlement happen.

So four tenants, long term leases, banks are happy to lend 60% on what they call a leased stock loan. I just had to come up with the 40%. 40% of $1.6 million is $640,000 plus the stamp duty. Sold some shares and I redrew a hundred grand from a Gatton property just to come up with the deposit.

Adam:: Did anything go wrong with this one?

Andrew:: Part of the due diligence, I did spend $1,500 on a building and pest inspection that came back all clear. No major maintenance with this property.

What that building inspector probably didn't have is a lot of expertise in cold storage. So now, 18 months down the track, just in the last two months, I've actually had to invest $46,000 on maintenance on these cold storage facilities.

The wording in the invoices is that I had to replace the condensers and evaporators in three of the five cold storage units. So that's a capital expense. Even though the tenants pay outgoings, it's a capital expense that just came straight outta the bottom line for me.

But in the big scheme of things, if that tenant's gonna stay there another 17 years, they've been there 17 years already, it's okay.

And I had that property revalued after one year. Bought at $1.6 million. Herron Todd White revalued it after one year, $300 grand higher — almost $1.89 million. So $290 grand more was the valuation.

And I've just got an extra $200 grand in the bank last month ready to go for something else because I revalued it and the bank gave me another $200 grand. It's very hard for me to save $200,000 from working as a real estate agent.

Adam:: What are the key takeaways from this deal?

Andrew:: Look at undervalued properties below replacement cost, read the leases, talk to your tenants, understand the market, and use capital growth through forced appreciation rather than just hoping the market goes up.

Thanks for listening to the Andrew Wright Property podcast. This is all about building a community of like-minded investors who can share real life stories, experiences, and collaborate with a view to helping each other.

Join us. Get in touch through the link in the show notes. I look forward to you joining me on the next episode.