Am I Missing Something?

Hey all,

I did some analysis of commercial versus residential property, and was surprised by the results.
I used a purchase price of $500,000, the same yield, and assumed the outgoings (based on my knowledge) to create net rent figures each year for them.

What I found was that the outgoings (including repairs) saved for commercial was negligible to overall performance (total rent earned) versus residential.

I linked the residential's rent into the property price=every 3 years there was a rent increase which correlated to x% yield of the current property's price (from my research yields take a long time to change hence why I linked to the price).
I tried different realistic residential property growth rates from 6% p.a. to higher

Really the only way I could see commercial being worth it was if its yield was vastly different to that of the residential property. But I feel like I am now talking 7% or higher yields on the commercial side to make it worth it as you can get 6% yields in Hobart or Darwin, and with apartments (along with better than commercial capital growth I may add).

I can understand when we start to get into commercial properties worth over say $1 million and a bit, that other factors come into play (finding a residential property that has a 5% yield in this bracket becomes much harder), but for the sub $1 million bracket=are you guys typically only buying commercial buildings of 7% or more yields?
I can't see the point when I could buy residential of similar yield and use the better equity generation for more investments too.

 

I think yields are vastly different with commercial.

 

Sure, but my limited experience says that above 7% yields in Victorian commercial starts to get into riskier assets like those little warehouses in Cheltenham that struggle to lease because there are lots of other little warehouses just like them up for lease in Cheltenham.

I'll admit I haven't looked at commercial in other states too much, but residential wise I have and I feel a 6% yield in a medium risk (lettability) area is achievable.

 

Yes, that would sound right, the higher the yield the more risky it would be in general.

 

And that is the point, why would you bother with the 7% commercial yields when the risk factor means that over a 30 year span you probably will have a higher vacancy rate percentage than a 6% residential, and thus the figures may come close to evening out.

 

I personally wouldn't. Lower LVRs and higher risk with longer vacancies, more litigation risk etc

 

7.5% - 8% yield is pretty standard. Keep in mind that is on net rent - ie after outgoings (rates, pm fees etc). Assessment of strength of tenant is important.

 

The cheaper Commercial properties, say $500k, will have yields like resi because they are similar categories of investment and are in greater demand by similar investors.

Be sure to base assessments on Net yields. Usually Commercial tenants pay for maintenance etc which would have a big effect on net return

 

Similar thread exists, take a look of this:
Thoughts on investing in commercial vs buying residential
As @New Town suggests, Net yields are much lower for sub 1Mil, but the key is to look for properties that has potential to go big time, and once the currently lease term expires you increase rent massively, so once the new lease is signed, and so does the worth of the property.

The link mention how you can identify what properties has potential.

 

Thank you all. I did do my assessments based on net yields, and I did factor in rent rises every year, but still residential was better.
Does anyone know where I can find info on the cap rates/yields of the state capitals around the nation?

 

I don’t Understand the calculations of 6% resi vs 7% commercial
A 6% NET yield is only possible on a mediocre quality resi asset with limited growth

It’s true yield is prob 3-4% once all costs are truly factored
It may have LVR restrictions of its own if it’s a unit or townhouse or a limited pool of buyers

A resi Asset that is worthwhile to hold and develop prob nets you 1-2%. If you borrow , you are almost always paying money out of your pocket


Agree that the good yielding, less risky commercial stuff is really in the 5M + category and most people are better off investing in syndicates or reits...

 

@HenryF - There's very few single residential investments (for the same investment) where you can pull $50-60k nett pa, minimal land tax exposure and a long term tenant. Rinse and repeat.

Better again If you develop.

Savills, Frank Knight, JLL Etc all have commercial publications.

@Bris developer - risk, Pfffft.

 

Keen to see your assessments on
Residential vs commercial
Could you post the details ?

 

Hopefully this works:
Take a look at attached chart.

Residential=
Rent is yield linked to property price, BUT only increases once every three years (more realistic I feel). Outgoings are:

• $750 for maintenance
• $1000 for water rates
• $1250 for council rates
• $1000 for insurance
• $250 for land tax

Commercial=
Fairly self explanatory.
Outgoings are:

• $250 land tax-was going for a VIC retail lease scenario
• $300 maintenance-there still is some-e.g. eventually replacing the roof

Unlike Bris developer, I am not looking for hold and develop residential, just hold.

 

I can see why now
It is because the CG is caculated higher
In one instance the calculation is
Commercial doubles in 23 year (3%)
Residential doubles in 7 years (6%)
So in theory a cheap house in Logan will one day be worth more than the Westfields Chelmside shopping centre

 

One commercial category beats residential hands down.
Business owners renting from their own SMSF. The tax gains by themselves are considerable.

 

No the theory actually more playing into this, is that yields change slowly. Take Hobart-it has long (over a decade) been a high yielding state capital, 6% p.a. growth as a long term growth rate is fairly conservative. For sure though the 6% will be up and down over the 30 years whereas commercial rent increases should be steady, but I still think over the long run the residential should average 6% at least CG.

I don't doubt that the commercial will have CG above and beyond its simple rent increase-I am measuring rent earned here, not CG.

 

My thoughts are the same
CG will follow rental growth but since GFC there has been yield compression
Yields (net) that do not cover cost plus a risk factor plus profit factor have built in future CG anticipation .
When the CG appears to have disappeared I suspect yields will need cover the above.

 

So is your argument that basically-sometime in the next 30 years we are likely to see a compression/recession/GFC/downturn etc. in residential property prices, whilst their commercial cousins plough on through and there lies your answer as to why commercial is better?

Or is it more that your saying commercial rents (yields) are undervalued and need to come back up?