Commercial Property -talk of the town

Alot of hype around commercial properties with small investment and higher yields(higher risk is given). I have been looking/reading about commercial properties but haven't acted on it. Couple if reasons-still learning about it as we want to use our super to purchase one. I came across the following article/avertisement:-(no risks have been provided)

Why are so many residential property investors now starting to snap up affordable commercial properties?

There are actually 7 great reasons:

1. Residential yields are as low as 3% - whereas commercial yields are as 6%-11%. This means, you can potentially get 7 times more net passive income from commercial property! In fact, you can get as much as $1,800 per month positive cashflow from a $450,000 commercial property.

2. You can secure properties with much longer leases – up to 10 years in some cases. This means you can truly get ‘set and forget’ cashflow when you know how to find them.

3. It’s a ‘hidden property boom’! In some cities such as Sydney, commercial property is enjoying faster capital growth than residential! Especially now that growth is slowing down. This means, you can get capital growth and cashflow from commercial property.

4. It’s surprisingly affordable to get started! You can buy a commercial property for as low as $150,000 – even in a capital city. This means you can ‘dip your bucket’ into the river of commercial cashflow surprisingly cheaply.

5. The borrowing options have never been better. Right now, commercial property investors are getting loans of up to 80% of the purchase price - with interest rates at around 5%. Not only that - low-doc loan options such as ‘lease only’ are available in some circumstances.

6. You have less “out of pocket” expenses! Unlike residential property, where you get slugged for rates, maintenance, etc. in commercial you hand the bill of that to the tenant, in many cases.

7. Instead of needing up to 10 properties to retire from residential property, you can potentially retire with as a few as 3 properties. For example, a Melbourne investor is getting around $35,000 in net income from just 1 property. With a 5 year lease in place!

 

Is it true?

Any risks involved using smsf? And any other things 1 must be aware of !

 

Plenty of good commercial options. And plenty of duds. Requires a lot of due diligence on location, zoning, demand and tenant

 

Hi @DaveM ,is there any black and white on zoning, demand and tenant as in what works , what not?

 

In what city, at what price point, in what condition, etc etc, there's no magic pill or secret top 5 do's and don'ts that apply to all commercial property, once you accept that and go about gaining an understanding vs working off a list you'll find yourself in a better position to narrow down your queries or enquiries to something more specific

Whoever wrote that list in your first post is either a spruiker, a con artist or a bit of both because they've used examples throughout at the edge of what's possible and made it seem like a combo of all those examples exists

Eg 150k commercial purchase,80% lvr, 5% interest rate, 10 year lease, strong capital growth prospects, there is a greater chance of finding an original thought in Pauline Hanson's head than there is this hypothetical property

 

+1 for con artist @sanj because when I mentioned about Risks to the person who advertised this article.

The reply was -there are risks but we will manage them lol

But thanks for pointing out few things.

We want to do investment that is sustainable and also not a duds.g

 

Keep asking , learning and questioning and you'll find yourself able to answer more and more of your own queries as you go along, gaining confidence along the way. good luck with your search!

 

Zoning and demand are only two factors in the equation. Unlike residential, it is all about location - whether it is for exposure to passing traffic or access to main roads/transport hubs or proximity to complimentary businesses (for b2b sales).

These properties are subject to economic conditions - it may lease like hot cakes in a good market and you may snag 5+ years from a tenant but if a vacancy occurs when things go south no one is looking unless there is a strong sublease market as an incentive for someone to move.

 

Thanks @sanj and @Scott No Mates for outlining few key points.

The more I am reading into the more questions comming out.

In regards with Zoning -that be depends on the area/council if it is industrial, resi,retail -that's not in my control?! I can only control if I am willing to invest in industrial etc

I read a report on 1 of the famous commercial property related organisation where thay have done the comparison on all states various types of commercial properties.

Any broker can do commwrcial IP loans or is there a specialist ? I would.like to get something with secured lease that may help in the loan process too.

If any links,websites you can recommend -I be thankfull.

 

Control? The only thing you have a say in is the area within the boundaries and then it's subject to town planning and the lease (which you negotiated/took over).

As for which broker - ask them how many and value of the commercial loans that they're writing each year, $Xm/month is not a big number unless they're all small deals (which may be perfect).

Run some numbers on something like this, then check the auction results a few days later. Linky Ideal site to redevelop into factory units or for manufacturing where Raw materials come in at one end and can leave by the other.

 

I have read couple of more reports on various types of zoning and the impact on lease etc. Retail target soecific clintale compared to industrial or warehousing.

Big thanks @Scott No Mates for pointing few things which I will practice.

 

Great list of benefits. I understand you can still claim Div 40 on commercial.

Some of the downsides are the tenant pool compared to say well located residential property. Property value is much more cap rate driven - people generally don't fall in love with the typical mum and dad style commercial property and overpay when you try to resell.

Unlisted property syndicates are also not a bad way to play in this space.

 

Hi @bookworm , would like to know more about Unlisted property syndicates?!

 

Hi Newfast

Basically a investment vehicle that pools individual investor funds and acquires a single or portfolio of properties that would normally be inaccessible to individual retail investors (unless you have a spare $100m to spend on a single asset).

An example is an office tower on a 10 year lease to the NSW government with built in 3.5% p.a. rental increases, warehouses leased to coles/woolies or a portfolio of hospitals leased to private operators on very long leases. You basically subscribe (normally $20-50K minimum, some $100K) and you participate in rental income (tax deferred, with depreciation and all) and capital growth (normally wound up after say 5-7 years).

 

Wow, thanks @bookworm , i have been living under rock. Given the limited serviceability , i think this be the preferred option.

I am sure , there be various clause in the Unlisted property syndicates that keep everyone honest and keep the con artists away?

Do you have any recommendations on the companies who are running this (have you done it , tried and tested)? Or a google search will do?

Why not many people talking about it?

 

Don't know much about buying in SMSF

But our focus has now been commercial properties in US.
I am still a novice but learning alot along the way.

Length of Lease is critical, term and conditions. If you have someone with experience to look at leases in the initial stages, this may be very helpful. Devil is in the detail.

We go to auction as this is where we get some of our great deals, below market value.

Income, income, income.... we will only buy commercial property with a minimum of 10% net return.

Location and quality of product also important. We are buying B grade commercial properties. If you can add value to the property ie develop then this is a bonus.

Quality of tenant, Financials on the company/companies who will be leasing the property.
We make sure we are not leasing to a company that has poor financials, big risk, don't want any defaults.


MTR

 

@Newfast Hey there, sorry I missed this post, following on from our PM's back and forth. the stuff listed in your opening post is the "grass is always greener" with the aim to promote whatever is being talked about as being the solution to all your problems.

Unlisted property trust promoters have to meet requirements in terms of advertising to the public, such a prospectus and other things hence why many op for the wholesale investor route (i.e. not allowing the general public to invest) just make sure you read the offer documents and understand who/what you are dealing with.

One final thing is that unlisted property trusts are governed by ASIC to a certain degree (as not all trusts are registered) and many of the "promoters" will have an Australian Financial Services License