Commercial Real Estate Investing Tips

Hey guys,

I just put together a quick list of tips for getting started in commercial investing.

Tip 1: Look for long leases - a three, five or 10-year leases, with an option to renew. Long lease = more security!

Tip 2: Make sure the location is viable. For example, if you’re buying a café, it needs to be in an area that gets consistent foot traffic without an oversupply of competitors.

Tip 3: Understand the commercial property market drivers. Make sure the tenant is in a high demand industry, this is essential for growth. For example, you wouldn't want to buy a Blockbuster store when there was evidence that the industry was being replaced by Netflix. Industries such as the medical and fast food industries are on the rise. Buying into a growth industry can lower the chance of a vacancy.

Tip 4: Understand local demographics. As certain segments of the population move to different locations, new opportunities arise. For example, If there is an increasing medium age of the people for a suburb, there is more demand for medical based businesses.

Tip 5: Diversify. I personally have liked to buy multiple cheaper commercial properties as opposed to buying one high value property. For example, three properties totalling $1,000,000 gives you a lot more lease security compared to only relying on one tenant for one $1,000,000 property. There is also the argument that smaller commercial properties with lower rent expectations are easier to fill compared to large expensive commercial properties.

Tip 6: Understand how long it would take to find a new tenant if your current one leaves. The best way I have found to work this out is by checking “first listing” to “first listed” dates on online real estate portals An example, If you were looking at a 250m2 warehouse, you would need check how long it has taken to fill a warehouse between 200-300m2. If the average is below three months, the risk is not great.

Having a great understanding each of these tips is essential to do well in commercial property. When you get it right, the returns can far exceed the best residential returns.

Scott O'Neill

 

What sort of net yields can you achieve with a quality CIP these days? It used to be my endgame strategy, where I would borrow $2M against my RIPs to buy a $3-4M CIP. However due to prices in CIPs seemingly increasing, I believe that the yields have dropped quite significantly.
Is 8%+ still realistic?

 

7.5-8.5% nett yields are still achievable with sturdy leases.

I plan to follow a similar stratagy. I have a large amount of residential stock and it's starting to give me headaches. I would rather have two supermarkets compared to 20 houses

 

Thank you Scott
Would you take the risk in buying a vacant one?

Have you considered multi - ownership? Unit trusts or tokenising for bigger ones ie shopping centres.

 

I have never been involved in a vacant sale. I rather not risk the vacancy.

I have worked with a few clients involved in syndicates. There are obviously advantages with group buying, but I always prefer to have 100% ownership.

Also - as you spend more (+$5,000,000) the yields don't necessarily get better. If anything the yields drop as company's buying these assets are less concerned with maintaining a good yield. They opt for security. For example, buying an AUDI supermarket with a 4.5% nett yield is a common number. Mum and dad investors generally require +6% nett yields to remain highly positively geared.