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Does this seem like a reasonable statement?

Discussion in 'Commercial Property' started by Beelzebub, 24th Sep, 2015.

  1. Beelzebub

    Beelzebub Well-Known Member

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    Commercial property is a cash flow positive play best suited towards the end of your property investment adventure.

    My thoughts:
    I believe cash flow positive is the way to go as I see purchasing cash flow negative properties as somewhat speculative and high risk. Buying property X with a 3.5% yield hoping it will achieve a capital growth rate 2-3% more than property Y at a 6% yield three suburbs over doesn't add up to me; particularly as this strategy would kill your serviceability and ability to grow your portfolio: I figure this game is really about using property to access finance rather than getting finance to access property i.e. it's all about wealth through leverage more so than achieving massive growth on a particular asset class (If that's what you want invest in shares).

    However most cash flow positive properties are cheapies, where cash flow can be destroyed by a blown hot water system or the replacement costs for an air conditioner. I haven't seen too many cash flow positive properties at 6%+ yields in the $500k mark?

    The solution to this would seem to be commercial property, where you can get cash flow positive yields on larger amounts of capital investment.

    However, you need around 70% LVR to break into that market severely limiting your access to finance and your ability to grow (remember how it's all about leverage). Also, most of the commercial property available seems very risky around the $500k mark? And there's a whole bunch of other factors that make commercial property seem difficult. But those yields: 7% seems possible with a larger capital investment than your $250k resi investment and the tenant pays outgoings.

    However, when you begin to slow down and your near the end of the game you don't really want to be walking around with huge debts at 80% or 90% LVR. Eventually I would imagine you would want to sit around the 50% LVR range: So, I'm thinking CIP could be a good play when you want to be less aggressive with your portfolio growth and want to sit around the 50-60% LVR range.

    So, these thoughts have led me to my introductory statement.

    Currently I have my PPOR $400k+ in Geelong area and IP 1 in Ballarat which I purchased for $275 with a 6% yield. Hope to purchase again late next year... But what to buy? Is my strategy okay so far?

    Now, people of PC, please correct, confirm or challenge my thoughts: Teach me people :)
     
  2. BurnettGroup

    BurnettGroup Well-Known Member

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    Define your definition of the word "Commercial". Are you talking retail, office, transport, warehouse, hotel, motel, chinese laundry, charcol chicken, red rooster, pizza hut,.......Dare I say it, a 7/11.
     
  3. Beelzebub

    Beelzebub Well-Known Member

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    I have no idea: Would warehouse, office and retail be a good definition? I'm really looking to figure that sort of stuff out with this post. If it helps, I would probably start with retail or office if I was to purchase a CIP.

    In any event, If my general statement is right and commercial is for later on I figure I've got a good 10-15 years to figure it out. If commercial is a good idea now then I guess I need to learn fast.

    In my mid 20s BTW, so time is on my side.
     
  4. BurnettGroup

    BurnettGroup Well-Known Member

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    At least you didn't say a 7/11.

    I've never been involved with Office or Retail so cant answer that, Warehouse and Transport, "yes" but only on the construction side. I've dabbled in a few Hotels with great results. The idea is lease them for 3 years, then purchase them. NZ is a good place to grab them, they offer leasehold / freehold options. Come complete with a package, ie; manager and staff, licenses etc, already in place.
     
  5. FireDragon

    FireDragon Well-Known Member

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    Retail and office commercial properties have higher yield than residential properties BUT the vacancy rate is also higher than residential properties. To reduce the vacancy rate, it's possible to buy a commercial property in a blue chip location and a good tenant such as banks, big supermarkets, etc with long term lease but it's unlikely to get the 7% yield nowadays.

    When the economy is in bad shape, depending on the location, it's possible to have a retail shop or office vacant for few months to a year. Personally when I retire I won't purely rely on commercial properties, I will make sure I have enough passive income from my residential properties before I consider commercial properties.
     
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  6. The Y-man

    The Y-man Moderator Staff Member

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    You get 7% to 8%pa net of costs on CPT's.

    Direct commercials you really should be looking for much higher returns - 10%~14%pa depending on the business and potential CGT of the ground underneath.

    The Y-man
     
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  7. Beelzebub

    Beelzebub Well-Known Member

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    Thanks Y man, that's the sort of advice I'm after to help me learn... I think. I don't understand the terms you have used. What do you mean by direct commercials? and what are CPTs? Certainly helped put into perspective how very little I currently know.

    Cheers
     
  8. D.T.

    D.T. Adelaide Property Manager Business Member

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    There's 75% no doc esque finance available on commercial now so not as inaccessible as you think.

    Personally I'd go the bank / supermarket / bunnings route as represents lower risk imo.

    If I was to look at retail it'd probably be multi tenant rows of 3-5 shops so as to juggle vacancy exposure.
     
  9. FireDragon

    FireDragon Well-Known Member

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    I partly owned a block of 7 retail shops in Randwick Council area on the main road within the shopping area, so it's not something regional. From my past experiences the vacancy rate is much higher than residential. Some tenants stay there for 10+ years but some may only stay 2-3 years. Don't forget when you sign a new lease, there is usually a 2-3 months rent free period. For my block, I normally calculate the average rental income as 2/3 of the rent when fully leased.

    I am not saying we can't do well with commercial properties and in fact most of the assets in my family's portfolio are commercials and the growth are huge especially for the ones that have development potential. However, the passive income from commercials are more volatile than residential properties.

    I thought most pepole's ultimate goal is to have enough passive income to retire earlier. I am just a bit uncertain why many people like to have riskier asset during retirement?
     
  10. sanj

    sanj Well-Known Member

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    Your incentives are typically 33%? Seems pretty bloody high
     
  11. FireDragon

    FireDragon Well-Known Member

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    So let say, when all the shops are fully leased the income is 300K a year, I will assume the average rental is 200K.

    Edit: sometimes the shops are fully leased but sometimes a shop can be vacant for half a year and sometimes the tenant may ask for rent reduction during bad times. So on average I will assume 2/3 of the rental income.

    I just remember I saw this article: http://www.dailytelegraph.com.au/ne...s-impact-arrives/story-fnpn0zn5-1227383606949

    When I walk past that area I was wondering why so many shops are vacant for many months, I didn't realise the impact of the light rail is so huge. Personally if I only rely on passive income from commercials I will make sure I have enough buffer to cater for long period of vacancy.
     
    Last edited: 25th Sep, 2015
  12. The Y-man

    The Y-man Moderator Staff Member

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    Check my post in
    https://propertychat.com.au/communi...hat-returns-or-secure-income.4127/#post-69431

    CPT = commercial property trust, although these days REIT = real estate investment trust. I also use it generically to include syndications and other joint ventures.

    Basically a company can start up a unit trust, get investors by selling the units in the trust, buying commercial properties and divvying up the rent at the end of the month.

    The managing company takes fees etc.

    The Y-man
     
  13. Beelzebub

    Beelzebub Well-Known Member

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    Thanks Y man, I saw that post. Was interested in the concept.
     
  14. The Y-man

    The Y-man Moderator Staff Member

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    BTW when I say "direct commercial" I just me you owning it directly, or controlling a JV to own it. :)

    The Y-man