Extracting equity for first Commercial IP or invest in REITs

Discussion in 'Commercial Property' started by Mark202, 13th Dec, 2021.

Join Australia's most dynamic and respected property investment community
  1. Mark202

    Mark202 Well-Known Member

    Joined:
    30th Dec, 2019
    Posts:
    162
    Location:
    Brisbane
    Hi all

    I have approximately $600K equity that I can pull out of my current resi investment properties and considering whether to venture into my first direct commercial IP or take the easier approach and put it into unlisted REITs @ around 6.5% yield or even put some of it into an ASX 200 ETF which has averaged a total return of around 9% or so for 30 years. I don't need the money now but looking to build up the highest possible passive income that I can over the next 5 years without taking any risks that could wipe me out. I am ideally looking for $100K+ passive income in 5 years but if it takes longer that's also ok. My resi property portfolio is neutrally geared and I am happy for that to bubble away in the background and it may allow me to extract further equity for 1 more purchase in ~ year 5. At the same time I am putting cash into ETFs and should have around $600K-$700K invested after 5 years so I am trying to be reasonably well diversified.

    My rough calculations show that putting it into a direct commercial property could generate higher returns vs REITS due to additional leverage (obviously that also exposes you to additional risk as well). I have a couple of questions and will then explore further.

    1) I understand that many people will purchase in a trust or company structure and often extract equity from personal resi property portfolio to do so. Obviously I will get tax advice on how to structure the loans but are commercial lenders concerned about the fact that you have extracted equity for the deposit which means you are essentially borrowing >100% when you factor in stamp duty and purchasing costs? Or when people extract equity from their resi properties, are they actually using that to complete the entire purchase and are not borrowing any additional funds?

    2) What sort of price point do you think is possible if you have a $600K deposit (funded by extracting equity)?

    3) With a REIT I could invest straight away and get around $21K net ($600K * 6.5% yield - 3% interest). What would be the minimum net return on a direct commercial property investment that you would want before taking on the additional risks (e.g. vacancy, rising interest rates on a higher debt balance). E.g. If a commercial property could only get me net $30K then I am not sure it is worth the additional risk and effort....?

    Thanks in advance!

    Mark
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    27,100
    Location:
    Sydney or NSW or Australia
    If you're looking at CIP, there are still suites like: linky which could fit your budget (not a recommendation).
     
  3. Beano

    Beano Well-Known Member

    Joined:
    7th Apr, 2016
    Posts:
    3,346
    Location:
    Brisbane
    are commercial lenders concerned about the fact that you have extracted equity for the deposit which means you are essentially borrowing >100% when you factor in stamp duty and purchasing costs?
    The lenders are not concerned about 100% borrowing .
    They look at the total situation.
    I frequently 100% finance to buy something as surplus funds are use to repay debt.
     
  4. Mark202

    Mark202 Well-Known Member

    Joined:
    30th Dec, 2019
    Posts:
    162
    Location:
    Brisbane
    Thanks Scott. At this stage I am just looking at whether a CIP is worthwhile (and possible) vs more simple options. I'll start looking at individual assets when I know whether it is worth pursuing. :)
     
  5. Mark202

    Mark202 Well-Known Member

    Joined:
    30th Dec, 2019
    Posts:
    162
    Location:
    Brisbane
    Thanks Beano, that's good to know.
     
  6. Beano

    Beano Well-Known Member

    Joined:
    7th Apr, 2016
    Posts:
    3,346
    Location:
    Brisbane
    3) With a REIT I could invest straight away and get around $21K net ($600K * 6.5% yield - 3% interest). What would be the minimum net return on a direct commercial property investment that you would want before taking on the additional risks (e.g. vacancy, rising interest rates on a higher debt balance). E.g. If a commercial property could only get me net $30K then I am not sure it is worth the additional risk and effort....?
    With commercial property the key is the sustainable rental.
    Don't get too focused on the passing yield focus on the market yield and potential to increase the rental of the site.
     
    kmrr, Mark202, Cousinit and 1 other person like this.
  7. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,423
    Location:
    AU
    To your point 3.

    This is a viable option if you only want limited CIP exposure. A friend of mine has done this using Charter Hall DIF4 via $1m equity pull with Macquarie at 3% interest only. Paying IO from reserves and using distribution reinvestment (2.5% discount) it models very well over the long term.

    Drawbacks to this approach ;

    - very limited liquidity outside of 5 year windows
    - manager risk
    - inability to leverage increased asset value, as you would need to do if you wanted to create a large CIP portfolio
     
    Mark202 likes this.
  8. Mark202

    Mark202 Well-Known Member

    Joined:
    30th Dec, 2019
    Posts:
    162
    Location:
    Brisbane
    I see. Might need a Commercial Buyer's agent to help with that.
     
  9. Mark202

    Mark202 Well-Known Member

    Joined:
    30th Dec, 2019
    Posts:
    162
    Location:
    Brisbane
    Gotcha. Thanks, very helpful. :)
     
  10. kmrr

    kmrr Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    267
    Location:
    Melbourne
    further to this OP. my broker has said something similar to me. i've accessed equity to use as my 30% deposit and he has suggested that the next financier (a different institution) will likely look at the loan as a lease loan only. they will be assessing the strength of the lease vs the balance of the properties purchase price (in isolation) and not be looking at my whole situation which would otherwise be the case if i was targeting residential.
     
    Mark202 likes this.
  11. kmrr

    kmrr Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    267
    Location:
    Melbourne
    what do you mean by 2.5% discount?
     
  12. Beano

    Beano Well-Known Member

    Joined:
    7th Apr, 2016
    Posts:
    3,346
    Location:
    Brisbane
    The banks mainly use the properties they have under their security to extract equity.
    The have a limited look at the rest of the portfolio.
     
    Cousinit, Mark202 and kmrr like this.
  13. Bris developer

    Bris developer Well-Known Member

    Joined:
    16th Aug, 2015
    Posts:
    358
    Location:
    Brisbane

    I never liked REITS or any shares for that matter. The Benefit of leverage accrues to the fund managers not to you…

    you can easily get 10% cash cash and 50-100% uplift in equity if you buy the right commercial properties
     
    Cousinit, Mark202 and Beano like this.
  14. Mark202

    Mark202 Well-Known Member

    Joined:
    30th Dec, 2019
    Posts:
    162
    Location:
    Brisbane
    Thanks everyone!!

    I think I will have a go at getting at least one commercial property as opposed to investing in REITs. I am still in the building phase so might as well take advantage of the leverage.
     
  15. Beano

    Beano Well-Known Member

    Joined:
    7th Apr, 2016
    Posts:
    3,346
    Location:
    Brisbane
    If you keen to get started but have not saved enough then perhaps just buy 50% of a commercial property.
    Others do it .
    A 50% interest in the EY Centre at 200 George Street, Sydney, a 37-storey office tower comprising 33 office levels and 4 levels parking for 63 cars, incorporating the existing buildings at 190 and 200 George Street and 4 Dalley Street, an 11-storey former Dalley Telephone Exchange building refurbished for plant and servicing purposes, completed and officially opened in June 2016. It has a net lettable area of 38,983 sqm, which was bought for $575 million;:rolleyes:
    You can buy the other half later :p
     
    Cousinit, Ben_j and Scott No Mates like this.
  16. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    27,100
    Location:
    Sydney or NSW or Australia
    Is that as a going concern or should I allow for GST?
     
    Beano and Cousinit like this.

Do you need help with investment strategies, don’t want to buy the wrong stocks, or you just need a regular income stream? We provide the research to ensure your investment selections achieve the goals. This is the value of advice.