First investment - Commercial or Residential?

Discussion in 'Investment Strategy' started by Alex10, 12th May, 2021.

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  1. Alex10

    Alex10 New Member

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    Hey guys, I'm interested to hear all about commercial property world and I'm curious to know if it would be a wise first investment.

    My partner and I are in our mid twenties living in Sydney and are looking for some guidance regarding our first investment.

    We've only researched residential properties, mainly villas/houses (around Newcastle, Gosford, Western Sydney) but now after reading a few of the threads in the forum I'm curious to hear about commercial properties. What are the pro's and cons of commercial property? Is it a safer investment?

    We have a budget of around 600k, and we want to put as much research into this as we can so we can map out a strategy

    Happy to hear all suggestions, I'm new this forum and everything has been so interesting to read :cool:
     
  2. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    Pros - rental yields can be great
    Cons - you'd better hope they have a long lease in place or the place is easily to rent out.
     
  3. NickWCBA

    NickWCBA Well-Known Member

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    I’d aim for a residential portfolio first. Can be riskier with vacancies etc.
    Smart money would accumulate less risky residential then start playing in the commercial space for cashflow.
     
  4. Branden

    Branden Well-Known Member Business Member

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    They're two completely different beasts. In both cases, education should be at the forefront of your investments. If you have a good understanding of residential or commercial either may serve you well. Moreover, I would encourage you to consider which property type is going to suit your goals, circumstance, and risk appetite.
     
  5. The Y-man

    The Y-man Moderator Staff Member

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    Do both - resi direct and commercial thru prop trusts.

    The Y-man
     
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  6. kmrr

    kmrr Well-Known Member

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    I've got one of each and must say i have gotten much more satisfaction out of my commercial property. i bought it under leased and at 6% yield oct 2019 and contracts are now being reviewed with rent 10% higher. cap rates have been squeezed too so once it gets revalued i am hoping to get 25-30% capital growth in circa 18-24 months + the great cash flow. i've spent 9k putting in new blinds and new skylights too though.

    compare that to my resi, and i have done a kitchen reno and achieved circa 30% CG in a bit over 4 years but have also had to fork out 15-20k fixing stormwater pipe issues and had to manage an insurance claim. cashflow has been neutral
     
  7. Alex10

    Alex10 New Member

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    This sounds interesting, where can I educate myself further with this?
     
  8. The Y-man

    The Y-man Moderator Staff Member

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    They are basically like owning commercial property jointly with other investors. You buy "units" or "shares" in them (usually managed by the property management company), and you receive your portion of the rent based on how many units you own (less management fees, interest costs, repairs etc).

    The main risk is that you have no control as your proportion of ownership is likely to have no impact when decisions are voted on (if the decisions such as sale/purchase of properties, fees, works are even voted upon).

    There are essentially 2 ways to get into the market: unlisted or listed. There are pro/cons for each.
    Listed: Small capital outlay, very high liquidity. Ability to buy property below bank value.
    Unlisted: Low liquidity, higher returns (less overhead costs for compliance, reporting etc)

    There are different trusts for Office buildings, Shopping Centres, Industrial Warehouses etc.

    Check out threads like: Unlisted Property Trusts 2021 [Property & Infrastructure Funds]


    Examples of listed trusts:
    Vicinity Centres, Home Page
    Property Portfolio - APN Industria REIT

    Examples of unlisted:
    Cromwell Direct Property Fund - Cromwell Property Group Australia
    Unlisted Direct Property Funds

    The Y-man
     
  9. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    The historical wisdom is that you do resi first, and build up your equity. The last property, the icing on the cake would be commercial.

    Actually, the reason for this is simply that it is very difficult to save the deposit for a commercial property, which is more likely to require a 40% deposit. So the reason is less strategic than it may seem, though obtaining finance is an important consideration.

    If you are confident with finance, I agree with the comments above - do both.

    If you are starting out with a low deposit, starting with resi is probably more practical.
     
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  10. Chabs

    Chabs Well-Known Member

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    Commercial is simply higher risk and higher reward.

    It’s objectively the faster way to build a portfolio, however finance gets tougher much faster, as banks are concerned about the longer vacancies, and higher uncertainties.

    Banks will also be extremely conservative with valuations, and in some cases they will follow up every x years to re-evaluate the loan.

    That said commercial is where big money makes money. Once you have access to the lower rate commercial loans (eg 2.5%) rather than the typical market rate ones (e.g. 3.5-4.5%) and can do 50% deposits, it really becomes a rich persons game. People with massive assets and extremely stable cash flows probably have access to sub 2% financing!

    to get to the rich investors level, you need to look safe to the banks, so that means very stable monthly cash flows and 50% or lower LVRs

    If you’re planning on adding sweat equity to the investments, do a resi or two, sell them after adding value and then gradually invest proceeds into commercial properties under family trust or company structures for optimal cashflow.

    you make the fastest money with a 26 year olds income/deposits with resi, doing a ppor on a ****** place, fixing it up and then selling it CGT free once you’ve lived in it for long enough.
     
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  11. Kevbo

    Kevbo Well-Known Member

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    Why is it that for commercial property people often use a trust structure? Why wouldn’t these people use trust on residential property?
     
  12. The Y-man

    The Y-man Moderator Staff Member

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    For us, it's tax benefits get by having it in your own name for resi (can offset losses against other income, land tax thresholds, etc etc). Commercial wouldn't carry the same benefits being held in personal name, hence in trust for ability to direct income etc.

    The Y-man