Going from housing to commercial property investment, how much capital is needed?

Il look into these reits for sure thanks!

 

another question mate what is direct CP? Haha thanks

 

I listed to this podcast once about commercial props, it was amazing. I wish I wrote down the name cause I really want to recommend it.

If anyone can help ...it was about 9 months ago, a popular Aussie investing podcast. They had this special called "commercial property week" where they focused the topics on CIP's.

 

Gunga din..something we finally agree!

A lot of people are rushing to get into Commercial Property ...the marketing by some slick BAs is also pushing this.

CIP is a very different beast, a couple of things to consider:

1. Finance review are common on your asset. In some instances the bank can ask you to repay your loan... in 90s recession it is very common..if they deem the risk not great.

2. Vacancy can be an issue. Sure if you buy a large asset you do reduce the issue if you have lots of tenants.

3. If another large newer shopping center gets put in....that can cause massive issues.

4. In a downturn...be prepared to work very hard...as CIP becomes a pain. Saw that in 1989-1992.

5. You need to have a seven figure bank in cash...if you have large investments in CIP.

6. CIP rents can drop as much as 50%

7. Large assets requires a dedicated staff to manage...have you bought yourself a business then?

Resi does not have this issue...for one Consumer Credit Protection (CCP) the process of repossession is long and it has to go through many processes. Most houses if maintained will rent..it is question of dropping the rent to meet the market. Even in Perth the drop at the worst point was 20-30%.

A lot of people buying have never seen a massive recession....once this happens ...people are educated forever.

 

We cant disagree on everything now can we?

 

Ditto big time. The REIT does not call you on weekends and you get a share of the best A class buildings in the country, not what you can afford. You get the CG and yield with very minimal work. You can make better returns on your own but you need to be in the top quartile of operators. (i.e be really good at it and work on it). If you have the time,energy,money to invest in improvements and expertise direct is best. I am good at other things but not commercial but I want to be invested in it. Answer: REITS.

 

You just have to try harder

 

Not equity net rental I am talking about (after expenses but before taxation) .

 

Yeah first commercial 1994 18 % net return 10% funding last commercial 2021 7.5% net return today 10% funding 3.2%

 

great advice mate yeah seems like there is alot more risk in commercial property thats for sure

 

There can be more risk and there can be less risk.

 

Yes...structuring is important...but the stuff I see BAs putting their clients into is risky.....

 

Lack of depth of understanding for most BAs. Most have come from a residential background whereas many agents who I know & have been in commercial for a while are generally holders of a B Property or B Land Economics as a minimum.

 

Yep....wait till the next major downturn ...watch what happens with commercial...some of the returns now less than resi...people getting in ...really?

 

The majority times that I've seen sites sell on ‹3% yields have been when there's a large development upside - sales price has been based on the expected rental of the new buildings.

A wild guess on a speculative development with the hope that the sun keeps shining.

The rest of the times have been the sale of suburban banks with 2 x 5 yr leases or with a major fast food player in place. We know what the banks have done, if you can find one.

 

It's the compounding perpetual income that is the cherry on deal.
Did you and your family start Collier's international real estate ?
If so me and my mates have paid your family so many hundreds of thousands of commissions you probably never ever need to work ever

 

If you look at Regional locations there's plenty of sub-million opportunities. Risk profile is obviously a consideration so DD very important. Multi tenancy properties can be one way to mitigate some of the risk of long waits between tenants.

Also consider CP valuations often derived from rental income as a yield percentage that is used to work out a value. There are obviously other valuation considerations but note this as it differs from Resi.

As for finance, you'll be dealing with the Business Banking arm of your bank, not the Retail area used for Resi.

 

Having recently purchased our first CP I am nowhere near as experienced as some on this forum but I'll share some things I've learned from my personal experience;
Compared to resi, a lot of the transaction costs are higher, make sure you know what you're up for and have cash available.
Commercial lenders will have a lot more hoops to jump through, this can take extra time to get sorted so allow for it.
Yields are higher for a reason, the asset class is higher risk, long vacancy are certainly possible, as are other expenses although these are manageable if you're properly prepared, be properly prepared.
Because its higher risk lenders charge accordingly, rates and fees are higher than resi, lender may also want to reassess the loan every 12 months.
A lot of the value of a CP is the lease, if you're borrowing a large fraction of the value you will need a lease already in place.
Leases are not mostly generic like resi, read a lease carefully and get legal advice on it where required.
Honestly the main drawcard for commercial (industrial) for me was the yield but the way things are going at the moment with advertised yields dropping well into the 5% range and even some I've seen advertised in the 4s along with interest rates rising its getting harder to see the sense purchasing at the moment, buyers in the current market really run the risk of having a negatively geared CPs if rates rise enough, not good news especially if have bought in a trust because the losses cant be passed on.