Progressing from Residential to Commercial

Hi everyone,

I have a couple of residential properties and looking at purchasing a commercial property next.

I see 2 common statements while I'm researching commercial property

1. Only graduate to commercial property once you have a substantial base of residential property ($10M+)

2. Point number 1 is a myth. Having (any or substantial) residential property is not a prerequisite to having a successful commercial property portfolio

I know commercial is a different beast and will definitely be dedicating significant time to educate myself before going down this path

Is there any truth behind statement 1 or 2? If so, why?

 

1 is the most stupidiest thing I have read, Two is correct (except for elliot wave theory). If you can get finance for commercial you get commercial, when you can no longer get finance for commercial than you have to buy resi. Commercial is much easier in every way except financing. Lease and forget for years just spend the money which you can get in advance, you can index rent increases, tenant responsible for maintainence. Maybe paying council rates is all you need to do but you make that the tenants obligation too. The weird thing is the worse a property's potential earnings are the easy it is to get finance. The thing that makes commercial a good investment is the fact it is hard to get finance for and reduces a buisiness's ability to scale and spend funds most productively

 

No. 1 is a fallacy - there are how many developers who successfully develop and hold residential property? Compare that to the ones that hold retail, commercial or industrial property.

 

what did John Laws say?
"If you are on a good thing - stick to it!
If you find a better thing - switch to it"

plus, i think the threshold is more - what do you know about businesses? Do you run a business? Do you understand the business trends, weakness and strengths of the different sectors; retail, industrial, office (lol, are there any strengths there)

enjoy the journey and best wishes

 

Hi Fargo - isn't the success of commercial dependent on how the economy is going? e.g. if you were to purchase some office space, it would be clearly difficult to lease it out in the current COVID situation with businesses all working from home (at best, you would need to provide a significantly discounted rent). And as property guts said above, experience/knowledge of businesses across different sectors would also be required given the differences in each.

 

Great advice! I am a fan of John Laws - lol, did he actually say that?

But I agree, stick to when you're on a good thing. Only change/switch if there is compelling evidence to convince you to do do.

 

Even better, try and and find somebody who is on a good thing and wants to sell for a song. I'm sure they're out there.

 

Commercial, like Resi, has a full spectrum of values and markets... Yes there is more you need to know, plenty of risk and certainly more complexity than Resi, but entry can be had for entry prices lower than many would admit, it certain areas (no not capital City CBDs).

Purchasing structure is far more important, as is having a team of trusted professionals to do those necessary legal and commercial transaction activities. One thing I’ve learnt about CIPs is that when things go bad, they can go really, really bad if you don’t have a proper business plan.

That said, it isn’t necessarily as scary as some of the rhetoric I’ve seen over the years. Just do proper due diligence and do it to a professional standard.

 

In my experience commercial property can have significant vacancy periods and expensive outgoings. I would want a lot larger cash buffer for a commercial property. Can you afford to hold a property if it is vacant for a year or more?

 

Here's a interesting story...an old colleague of mine, her parents run a bedding factory...they actually manufacture the beds here in Australia (Sydney). Started off small in the early 90s, rented a warehouse but made enough to buy it, then proceeded to buy in the same suburb/street they manufactured in and progressively got up to 6 warehouses (1 is used themselves) and they average 60-70k per warehouse. They've hardly had any vacancies and only have the one PPOR (albeit a relatively luxury one) estimated to be worth 4mil in Tennyson Point.

I've talked to them once at my colleague's wedding and they told me that their motto is they chase the cashflow not capital growth as to them its hard to gauge etc. I've met the opposite whereby they owe 7 residential properties (huge land tax bill) and shy away from commercial as they don't understand commercials and it's too risky.

 

This is where structure of ownership and having a "plan" come into play.
As a small company likely with a couple as the directors, as the company grows and is profitable it buy's the building, then another to expand into, and then another because it can afford to, thus the expenditure reduces tax payable any given applicable year, as the business grows its wealth and asset base up to a point where the owners sell and retire putting those years of profit and growth directly into superanuation at a reduced taxable rate (compared to selling alone).
Not tax advice, and I expect that in recent years the amount has been capped.

I've started in a small retail/commercial unit, it was cheaper than the resi units above, the returns are better than the resi units above, and the tenant pays various outgoings, yes the vacancy times can be longer (this purchase was CF+ after 3 years).
Ensure there is plenty of parking available/nearby if you buy, as this is often lacking for staff and customers

 

Yes