Random observation why it's much easier to buy resi property (and resi OTP) over commercial

An 80 page advertising feature from a local paper. Comes out weekly. Many pages of OTP sitting right at the front in the prime part of the material. Do you ever see the same advertising for commercial?

 

There's an ad I keep hearing on the radio about commercial property on StKilda Rd Melbourne. It's interesting as the ad seems to be pitched at the uneducated investor and it's always on commercial radio. Anyway...

 

I think its got more to do with less interest by retail banks etc to make it easy for mum & dad investors to get into. That and risk seems higher due to the different styles and agreement types for commercial property.

I also think most investors have either heard horror stories or driven past vacant commercial properties that have sat vacant for months or years, vs the likelihood of that happening in resi is much lower thanks to single digit vacancy rates across all the major east coast cities.

That said, on the flip side to counter everything I just said, every 12 months I think I should get into commercial (the yield! making tenant cover expenses! long term leases!) and pretty much every property I look at under $2m is a crap deal pitched to idiots that normally gets sold for more than its worth to a cashed up SMSF buyer. The "good" deals don't seem to start occurring until more like the $3-4m+ price point, which is laughably beyond my means at this stage.

 

If you are investing in commercial the financial strength of the tenant is important. This requires an investor to undertake legal and financial due diligence on the tenant which is more complex than it is for residential.

 

Definitely tricky. I can't find anything worth having under $1m. Even then the lvr requirements mean a hefty deposit is needed. Yields way better than resi but if loan period is over 15yrs as required by the bank, and you lose your tenant, where do the $10k pm loan repayments come from? Covering a resi vacancy is a pain but I think those repayments would send most people under.

Not sure if investors take out insurance for this, and what the costs look like.

 

Yep, I think a few people are spouting about buying commercial without having really looked into it. For sub $1m the yields look average, lots of competition to buy, lots of rubbish that no one wants to buy and has been for sale forever. Around the 1m mark the quality starts to get better but the shocker is 10-15 yr loan terms. LVR at 65% ish so unless you have very deep pockets you've spent your cash buffer. And wow, no way would I risk $10k pm repayment shortfall if tenant leaves. Instant financial suicide.

 

OMG I think unless you can find a hidden gem and/or have huge resources you may be best to steer clear.

 

And so the more money you have the easier it is to make more money.

 

I think the reason people get scared off commercial is because of alot of these types of posts .
There is plenty of good com available from $350-$500K in sydney (NW etc)that carry good returns and well worth the risks .
Yes you need to have higher cash deposits and yes very wise to pay them down with the cashflow to help prevent issues with yr lender during a down turn .
But
Commercial can return 10-12% so the extra incomes help to lower these risks down reasonably quickly if yr wise with the debt

 

Same old

 

Commercial is an odd game. Its either really good with a high upside and manageable risk.

Or really risky with a low downside and not so good upside.

 

Everyone gets to do their own dd and if you can find something good then commercial absolutely makes a lot of sense.

 

Everybody, thanks for sharing your thoughts, some excellent posts showing some major concerns to consider.

I can't afford to not understand the potential downsides. Thanks.

 

Might be a stupid question but can commercial be insured against a drop in value? You could insure against a tenant not completing its full lease... I guess you need to be somewhere that's always going to be popular.

 

This is my second venture into property investing.
I bought a retail/office with street frontage, ground floor of an apartment building.
It cost about the same as a 1br apartment above, but the office rental return is nearly double what you could get for the 1br
And i have a tenant on a 3yr lease with 3yr option, with annual CPI increases
Closest thing to set and forget

(sure it's not all beer and skittles, but its not too bad)

 

Plenty of 10-12% net return commercials available in Sydney priced $350-500k? I'd love to see some examples, would've thought they'd be flying off the shelf? I guess they have to fit your profile, would be interested to see though.

 

You need a good spread of tenants incase you lose one or two hence I suggest 20 plus tenants ...at 50 spread over different cities different types a loss of one or two is substainable

 

Agree, and very important to pick the correct properties/tenants early on because having to stump up $10k+ pm mortgage repayments because your tenants left at the end of a 3 year lease and no one else is coming forward would make it very difficulty to move on to numbers 2-20.