THE PERFECT MIX OF FEAR AND EXCITEMENT

I can understand the temptation to develop, after all that's what I do for a living and I love it. you have to ask yourself though, keeping in mind your existing stressful job and long hours, do you want /need the headache? also, assuming you do develop, how much closer does it get you to creating that goal of $x/year in passive income?

weigh that up against selling the sites and putting that cash towards something income generating. ultimately only you and your wife can make the call on what to do and what works best, just make sure each step gets you closer to your goal and imo capital gains don't put $$ in your bank account each month

also, buying buy and hold resi in the hope it rises in value so that you can then use that equity to fund a development doesn't make sense to me. too many loose ends and it could take you years before you finish that development. in the meantime they're all costing you money instead of earning you income.

 

Thanks everyone for sharing some ideas re: commercial... It is something I have never thought about before.
Perhaps I should be thinking about options other than just B&H, but that's all I had thought about before. I guess that's just what I have seen my parents / colleagues / friends do, so it's great to see some different perspectives here

 

For someone like @Bran, who has just finished his specialisation and is projected to increase his income significantly over the next few years. I don't see much point in targeting cash flow positive properties at this stage. The cash flow income wouldn't make any difference to his already projected high income. I would target investments with capital growth potential, such as development sites (either resi or commercial), but not necessarily develop them now.

That's what I did over the last 10 years ago, and it worked pretty well for us.

 

What makes you think the commercial property will sell at 8% yield? Is that what they are currently going for?

I did a search on realcommercial for Melbourne 8%+ yield.... And nothing came up.

 

I agree and I would be looking at this path too if I was @Bran, though I don't know his situation intimately so could be wrong.

 

personally I disagree because it his goal is to replace income and he's already indicated that doing his job for the next 20 years would be exhausting. buying development sites means either holding them up and losing money every year (which goes the opposite direction to the goal of creating income) or developing those sites which, for someone who works long and stressful hours and has a wife and kids, might not exactly appeal.

that's just how I'd approach it in his situation but there's no right or wrong way. I've yet to see a justifiable reason for a goal of extra income to one day replace part or all of his current income is best served by taking money out of his pocket every week instead of adding to it though.

 

What about a mixture. Buying deals that have great CF and other deals that will allow to create more equity for the future.

 

Hi mrdobalina,

I'm currently looking into commercial as my next investment.
Could you give some tips/advice that may help a beginner?
Cheers

 

again, if the goal is to replace income and someone is realistically able to save hundreds of thousands a year so additonal deposits are no issue, how does equity help? eventually that equity will need to be turned into something income generating. in the meantime youve wasted a fair few years losing money instead of making it and taken the risk of the market gods being good to you and giving you good capital growth.


honestly, what good does equity do in this particular situation? you're going to need to either borrow against it or sell to free up the equity and then put it into something high-ish yielding. instead of going from A to C to B why not go straight from A to B? what does C achieve?

 

Agree @sanj. Don't want to be too nosy, but need to confirm that someone actually CAN save hundreds of thousands a year. Also if @Bran can unequivocally say that he only wants to replace his income and the building of wealth is not on the cards or a far secondary consideration, then I would agree with you.

 

Cash flow is king...Buy 2 x 1.5m commercial property with 7-9% return...with rent increases and newish property & you are set for life.

$3m loan @ I/O 5.3% = $159,000 repayment

Rent Collected = $240,000

Net = $81,000.....with rent increases

 

Does commercial property carry more risk?
What happens when economy's turn bad, or areas struggle, and businesses start closing. How do you find a tenant in uncertain times.
Can you still sell commercial property for what you paid if you can't show what it generates in return if a downturn occurs?
Still learning, many questions.

 

Yes, eventually.

Everybody's circumstances are different, but let's look at @Bran as a case study. He's just spent 15ish years studying medicine, working his internship, studied more and gained his specialisation. As a medical specialist, his income would be circa $500k, and could possibly go to $1m per annum over the next 10 years. Is he likely to give that up so soon after gaining specialisation? I doubt it.

Would buying cashflow positive property make any difference to his income? $10k CF+? $50k CF+? I doubt it.

I would focus on high growth potential investments, that could make a few million over the next 5-10 years. If they were CF-...so what?.... He would barely notice it with his current high income. When he's ready to retire, turn those millions of equity into something could could generate positive cashflow, when he actually needs it.

You ask how does equity help? Well, having a few million in equity feels much better than not having it.

 

In general yes. People have to live somewhere. (resi). But they don't have to run a business. (comm).

The value of commercial can greatly be affected by the lease in place. So you buy a property with a 5 year lease and x amount of rent a year giving you an 8% yield for example. This covers interest and other costs. Say the tenants decides not to renew the lease and leaves after the 5 year period. On a million dollar property (assuming 100% lend) youre looking at over $1k a week interest As well as that your $1m property with no lease in place will be worth less now as it isn't generating an income and therfore the demand for it is reduced. Commercial properties can potentially take many months to lease out depending on many factors. So unless you can plug that thousand dollar a week hole, you'll be in serious trouble very quickly. If you try to sell it would almost certainly be less than what you paid when it had a lease (assuming no market movement).

Just something to think about.

 

Thank you for the feedback.
If you were to sell for what ever reason, then while its leased is the best time to sell.
Do commercial properties go up in value the same as resi, supply and demand? I see many areas with huge demand for houses and prices have risen heaps over the years, but in the same locations I see vacant shops fronts.
How do you asses if the area stacks up?

 

Here is a link that goes through the basics. It's a good place to start.

Commercial property investment vs residential & commercial investing tips

Pros & cons: Investing in commercial property - realestate.com.au

 

"Commercial properties are generally lower priced compared to residential properties so you need a smaller capital outlay."

Wtf???

 

Thanks York. I have a lot more research to do.

 

Yeah I saw that too....that was a poor example in the context of the article.....

 

Just because you did a generic 8% yield search on realcommercial.com.au doesn't mean they aren't there. Agents don't put a price for a reason.

Find a seller desperate enough, or if you can line a tenant up and search together for the perfect premises, or find one slightly lower yield that may have more space for more potential income.....

Also, ones with leases that have good rent increases (3.5-5% p/a) make a 7%er turn into an 8/9/10%er very quickly.

Gotta be a bit more savvy than a quick scan.....but they are out there.

pinkboy