What would you buy for 5 mil ?

Hi BG, interesting post. Theres plenty of space here to go into as much nitty gritty as you want. I think you would have a very interested audience.

 

And why would you drop one of the 3? Income is income.

 

Correct, but for someone starting out in business or investments, 3 is a good number to start with. More than that, your head starts to spin and you lose control of what your supposed to be doing. You also only want to work 7 - 8 hours a day, not 14 - 15 hours in the beginning. Iv'e been doing PI for 30 years, I still do 5 at a time, no more. I work around 4 hours a day.

 

We're talking about commercial IPs right? Aside from initial leasing, they're not very much work.

 

Commercial yes, (Depending on your definition of the word, Commercial).
What's not much work.???

 

Commercial IPs

 

Depends on the "commercial" bit, if it's office, transport, warehouse etc, each has there own set of problems..
I recently bought a Pub with 3 bars, 2 eateries, a function room and 80 beds. Then the fun started, council informed me drains would need to be changed and renewed, (at their option, my expense) this would be reflected in my rates etc.

 

I agree...and I manage significantly more than a few dozen of them

Mostly office, a reasonable amount of retail and a few industrial.

 

Leverage or non-leveraged funds? LVR?

 

Any problems with the Industrial.

 

The reason is primarily for cash flow leading into an impending semi-retirement.
It's probably the right thing to do to start small in this asset class having extremely low experience in it, and build from there as was the case with resi.
I think we are done with resi IP's at this stage.

 

60%, or whatever we could get away with.

 

No problems with Industrial, My business is focused more on commercial office and retail.

 

Gotcha. Interesting too know what everyone's little goldmine is. Hope it works out well for you.

 

So you're planning to head towards semi-retirement by purchasing a risky asset that will have interest costs of ~$300K pa, (plus land tax & rates & insurance if there's no tenant to pass them on to). Most think that Australian economic grow is not heading in the right direction ATM - businesses are a little more likely to fail than usual - commercial vacancies are likely to be a little higher & tenants will have a little more power than usual.

What risks do you see ? Is there a 10% chance that the tenant goes broke ?, or doesn't renew after 3 yrs, or renegotiates the lease while threatening to leave - you may be looking at a 2-3 yr vacancy - your outgoings will be close to $1M. Is that a risk you're willing to take as a retiree ? And when a new (less than ideal) tenant does come along after a couple of yrs, you'll probably be happy to accept whatever terms they offer. That's if the bank hasn't noticed that you have no rent coming in, and exercised clause 142.m) xxi) of your loan agreement and demanded repayment in full within 14 days. Will your other income streams support that level of exposure & not impact your lifestyle ?

Most people look at safer assets when retiring - why are you looking a risky one ? Multiple tenancies will mitigate some risks, however, there are still risks that can affect the whole asset.

 

Thanks for your concern.
$300k interest on a 3 mil loan is a bit excessive, I don't think I would accept those rates.
In all honesty, I'm planning on making more income being semi-retired than I do now.
Probably shouldn't have said retiring, more like taking a break of undetermined period.

You are correct though, this would be a risky move and I will proceed with extreme caution.
I'm not too concerned with a bit of risk going in to this phase of semi-retirement.
This is more like the beginning of my business/investing life, not the end.

 

@ Keithj - what are you smoking dude?

Interest @ 10% of 100% of asset (or 14% on $2.1m)
2-3 years outgoings @ $1m on a $3m asset

Even if my maths is conservative @ a 7% gross yield, the return is only $210k a far cry short of $666k outgoings or your $300k interest figure. By your reckoning you'd require a gross yield of close to 25% to break even.

As for seeking conservative investment classes in retirement quite the opposite - you're a ling time retired so still require income producing assets without putting all your eggs in one basket.

 

A different perspective for you to think about.

Let's say you buy commercial for $5mil with 60% LVR. I am going to make couple of assumptions here so bare with me.

Assumption 1 - You buy commercial with strong tenants and therefore best net net return you can achieve is 7%

Assumption 2 - In current climate best commercial rate you can achieve is 5%.

Your investment position looks like
- $2,000,000 (40% deposit)
- $250,000 (5% purchasing costs on $5mil)
-----------------
Total = $2,250,000

Borrowings = $3,000,000

Loan @ 5% = $150,000

Rental Income @ 7% = $350,000
--------------------------------------------
Your income = $200,000

Let's look at an alternative scenario. Suppose you use your initial capital of $2,250,000 to buy big 4 banks which control 80% of the Australian mortgage market. This means you have a small stake in virtually every residential and commercial property in Australia that has a mortgage on it.

The numbers are as follows. Because we are investing in shares we want to be more conservative so will only gear the portfolio by 40%

- $2,250,000 (60%)

Borrowings
- $1,500,000 (40% gearing)

Total portfolio size
- $3,750.000

Since, you will be borrowing >1,000,000 I believe you can easily negotiate below 5% margin loan. My borrowings are much less than $1,000,000 and I am paying 5% and my account manager has told me multiple times they will offer more discounts if my borrowing goes above $1mil.

So lets say you can borrow the $1.5 mil at 4.75%.

Based on current prices all big 4 are yielding gross return of 8% or above. Let's take 8% for this exercise.

Interest costs @ 4.75% = $71,250

Income @ 8% = $300,000

--------------------------------------------
Your income = $228,750


I understand you can change the figures/assumptions above and make the other case more compelling, but with shares option you are more diversified, less hassle as no management required just enjoy the quarterly dividends.IMHO that is how retirement should be.

Cheers,
Oracle.

 

Hmmm... that's a good idea

I agree - 10%IR is unreasonable. However, I've included the opportunity cost of the $2M deposit what could be earning x% if it wasn't earning 0% in a vacant asset. I assumed 6% IRs for comm.

Excellent.. I have a similar attitude

I'm looking at the risks - v. few people in this thread are doing so.

The assumption I'm making is that the investment goes bad at some stage in the 1st 5 yrs of purchase and income is $0 for an extended period.
6% IR cost on a $5M purchase is $300Kpa. The assumption I am making is that the opportunity cost of any deposit would also be 6%.
Total cost of a 3 yr vacancy would be close to $1M.

Add in a couple of percent land tax, rates & insurance every year that cannot be passed on to the non-existent tenant..
Then consider it reverting to P&I over 10 yrs after the IO honeymoon.

I'd tend towards several smaller diversified comm investments rather than putting 5M eggs in one basket.

 

Hi oracle

Where are you getting these rates? Is this just for personal names or can you get these rates on trusts as well? I see Westpac offering similar numbers but only in personal names...

BTW, perhaps you should increase your CIP yield assumption to 8% for a fair comparison. Of course the risks increase if you just buy one monster property but the fact is that the properties get better (better tenants, better locations, better leases, better land content, not always better yields but usually better yields ceteris paribus) with size. That has to be contrasted with the risk of putting all your eggs in one basket - only an individual investor can make that decision but keithj is right to point the risks out.

Ace - in that price range I would cast a pretty wide net around the country across types of properties to find one with the right combination of lease quality, tenant quality, location, tenure, land content, development upside, net yield etc etc etc that I like. There are no rules around types of properties that will fit your particular risk appetite - it's all up to marrying your hopes with those of sellers and that could happen on any property type anywhere around the country.

It's funny - most resi investors wouldn't dream of just taking a quick look at yields on realestate.com.au in their area and drawing conclusions about the entirety of opportunities in the RIP space. However, a large number of investors do exactly that on realcommercial - check a few properties that don't appear to have very attractive yields for the risk and conclude the whole market is not worth it. It's only the diamonds in the rough that make the game worth playing and they could be less than 1% of the overall market - just like resi in that respect. Finding them is all the fun.... anywhere from an industrial shed to a medical centre to a bank.