When did you branch out from "normal" property investing

Hi all,

This is a question for anyone who has branched out from the traditional residential investing to try something else that usually carries higher risk. This can include developments, commercial property or international investing to name a few.

My question is, how early in your investment life did you branch out? This can be in terms of number of years or how many properties you had previously purchased. Also now that you have changed strategies do you stand by waiting as long as you did or would you have tried these more advanced methods sooner in hindsight?

Thanks,
Nick

 

I'm looking into doing my first development right now.
Starting to really not wanting to go to work and am sick of just banging my head against the wall. If I don't do anything, it'll be over 10 years before I can get out of there. So I'll try and speed this up by building and selling 4 environmentally sustainable townhouses. Depending on how painful the journey is, the idea is to rinse and bringing forward retirement 5 years (I won't actually retire, but find a job I enjoy, regardless of pay).

 

I started with my first purchase. It was for a main residence to become a rental down the track. The whole unit needed renovating and the yard was a mess! It was very nice by the time I sold

 

Did you already have any form of renovating experience? Or do you know a trade which helped you out?

 

1st and 2nd investment property have both been commercial warehouses (one was out of need for our business, and the other was simply because it made the most sense lol)

First one was $275k in 2014 (neighbour just sold identical warehouse for $520k.)
Second one was $480k in 2016, with 7% net yield, 21 year lease. (Following prices in the area conservatively worth around $800k now)

Now looking to build my first residential IP, guess I am doing everything backwards

 

I am definitely curious about commercial property, especially since a lot of people on here seem to have a pretty positive view of it, but am hesitant to try something different when at this point I only have the 1 investment property. Is it still a pretty similar process for doing your research just with a slightly different focus?

 

Commercial is pretty much opposite to residential in a lot of ways, it can take months/years to find a tenant and in general the capital gains are much lower due to a higher rental yield. But if you buy in the right location and for the right industry then you can have both capital gains and cashflow.

There are some differences with finance such as you will need minimum 30% cash and the loans are at different rates but there are ways around that if you have equity. It's common that the tenant pays all/most of the outgoings so your holding costs are low.

Depends on your price range what you should be looking for, office suites have great returns and tenants are usually easier to find but they need to be very well located and the leases are generally short (1-3 years). Industrial warehouses can be hit and miss, really depends on the location and the type of industry but you tend to get tenants who will stay for 2-5 years for the cheaper end and can be 20/30 year leases on the bigger warehouses.
Most importantly, a commercial property is only as good as its lease (because of the risk factors mentioned above)

So when you do find one that works, it usually works really well.

 

I helped my brother in law renovate his house and had a mate help me out. He had renovated a prev property. With the unit I bought it was mainly paint and floor coverings, a new kitchen bench and lots of cleaning up the yard. Also, in bedroom 2 there was a cupboard with no door that was an odd size, so I framed that up a made two custom, hollow core doors and hung those. I don't love rebating hinges but it looked good when I finished.

 

I find doing online DD for commercial property (which i'm just interested, don't yet own) maybe 10 times for complex than resi.

With resi I can flesh out obvious issues within a few minutes. Commercial takes me 30 mins to work out the lot is at the rear of the complex facing a dainage ditch and is next to bikie tenants and vacancies, and someone has a controlling easement to all walk through your front door on the way to their dance studio

 

From RE only sold out few lemons IMO, over the years have made some mistakes as a learning process.
In addition have invested elsewhere for diversification reasons, not because decided to change from RE, rather decided to invest elsewhere along side of it.
SMSF, Private IPOs, other IPOs, direct share investments, overseas estate, collectibles, business, etc...
The aim is to have at least 3 alternative passive incomes, so if one dries up we have passive income coming in from elsewhere.

 

Got to 4 residentials and found it was too much work and too little income.
Shifted then to commercial ...first year in commercial started to make taxable profits (from years of residental loses) ..the profits were too addictive could not stop buying as every property added to the total profit!

 

3-4 years after my first 4 houses. Became even less interested after I sold two of them and made so little money. I keep a full spreadsheet on all costs from legal to repairs to stamps to selling fees to rent, and the IRR (20%) was barely acceptable with a lot of leverage

Got into mixed use/commercial and never looked back. First commercial doubles in 2 years. Second one tripled in 4-5 years. Would I still do resi? Yea only in a steal of a deal.

 

Commercial is definitely something that interests me and although it may still be a few years until I have the opportunity to invest in commercial, do you have any tips for the type of commercial properties to look at first that may be slightly less risk even if the return isn't quite as good?

 

1. When building granny flats became too vanilla.
2. When I did the math and realised how slow it would be to see sizeable progress within a decade.

Went into head-leasing. It aligned with my love of meeting new people, and it requires more creativity.

Unexpected side-effect, you start meeting some really amazing and successful business people.

Basic head-leasing is now bread-and-butter, am working on more creative deals.
Have a mentor who has taken 5 companies he owned public.
Learning from him, goal is to list my own in 5 years (not head-leasing).

 

Can you please shed some light if this is not confidential? Never heard commercial double in 2 years...

 

Just some real examples
Case A
Person A purchased for $1.3m sold portion off for $.5m then sold balance for $1.3m within 4 years
Person B purchased for $1.3m sold to person C for $2.3m within 4 yrs
Person C holds it for 23yrs and it is worth perhaps $6.5m
Working on lifting net rentals to $1m

Case B
Person A buys property for $.9 in 1993
Person B buys property in 2016 for $16m
Net rentals over $1m

Case C
Person A buys property for $1.7m
Person B buys property at $3.1m four years later. Still holding 17 years later worth perhaps $6.5m net income about $.5m
I would say to double in two years you would need to do something like change the use

 

I was doing only AU residential, buy and hold investing for about 9 years. I could see that it wasnt going to align with my cash-flow "FIRE" goals that I fleshed out and goaled myself with in my mid-30s (at that point, I created a 5 year plan to reach my own personal FIRE cashflow number within 5 years, Im 39 now and spoiler-alert; I've now reached it!).

But I knew that parts of my portfolio had made a tonne of (unrealised) capital gain. So, over 3 tax years, I sold 1 x fat-capital-growth property per year, paid out the mortgages and any required CGT (I was very strategic with the years/times when I sold these particular properties), leaving only a handful of AU resi properties in my portfolio with low mortgages and decent cashflow. Oh and the sell-down also enabled me to pay out my PPOR mortgage (that is an important bit - it is a lot easier to hit your FIRE cashflow goal when you remove your single biggest annual expense being your ppor mortgage...).

I then took the proceeds each year (along with additional salary income savings added in...) to buy a series of USA resi properties, cash-outright (no mortgage); averaging around 2 x purchases per financial year. Each purchase involved upfront rehab and so a bit of capital kicked in, to make them rent-ready at the highest possible yields.

This has been a game-changer and has continued to compound/reap rewards. Oh, and my sole goal/KPI for these USA ones was cash flow, but the pandemic unexpectedly has brought about pretty massive capital growth on most of them now.