Why Commercial ?

I had these questions sent to me ..thought it would be useful to post the answers on the general chat
1. How easy is it to start in commercial properties?
It is just the same starting in Commercial just a few more boxes to tick
a: Leases are very important ...no leases or short leases hard to get finance
b: Deposit is usually higher 30 to 40pc is general adopted
c: Need to reduce the loan to 40 to 50pc by the end of the lease
d:Valuations are almost always required
e:Valuations can be requested (and are often are) every 3-5years
f: Portfolio is reviewed by the bank every 12 month
2. How do you go about crunching the numbers and what parameters are factored in to calculate actual yields?
I do a spreadsheet projecting the cash flow forward reducing debt and factoring "what if" the tenant leaves at the end of the lease eg. 6mths vacancy, 2 months letting fee, fitout, rent free period, blg refurb, etc
3. You consider Australia or other countries are better for yields?
I saw your signature and understand you own in numerous countries.
I am from NZ so did not look at Australia till 10yrs ago but back to your question yields are all over the place hard to compare but one thing is certain prime CBD is low yield in every major city ...the old saying "higher yield higher risk" applies.
4. How do you manage to buy in numerous countries? Agents? Self Research or any other way?
Research then Agents
5. For starters, i have heard the best is to start in residential and then steadily move to other asset classes, may i have your opinion on that?
That is logical as Residential you can add value by doing things yourself and the starting prices are generally lower.
As your portfolio grows then "time" becomes more important and "money less" so you gravitate to where your time adds the most value. Hence you see less " elbow grease" more "using your head"
6. How much yield you define as a bare minimum for you to buy in commercial?
There is no minimum "passing yield" the important factor is the "market yield" and when it will be reached so you can crunch the numbers ...also have to factor in the likely growth
7. How do you factor spare time on properties and simultaneously give time to your family?
Difficult I do employ a property manager (part-time but onsite) and use real estate agents to manage large residential properties.
Flagging the day job allow more time to spend on the properties (I did not give up the day job till the investment income was .5m ten years ago .The ideal situation is when the family assist. My 18yr old son is now learning ropes. (Not to inundate him I though I may cover one/two different tenancy every week for the next year and a bit)

 

Great post Beano.

To add to above, for a general buy and hold commercial property you should be trying to build vacancy holding costs into your yield - ie rent is at a level where the tenants fund the vacancy period.

Not always possible on a purely $net/sqm basis but try to maintain the rental amount above the price dumpers with other non cash factors such as appearance, fit-out, facility/facade upgrades etc. Many tenants are happy to pay a higher rent to preserve the tens or hundreds of thousands an empty floor plate costs to fit out. Coupled with a strong make good clause in lease ie tenant reinstates back to how it was with a full repaint, lessor to retain capital improvements at their discretion etc etc

 

Ditto, great post.

A couple more questions.

What is your minimum acceptable rental yield?

How difficult is it to source finance? Do banks just look at the deal and yield, as long as the deal services the loan.... all good???

Any dud CIP that you purchased that turned out to be a gem? or you had to offload?

MTR

 

See Q 6 in @Beano post

See Lease Doc Commercial - Or How I learned to love Lease doc to continue investing

 

Yes, I know about this have not had time to have a good read. thanks
CIP, I think its hard to find strong yields at the moment? Could be wrong @Beano

I guess that's the difference those continually looking will source the deals??

 

What type of commercial property is god for starters? And why? what was your first cip?

 

Commercial securities are complex so you need to do your homework.

Yield is an important part of commercial properties however yield is dependent on a number of things such as the location of the security, the stability of the tenant and the type of security (warehouse, industrial, child care, petrol station, etc).

Lets break down each point starting with location – I generally take on a lot of the lender’s policies into account when assessing a commercial property. They look at the city/town and its population levels. Most have minimum population of between 20,000 to 100,000.

Stability of tenant – this is a big one. Its natural for businesses to well go out of business and finding tenants is time confusing. Analysing the tenant, the business and the product they are selling is important. A good example is a video ezy. Also look at the length of lease left and the options to extend.

Type of security – there are heaps of commercial property types. You’ve got child care centres, reception centres, hostels, boarding homes, panel beaters, hotels, Bursing homes, Theatres, Clubs, Farms, Airports, Churches, Schools, etc.

Some are easy to finance and others are very difficult so the other factors (tenant and location of security) become critical to finance. If you want to know the number one security that lenders love due to its demand and stability well its Child Care Centres. All lenders are pricing aggressively for this business. Some of the securities that are harder to finance include brothels, petrol stations and chemical sites.

Now consider all of the above before you purchase that ripper independent branded petrol station in a small country town returning 10% yield.

Lending is another key component to understand when purchasing commercial properties. There are major differences between residential loans and commercial loans. Lots of lenders have short loan terms that result in potentially significant costs. The majors have 5-10 year loan terms and/or a regular review that means you need to pay for updated valuations and provide updated income docs. There are some lenders that do 25 year loan terms and have no regular reviews often called “set and forget” so it’s worth considering this.

 

@Shahin_Afarin - are 'set & forget' lenders horrendously more expensive than others? Is it a % or fixed loading?

 

No they are not more expensive in fact some are cheaper. They do have some restrictions, e.g. the loan has to be under $2mil with ING and $900k with Adelaide Bank. The you have Suncorp which have an excellent (but vanilla) commercial product for under $1mil.

 

Hi Beano,

Thanks for taking out time to answer the questions.

A few more that i can think of:

8. What is the cheapest investment that you have done in Australia?
9. Are the investments in any of the regionals?
10. Are there similar smaller deals in nsw or vic?
11. What % of your portfolio is diversified actoss Australia capitals?

Regards

 

8. What is the cheapest investment that you have done in Australia?
The cheapest commercial would be carparks
Then it would probably small units used by sole tradesmen eg plumbers, sparkies,builders, storage unit etc
9. Are the investments in any of the regionals?
Ninety nine percent of my portfolio are in major/capital cities
10. Are there similar smaller deals in nsw or vic?
I do frequently look at the Queensland "Courier Mail" and the "Australian" have made many posting of recent sales ...around 8%.
You can't of course buy these as they are sales.
BUT you really need to look or use a buyer ...I have had many request to look but I NOT a buyers agent
11. What % of your portfolio is diversified actoss Australia capitals?
Negligible ...Due to my poor CG track record you can assume I "should have" invested in Melbourne and Sydney.
There are many PC investors that have double CG + of y track record
12:What type of commercial property is good for starters?
Refer 8
13: And why?
Low entry , little maintenance, does not become obsolete, no fitout required , easy to lease wihout the need of a agent, wide range of uses,wide market, easy to get a large number of tenants to reduce risk.
Buy single story ..less maintenance ,easier to lease , potential to develop , ie less blg m2 per m2 of land
14: what was your first cip?
It was a lemon ...a leasehold property purchased 1994 for $257k net passing income $41K 16% return
Today's value $0 (if I did not freehold the site)
Instead I
I obtain the freehold for $126K (so $383k cost today's value $970k Passing Net Rental $68k 7% net yield ) turned a lemon to a gem.
For large purchases you do really need to look across the ditch
The Land Tax , Stamp Duty and CG Tax is a killer
On my last purchase if I had purchased in NSW instead of NZ I would had to pay almost another million dollars in the first year alone!

 

Going forward another two decades I wonder if residential CG will continue to outperform commercial CG....that said perhaps the yield in the market are set the way they are because of that !
Commercial high Residential low because the CG is high for residential if commercial had a high CG then the yield would fall ????
Anyway the next two decades + I am putting my money on leased land!
I will do a posting 1-1-2037 and let you know if I was right or wrong

 

@Beano what are the main drivers behind CG in commercial?

 

@eskander The state of the economy.

 

Main driver is the business need hence the sound economy, strong retail market, growth in imports and exports, government spending.
But the killer is the continue building of new buildings diluting the current stock hence stay with properties that do not become obsolete.

 

If we want to improve CG in CIP, should we then focus on properties that can be improved or redeveloped then? For example, a row of old shops that can be redevelop as apartment block in future.

Otherwise, it sounds like we will just have to make do with higher yield than resi but low CG.

 

That is correct if
1 you can change the use
Eg a warehouse to a retail shop
The rate per m2 will increase
2 add a mezzanine floor to a warehouse
3 add a office to a warehouse
4 create carparking or hardstand for cars/trucks
5 split to small tenancies for higher m2
6 if mixed use create accomodation area
7 do a fitout for tenant for increase in rent

 

Here's a Melbourne carpark.

Capital growth has been dismal if he paid $400k 10 years ago.

There might be a silver lining if you can use the zoning to your advantage.

 

Great post, and nice builds by other posters!

Could you elaborate on 1. C) ?

Also couple more questions:

14. What portion of your net rent typically goes off into other expenses that may not be covered by the tenant as outgoings (eg property management fees, structural maintenance)?

15. A major attraction toward commercials I see is yield. However in times of typical interest rates (~7.5%), these properties would effectively become neutrally geared. Given capital growth is much weaker with CIPs, why bother with this asset class if there is minimal growth and neutral-ish cashflow?

16. Looking back, what would you do differently, knowing what you know now?

17. Are there greater benefits with direct ownership of CIPs; as opposed to LPTs, Unlisted Property Trusts and Syndicates? If so, could you elaborate?

 

5yrs ago i had the opportunity to buy a carpark with the apartment , it was only hk $500k today it hk $2.5m