Why Commercial ?

Could you elaborate on 1. C) ?
Where there is a risk of the tenant NOT renewing the lease on a ROR (Right of Renewal) the banks like to mitigate risk by having their exposure low hence the request to have the Loan balance reduced to 40-50%.
If the tenant renews then they are usually relaxed allowing the 60%-70% loan again

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)?
It varies considerably (not including interest and income tax)
High...Residential or commercial Gross leases
1:Agency management 9.5%
2ainting inside and outside $20k
3:Whiteware $10K
4: Carpet $10k
5:Accounting $1k
6:Leasing/advertising/valuations $5k
7:Building demolition/fitouts/blg curtain-cladding / $???
8:Stamp Duty -Land tax
To

Low Full Net lease
1:Accounting $1k
2:Leasing/advertising/valuations $5k
3:Building demolition/fitouts/blg curtain-cladding / $???
4:Stamp Duty


To Very low -Lessors interest in NZ
1:Valuation every 12 years $5k
2:a Postage stamp every 12 years to bill the tenant for 12 years.


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?
In times when interest rate are high like 9% the yields are 12% to 14% so the profit is still there
CG going forward is always unknown ....I still do not believe that residential properties can have double the CG that commercial has as in say 50yrs time we would have a ridiculous difference.
Also land zoning and use changes so commercial land may well be re-zone residential
16. Looking back, what would you do differently, knowing what you know now?
Purchased properties in cities that had large population pre-economic becoming welloff eg. Mumbai, Dehli,Beijin,Shanghai,HK at the time of handover to China, Jakarta ,KL,Hanoi etc
17. Are there greater benefits with direct ownership of CIPs; as opposed to LPTs, Unlisted Property Trusts and Syndicates? If so, could you elaborate?
The main benefit is you save the management cost , perhaps have more fun owning the property, perhaps have a larger finance leverage , greater flexibility but if you are incompetent or lack the time then let the professional run it.

 

Thanks for sharing your wisdom - am looking to move into this space over 2017 to balance out my resi and share holdings - outstanding question for me is whether to go the direct or indirect route! Maybe a bit of both

 

That's higher than most charge in Australia for comm properties these days. Also, its regularly passed onto the tenants.

 

Correct
The posting is showing
1: the high range so the 9.5pc for residential (yes i do have residential) the high range ...
2: the mid range commercial is about 4.5pc Yes in commercial mainly paid by tenant.
3: low range is 0pc for lessors interest that requires no management

 

Hi beano (and others), is there a good book/website/reference that gives a good overview of commercial investing?

You said you started out investing with partners. Were they friends/acquaintances? Was it beneficial at the beginning/all the way through? Do you recommend it? I ask because i am at the beginning of my investing journey and a couple of friends have wanted to form a partnership. I can see the benefit, more buying power, but could also be an easy way to ruin some great friendships. What was your experience?

 

Get yourself to a Co-op bookstore and source copies of Butt's Law, Valuation & applied finance textbooks as a good start (or look up the required texts for the M Property Investment/Development for WSU or UTS.

 

Nice to chat to you before Beano!

In regards to this:
A very interesting snippet here, about land prices varying so dramatically. I think there will always be more demand for resi in the mid term, especially seeing as business in general becomes more "amalgamated" over time with capitalism (ie. companies either get bigger and buy other companies, or get bought, most industries end up with a low number of big players, small players have a harder and harder time paying overheads in well located areas).

Meanwhile residential homes are very limited by land, and people want to be in places where they are comfortable, its convenient and have a good quality of life, and these places have only a certain amount of land! The pressure will always be therefore: to have less well located land being zoned commercial (unless the land is mixed use/high rise/shop top) and more well located land zoned residential. Thats why well located commercial will always be good (e.g. that $30m place in alexandria that sold recently).

The bit about 9% interest rates being accompanied by 12-14% yields. Do you think that if we were to assume that interest rates are on the move up (perhaps not to 9%, but 5-7% is very realistic), that it would be a good idea to play a patience game with commercial now? It wouldn't be fun buying now and watching the CG dip while your repayments climb. Unless of course, its a-grade land with a b or c grade building/tenant/use of land.

 

A very interesting snippet here, about land prices varying so dramatically. I think there will always be more demand for residential in the mid term, especially seeing as business in general becomes more "amalgamated" over time with capitalism (ie. companies either get bigger and buy other companies, or get bought, most industries end up with a low number of big players, small players have a harder and harder time paying overheads in well located areas).
The issue I have is will it ever stop ? Otherwise in the future land that is used as commercial but has multi -use could end up being just a fraction of the value of residential ...if the two holdings are side by side the commercial use would no doubt change to residential and a massive increase in the property could occur

Meanwhile residential homes are very limited by land, and people want to be in places where they are comfortable, its convenient and have a good quality of life, and these places have only a certain amount of land! The pressure will always be therefore: to have less well located land being zoned commercial (unless the land is mixed use/high rise/shop top) and more well located land zoned residential. Thats why well located commercial will always be good (e.g. that $30m place in alexandria that sold recently).
Over the last few decades residential have moved into the CBD area which was the domain of the commercial
(ps We do have a interesting CBD site (which I can update in a couple of decades to see if the land relativity has altered Residential to Commercial) that is next to a residential site. Interestingly looking at the valuation of both the value is currently the same.

The bit about 9% interest rates being accompanied by 12-14% yields. Do you think that if we were to assume that interest rates are on the move up (perhaps not to 9%, but 5-7% is very realistic), that it would be a good idea to play a patience game with commercial now?
Yes I believe the yield will rise as there always is a "risk" factor . (and a profit margin is need of course!)
My observation is that when there is a strong history of CG people have "build "this into yield ...so much that we now must have CG or we will be going backwards (cf- currently)
This is purely based on the investment use (the residential market is also distorted by people who purchase properties for "lifestyle" purpose ...largely ignoring the investment aspect.)
It wouldn't be fun buying now and watching the CG dip while your repayments climb. Unless of course, its a-grade land with a b or c grade building/tenant/use of land.
OR the rent has a hard ratchet ...tenant "locked" into the site then the increase in the interest will mainly affect the "Income statement" (Profit ) fall rather than the "Balance Sheet" (Values)

 

If an investor has limited budget, say less than $800k, wouldn't it be harder to buy CIP with CG potential? Should the investor instead put his money in resi instead, as there would be more choices to buy and renovate to increase CG?

Also keen to hear people's thoughts on what is the right mix of resi and commercial investments.

 

For several investors that I know it is 0% residential, even for the little old ladies who have one or two shops through to the two bob developers with a dozen cip. Yet other contacts are more development focused with change of use and flicking the sites with residential DAs.

 

Totally agree, if resi were to always generate more CG than commercial, then a house would eventually be worth more than a Westfield shopping centre (obviously extreme eg). IMO they have to both have CGs over the long term to keep their relative values in check. Yes in the short term timing of CGs will be different, it will be different in certain locations, states, property types etc etc. Inflation, demographics, economy, interest rates etc all have a say in the way they grow but to think resi will always have more CGs than CIP is not realistic.

 

Yes twenty three years ago i reached the same conclusion. ..(yes i used the rule of 72 and got some weird results ) and stuck to the high yielding commercials (and the odd high yield residentials)
I still have the same views

 

I did the same thing in the UK, high yielding residential (ex housing commission), people always said they would not grow as fast blah blah blah. They still doubled in value broadly over 10 years (taking into account GFC!). We used to refinance, withdraw equity, reinvest. Then when CG slowed, at least you have positive CF to continue to reinvest (at a slower pace though). You can't go wrong with positive CF (unless tenant leaves), CG is more uncertain but definitely where more wealth is generated. I guess it is a balancing act depending on your risk profile. Find your sweet spot as they say....

 

Yes CG seems so certain when going up and so uncertain when going down
CF+ from yield is so much more certain

 

Hi @Beano .

This place sold for $980 000
7/14 Rodborough Road, Frenchs Forest

Assuming the net rent is accurate, wish I had known about it sooner! Would that be something you would buy, as a set and forget?

edit: I only just noticed tenancy agreement expires 2018, would this make it a substantially risky one?


Additionally:

10/14 Rodborough Road, Frenchs Forest

That one (same complex) has an asking price of 3.45m, ran some BotE numbers, it seems like a reasonable yield, as far as market is going.

 

Beano.
Btw is this referring to Dennis the Menis?

Anyway, Really enjoying this thread

We just purchased commercial land currently rented as car park

The zoning on land means we can either build apartments or hotel this is Atlanta, USA next to the stadium.

If we can achieve a fraction of what you have achieved I will be a happy chappet

Thanks for sharing, brilliant stuff

 

Was it a cashflow+ property? also how much was the price/commitment

 

Here is the link with the numbers, for a piece of dirt the returns are ok for now, but we purchased it with the view of developing/adding value and then we expect to maximise yields. We are currently pursuing this via a town planner and architect.


Commercial Land Purchase - Atlanta, USA

 

@MTR Well done, solid purchase and a lot of upside to the deal

 

Yes Beano refers to the british comic i use to read .
I have not achieved anything like you have .
Looking at your postings you have actually done something like add value.
My portfolio is simply buy and hold (with minimal capital growth...but holding when interest rates fell!) ...no skill required for mine unlike yours!