Why Commercial ?

Nice, all in NZ?

Hotels and resorts seem to be the ones doing this, any other tenants?
Is there much value-add possible or is it more for stable rents and no maintenance, other expenses etc?
Are mortgages fixed for a long period?

If you are getting say 5-6.5% yield and rates go to 7.5% it is not pretty. I am presuming market rent reviews are not that frequent?

One of the old posters on SS, Dazz, tailored his industrial leases to be ground leases only, so tenants were responsible for everything above and below ground. What you are talking about seems quite different as the tenant actually owns the buildings until the end of the very long lease, if it ever terminates or can be simply renewed for a premium in perpetuity.

 

What SS and Dazz do is quite normal for a commercial lease. ..and that is how the bulk of my income comes in
Yes quite true when interest rates climb to 7.5pc again it will hurt hence i stress debt needs to be reduced when interest rates are low .
My breakeven interest rate is currently set on 12.5pc (due to higher yielding properties and debt repaid) so yes i will be in dire straights if interest rates reach 25pc again (i would need fund from my term deposit reserves and sell down)
Being noisy i would not mind knowing how my breakeven interest rate compares with others. ..I suspect with the rapid rise of properties the breakeven of most PC investors would be about 15pc after that the majority will be then losing money ....need to run a poll

 

@Beano , did you mean 1.5% ?

 

@el caballo I doubt it. Nothing is small in Beano world.

 

Surely it would be sub 15%. I had assumed a typo.

 

Really a guess. ..most of my mates sit at about 20pc mine is lower due to recent 6.4pc net yield purchases
It i stuck to the 10pc plus i would be at the 17pc breakeven
In saying this if there was mayhem like in 1987 + and we had large vacancies and decrease in rental rates then yes I would be in trouble. ...

 

I would hazard a guess it is less than half of that i.e. less than 7.5% if they are even CF positive as I sense most people (other than PC of course) are still negative.

For those that are in negative CF territory, prepare for those screws to be tightened. I have a large portfolio in the UK and it is a bit over 7.5% break even and I am 65% LTV broadly. Rates are lower there and I have about 40% fixed so there is some breathing room. If rates hit these levels, I will be back to the workforce after 10+ years of financial freedom, handing my "salary" straight to the banks on a golden plate. Wife may have to work then as well....kids can start washing cars to earn their keep, although they are pretty young.

I never plan to pay down debt unless absolutely necessary, I let CGs/inflation reduce it relative to market value over time. I use CFs and refinancing to carry on investing, although I am slowly reducing the LTV of the portfolio over time, it was 95% in GFC (still happy to use 0% balance transfers on credit cards though towards deposits).

 

@Beano, I suspect @RickProp 's numbers are the more likely scenario ie. circa 7.5%

Rick - great post. Were you UK-based at some point, now residing in Melbourne?

 

Yes, I was in the UK for 8 years. It was happy days before GFC, 105% finance etc (for primary residence), now down to 75% max for investment and less as one gets more exposure to individual banks. Difficult to buy as a foreigner, need big deposits.

 

My advice to you is stay in Australia when the big crunch comes
Selling soggy matches in the streets London would be no fun

 

10 years since the last one there, many more since the last one in here, it is time...just depends on how high rates go and how fast.

 

@Beano , @RickProp

Are you inferring the likelihood of an imminent recession in Australia?

 

Inferring sending the kids out to sell matches in rainy London would not be fun ...that what us folks from "down under" use to read about what the "down and out " did to survive in London did ! lol

 

I don't see interest rates at 7.5% because the velocity of money is a lot higher now. My break even is probably more around 25%. But if there was a recession the question is, would your tenants fall away. That's why prime properties are very important because if you had a retail on Pitt St, and your $180k tenant fell away, you could just release it for $140k and it'll be taken up in 3 days. But if you had a warehouse in middle of nowhere, it's a lot riskier, which is why your yield needs to be higher to begin with.

 

Having barely survived the 1987 crash in NZ and seen A grade buildings drop by 70pc in value and 80pc vacancy rates ...while interest rates shoot to over 22pc ..the most unlikely of the unlikely can and has happen!
But as people have been saying since the tulip bulbs crash "this time is different"

 

That would be a dream now.. but too unlikely.

 

Maybe..I will in the meantime go for safe road. .. low net yielders (6.4pc) and reduce debt...
I will not be most profitable or largest PC investor but I will be around after any crash!

 

Nice!!! One more question from me. ( Still No CP but looking to get one)

I should looking for Gross Return % or Net Return % ?

MI

 

Always net returns
Gross rental or (total Occupancy cost ) is looked at relative to market....to see if your rents are high or low

 

Thanks, so realcommercial.com.au saying that Return is 9.0% P.A. That is gross and need to look at the net

So i have to ask all the cost .