tgan
With this much equity available at residential interest rates, I would be looking at large commercial and industrial properties (CIPs). Assuming:
- Your residential equity comes at a cost of 6%
- The LVR on a CIP is conservatively 65% (higher is achievable for the right properties)
- The debt for the CIP comes at a cost of 7.5%
Then your weighted average cost of capital is ((6x35)+(7.5x65))/100 = approx 7%
There are plenty of quality CIPs which yield circa 9% net around the country at the moment (more if you like some risk with that...). This means tenants pay for all outgoings like rates, insurance, land tax, property management, maintenance, etc etc etc
Assuming you fully leverage your $1.4m equity @35%LVR and make some allowance for costs you should be able to access a CIP (or three) to the value of approx $3.5m.
Assuming 9% net returns and the 7% (above) overall cost of debt you get (9-7)%x$3.5m = $70,000 per annum in free cashflow on an exposure of $3.5m. Use any depreciation etc to improve the after tax cashflow as applicable.
Use this to pay down debt and build equity (as you are obviously used to doing already to be in this position in the first place) and then you can rinse and repeat. No dealing with heaps of tenants and their personal issues, no having to go through all the palaver of finding and transacting ten or more RIPs and manage all the records at tax time - etc etc etc. All for the "risk" of being in this part of the market which is just swimming with sharks apparently (FWIW I find it far more professional and clear cut than the resi market - with CIPs it's just about the numbers which keeps it nice and simple).
You'll need to learn a fair bit about leases etc to do your due diligence but it's an interesting process (to me at least) and there are plenty of resources to guide you, including plenty of posts on this forum.
Good luck with taking your next step on this investing journey...
With this much equity available at residential interest rates, I would be looking at large commercial and industrial properties (CIPs). Assuming:
- Your residential equity comes at a cost of 6%
- The LVR on a CIP is conservatively 65% (higher is achievable for the right properties)
- The debt for the CIP comes at a cost of 7.5%
Then your weighted average cost of capital is ((6x35)+(7.5x65))/100 = approx 7%
There are plenty of quality CIPs which yield circa 9% net around the country at the moment (more if you like some risk with that...). This means tenants pay for all outgoings like rates, insurance, land tax, property management, maintenance, etc etc etc
Assuming you fully leverage your $1.4m equity @35%LVR and make some allowance for costs you should be able to access a CIP (or three) to the value of approx $3.5m.
Assuming 9% net returns and the 7% (above) overall cost of debt you get (9-7)%x$3.5m = $70,000 per annum in free cashflow on an exposure of $3.5m. Use any depreciation etc to improve the after tax cashflow as applicable.
Use this to pay down debt and build equity (as you are obviously used to doing already to be in this position in the first place) and then you can rinse and repeat. No dealing with heaps of tenants and their personal issues, no having to go through all the palaver of finding and transacting ten or more RIPs and manage all the records at tax time - etc etc etc. All for the "risk" of being in this part of the market which is just swimming with sharks apparently (FWIW I find it far more professional and clear cut than the resi market - with CIPs it's just about the numbers which keeps it nice and simple).
You'll need to learn a fair bit about leases etc to do your due diligence but it's an interesting process (to me at least) and there are plenty of resources to guide you, including plenty of posts on this forum.
Good luck with taking your next step on this investing journey...
