ABC Pty Ltd or Mr & Mrs Jones - Comm or Resi

[Gentle_Chief]

Apparently Investors “mature” from Residential (units, houses, condos, duplex, multi-family) to Commercial Investments (Retail strips, Industrial, Office spaces, Warehouses, Shopping malls, etc) as they get more actively involved within the property game.

I have diligently looked at Commercial Investments as I consider myself as ‘somewhat’ a maturing Player in the game right now.

So far the game has been in Residential only. With a dozen plus properties I have seen both Capital Gains and Cash-flows from the diverse portfolio we (missus & I) hold.

Have witnessed both the Booms and Busts, purchased across different states in Australia & managing them 1000s of miles away.

And I am still Buying whenever the Bank nods at our application.

Ours is a strong CF Positive game.

I have nearly replaced my salary income from Nett rents. And I still continue working at my day job. So it is Passive income.

I am not in the business of losing a $ and then asking the government to give me 40 cents back. I hope to earn a $ wherever I can and pay 40 cents to the government.

This is the first time I have seriously considered buying Commercial. And my summary of the pros and cons are as follows:


Commercial Residential

Cost of Funds 9% 7%

Returns 9 - 15% 6 - 10% plus

Occupancy Factor 44 weeks 48 weeks
(out of 52 weeks)

Liquidity Factor 3 7
(Ability to sell Quickly On a scale from 1 – 10, 1 being hard and 10 being easy)

Annual Bank reviews Yes No
(If not tenanted, bank can call in the Loan to be paid by the borrower)


Property Value Dependent on Tenant Dependent on the Property

LVR 60% maximum 90% maximum


Investment Type 2 6
(1 being Passive and 10 being highly active)


Please note that these figures are based on MY current conditions. I am not saying that any one else will not be able to get a Comm Loan for less than 9%. Or that one may view the Occupancy factor for Resi at 50 weeks rather than 48 weeks.

I am being rather conservative on Resi and this is MY situation of the options in front of me.

Looking at the figures above, I did a lot of soul searching and beg the question why am I still looking at Commercials? The risks outweigh the Returns. Also with the LVR restrictions, my money goes further in Resi.

What say? Look forward to your thoughts…

 

[Aaron_C]

Unless the security is terrible and/or you are a risky borrower, there's no way you are going to pay 9% interest rates for commercial.

Plus maximum LVR is more like 70%.

Commercial is considered the end-game for property investors because the tenant takes care of everything. They pay your GST, your outgoings, maintenance, fitout and all you provide them is basically an empty shell. The commercial lease is so much in favour of the landlord...no Residential Tenancies Act, just the Retail Leases Act (which isn't THAT bad).

I don't know about you Gentle_Chief but my idea of rich is NOT being called at 12am in the morning in order to fix a leak in a tenant's bathroom. If a commercial tenant had that problem, I'd kindly remind him that the rent is still due on the 1st next month. Also you are not dealing with people who rely on welfare and who live pay-check to pay-check and you only have 1 month's rent as security. Lots of commercial landlords expect at least 3-6 months as a security deposit.

Plus with commercial bigger numbers are involved. If you buy well, rents increase, capitalisation rates fall, you make a double whammy on your investment's capital growth.

But if you find the commercial property game scary, then stick to residential. Just bear in mind that people get very rich from the commercial game.

 

[Dazz]

I have diligently looked at Commercial Investments

This is the first time I have seriously considered buying Commercial. And my summary of the pros and cons are as follows:

I did a lot of soul searching and beg the question why am I still looking at Commercials?

Conclusion therefore....The risks outweigh the Returns ??

What say? Look forward to your thoughts…

So, in summary, you've ;

• diligently looked
• seriously considered
• soul searched

...and this is enough to stop you dead in your tracks before summarily reaching a definitive conclusion.


I suppose the one thing you missed out on, and never did, was actually buy anything and experience what it was really like. As such, you'll never fully comprehend / manage the risks, nor enjoy the rewards.


Of course, any intelligent being, once having gotten a tad of experience under their belts actually gets effective systems in place to manage those risks. I would suspect with your residential experiences now, you're a far more competent Landlord, and easily able to handle the risks inherent with being a residential Landlord, surely moreso than before you purchased anything. Can you remember how clueless you were before you bought your first IP ?? Surely you're better than that now...


Never underestimate the value of this learning curve....it's worth millions if you get it right. What was absolutely knee-knockingly scary to start with can be handled with aplomb and ease as one matures, even turned to your advantage in some cases....for example a Tenant vacating can be a huge boost and blessing in disguise.


Gentle Chief, in all honesty you really have absolutely no basis upon which to draw any conclusions whatsoever.


I guess if you're happy and content to paddle around in the wading pool with your floaties on, then more power to you, knock yourself out if that floats your noodle........just don't stand up in the paddling pool and draw conclusions about what it's like to cruise laps in the big pool if you've only stood on the sidelines and watched. You'll never know.

 

[Rolf Latham]

Hi GC

Mid 7s, 65 % lvrs to higher LVRs are doable.

If you are looking for a similar value per comm as per resi transaction, thethe deals may not be that attractive

The "maturity? isnt so much one in investing experience, more in the resources to be able to hop out of the smaller fish bowl into a bigger tank

ta

rolf

 

[Rolf Latham]

Annual Bank reviews Yes No
(If not tenanted, bank can call in the Loan to be paid by the borrower)

Dont think that resi will shield you entirely from that

Many folks get concerned when they read their mortgage docs in detail abiut how they may end up in "default"

The biggest issue can be some LOCs have repayable on demand clauses in their T&Cs ,,,,,,,,,,,,

But yes, in general comm does have a more rigorous annual process than resi, though there are loans that are "set and forget" just like in the resi sector. These do have max $ limits but can suit most starter comm investors

ta

rolf

 

[Scott No Mates]

Chief, when you look at commercial/industrial you also have to consider your ability (or the tenant's ability) to value add to the property.

Owner funded improvements - eg development of raw site. This has a longer pipeline but also locks in additional profit/returns as you are starting from a lower base than the purchase of a leased building (known quantity/returns). Refurbishment - roof replacement/asbestos removal/NABERs compliance etc all bring in extra $$ as tenant occupancy costs or risks may be reduced somewhat.

Tenant Funded improvements - fitout, unlike residential tenants commercial tenants commit large sums towards a fitout (eg retailers, manufacturers etc) which make it all the more difficult to relocate.

 

[Gentle_Chief]

I don't know about you Gentle_Chief but my idea of rich is NOT being called at 12am in the morning in order to fix a leak in a tenant's bathroom. If a commercial tenant had that problem, I'd kindly remind him that the rent is still due on the 1st next month. .

Aaron, I have never been called to fix a leak in a tenant's bathroom.
Our REA handles it and just lets us know that a plumber would be attending to it. I just ask for multiple qoutes.

I guess the same would be true for a Commercial. No matter what the landlord needs to get a Bathroom leak fixed, right?

P.S : I will still kindly remind my residential tenant that the rent is still due on the 1st next month

Also you are not dealing with people who rely on welfare and who live pay-check to pay-check and you only have 1 month's rent as security. Lots of commercial landlords expect at least 3-6 months as a security deposit.

.

I totally understand that you are dealing with scrubby people and not the white collared big dice rolling bankers of the world who are plotting on who should be the next chairman of ECB.

But the truth is I have never 'dealt' with my tenants. I don't know them. Never seen them. Only know a name and the signature in the GTA contract that the REA scans and faithfully mails 'em to me.

But if you find the commercial property game scary, then stick to residential. Just bear in mind that people get very rich from the commercial game.

Noooo mate, it ain't no scary....!
Just trying to see the 'Real' benefits of going Commercial.

 

[Gentle_Chief]

I guess if you're happy and content to paddle around in the wading pool with your floaties on, then more power to you, knock yourself out if that floats your noodle........just don't stand up in the paddling pool and draw conclusions about what it's like to cruise laps in the big pool if you've only stood on the sidelines and watched. You'll never know.

Sure Dazz, after your post above, I am trying to reason here what makes Commercial a Lap pool whilst Residential a wading pool. Willing to learn what makes Commercial so much 'more' superior. Especially when the value of the property is mainly dependent on a Tenant.

The lack of one could be the beginning of an Investors downfall.

I have Resi properties in QLD that are pulling in a 3000 pwk from national tenants like BHP/Arrow Energy looking to house their staff desperately. Some of them are much bigger than the average shopping strips that pull in 50K per annum. Like many others on this forum who have a multi-unit housing portfolio these stand tall in CF and CG.

Similar negotiation techniques are involved to Commercials. The definition of Resi goes beyond the average DoH tenant, who I have as Tenants also, and I am not complaining...

 

[Dazz]

I am trying to reason here what makes Commercial a Lap pool whilst Residential a wading pool.

Scale my friend. The scale of things would be the main one.

I have Resi properties in QLD that are pulling in a 3000 pwk from national tenants like BHP/Arrow Energy looking to house their staff desperately. Like many others on this forum who have a multi-unit housing portfolio these stand tall in CF and CG.

Multi-unit housing portfolios generating $ 3,000 per week each is in the wading pool Chief.

I'll give you a tip - any rental levels quoted in "$ per week" is tiddly stuff.

When the Tenants start paying you rent in multiples of "Millions pa", then you can start doing laps in the big pool. The one example below flings off 7.5 Mpa. With an average house renting for $ 400 per week, you'd need to own 375 houses in your portfolio just to equal the yield from this one property.

You tell me which one would be better (on all accounts) to own. You tell me which one the Banks would be interested in supporting ??

http://www.realcommercial.com.au/property-offices-vic-melbourne-5868316

 

[Aaron_C]

Noooo mate, it ain't no scary....!
Just trying to see the 'Real' benefits of going Commercial.

Massive growth. Just take Melbourne for an example:

Back in the early 1990s a shop in Prime Melbourne CBD would've been selling for a 10% yield. Now, that same shop in Swanston Street would be selling for a 3-4% yield, and over 20 years that rental has grown enormously due to the population growth/development of the CBD.

Just on yield reduction alone, the value of the property has gone up at least 3 times...and I haven't even factored in the increased rents that bump up that yield to beyond 100x your original investment.

Vacancy? In these type of shops there are literally businesses lining up to wait for your current tenant to go bust as they want the space so badly. Some even will buy out your current tenant's business (paying goodwill) just to secure the lease.