CIP vs RESI

[jimboy77]

Hey guys, been reading these forums with interest for a while, time to see if I can get some expert advice....

I am fortunate to have about $300k equity in my PPoR (my only property) and have been trying to work out what to do with it for a while. I have a lot of questions but will keep this thread simple.

CIP interests me, largely for the higher yields as I don't have much free cash flow. How does the cap growth on a sub $500k CIP compare to a RESI? I know there are a million things it depends on, but in general, do you see more capital growth in CIP or RESIs??

Just browsing realestate.com I've found a $350k 3br RESI in Launceston renting at $435/week which is roughly what, 6.5% yield? I could handle the additional payments on something like that ok, even if interest rates go up. But it seems that it would be fairly easy to find a CIP (or 2) yielding 8-9%.

Not sure which option is better - appreciate any thoughts on the matter!

Cheers,
James

 

[Ridin-High]

i was reading a report earlier which said

Over the past 20yrs

Residential property has grown @ 10.4% aus shares was like 9.something and A-Reits which are the bodys who invest in commercial property in australia was below this.

But their is money to be made in anything, if you can find out how to add value to those investments you will do well.

My experience in looking @ CIP under 600k wasn't to flash, mainly looking at crap. Didn't really see much which got me excited. You can leverage the same amount for shares which can pay the same return. without the massive entry/exit costs

 

[jimboy77]

Yeah - I thought of shares but I feel there is more risk involved. I was considering buying into some of the banks such as Westpac - it's yielding about 6% dividend plus looks undervalued at the moment. So the dividend basically covers your interest and there is a good chance of some upside to the price.

But I am more worried about shares if a 'double dip' global recession happens (not saying it will, but it looks possible). Even if my property does drop a bit in value I would feel more confident in it rebounding. Just need it to be +ve geared...

I'm just not prepared to take on my perceived risk of shares over property right now. Not through negative gearing anyway.

Am I right in thinking that the value of CIP is more tightly linked to yields than RESI? This is why I am wondering if there is less capital growth in general with CIPs...

 

[Gools]

Jim,

Is there really more risk in blue chip shares than CIP?
What happens if you can't replace a tennant in your CIP when the lease expires?
What about the high cost of entry for a CIP?
Diversification limited for the CIP?
During the GFC most of the blue chips still kept paying their dividends, that can't be said for all CIP tennants can it.

REIP, CIP and Shares should be included in everyones stable portfolio but all the risks should be known for each type so that you are comfortable with the decisions made.

Gools

 

[Player]

Yeah - I thought of shares but I feel there is more risk involved. I was considering buying into some of the banks such as Westpac - it's yielding about 6% dividend plus looks undervalued at the moment. So the dividend basically covers your interest and there is a good chance of some upside to the price.

But I am more worried about shares if a 'double dip' global recession happens (not saying it will, but it looks possible).


Your shares can be managed with a stop loss if you are diligent to apply one using whatever criteria of risk management you elect.

Shares are also liquid as a rule, certainly far more than a CIP

Even if my property does drop a bit in value I would feel more confident in it rebounding. Just need it to be +ve geared...

Try offloading a CIP that is at end of lease or vacant if we are heading for (or already in a ) double dip. Also try refinancing that vacant asset if your LVR and (portfolio) servicibility gives the lenders indigestion.

I'm just not prepared to take on my perceived risk of shares over property right now. Not through negative gearing anyway.

Am I right in thinking that the value of CIP is more tightly linked to yields than RESI? This is why I am wondering if there is less capital growth in general with CIPs...

Definitely linked to yield, however there is always upside for those that buy well and understand the mechanics of leases and what the market that the prospective CIP is in and what gain there may be to rents. A review or new lease on higher rents (assuming cap rates remain the same) will increase the value of the asset and provide equity to draw off or at least appease the lenders.

Jim, I am very far from knowing it all in this arena, however that's how I see things. Not saying anything is better than another by way of asset classes, however remember you are not comparing identical fruits here. One is liquid and more easily managed by the click of a mouse. The other is far less liquid and has far higher transaction costs.

Do your homework and be thorough with DD. There are some here who are still buying CIP's (some big, some small), however they do not buy just anything. Do your homework and hasten slowly

 

[jimboy77]

Hi Gools - I definitely agree with all your points.

I think in my position the kind of CIP I would be looking for would be one with a stable tenant already in a contract with some time to run on it. Depending on how much I spent, I have access to a line of credit against my PPoR equity which could cover an untenanted building if I had to do it. I guess the most important thing is not just to buy any CIP with a high yield, but find a quality property that should not remain untenanted for long.

There are risks involved with any option - I would note that as an example, CBA shares were pushing $60 before the GFC with a "guaranteed" dividend which got reduced in the end as the share price nosed around $30. You probably wouldn't expect a 50% capital reduction and a rent decrease in a property.

The GFC was an extreme example and I think the odds of seeing that level of equity devaluation in the near future is extremely unlikely. I think that if I invested in blue chips there is a very good chance I could yield 6-7% plus gain 10-30% over the next 12 months in price. BUT - I still feel it is slighly riskier than property.

Anyway, this is all getting slightly off the topic - I am still trying to find out whether people think that CIP cap growth is slower than residential!!

Cheers,
James

 

[D.T.]

Also keep in mind that because you have $300k equity in your home you're not restricted to $300k properties, which is the impression I get from your post. You could in fact extract that and use it as a 20% deposit on $1.5mil worth of property, assuming you can cover the payments and purchasing costs etc.

Your own risk profile will dictate how much you're willing to spend, it's not for anyone else to tell you what you're comfortable with. But I'd assume at 300k you're excluding majority of the commercial IP market and therefore not making a fair comparison.

If it were me, I'd perhaps buy 3 x $400-500k properties in the suburbs of state capitals for their steady growth. Sit and wait a couple of years to get some equity in them and then either repeat the process or chuck it in some high yield stuff (REIT / CIP / Shares / whatever).

 

[jimboy77]

Player - agree with you also. I haven't decided completely which way I want to go yet. Just want to find out more about CIP so I can consider it as an option. Obviously the quality of the property I get and the lease terms will have a large impact on the risk involved and potential gains.

DT - yeah you're right. I think the banks are only foolish enough to lend me up to about $600k but I'm not sure I want to be in up to my eyeballs in the current environment. Was thinking about biting off a more manageable chunk around $400k. Are you talking about starting off with more blue chip residential properties before looking at CIP? I guess I could do that (maybe 1 or 2) and fund any shortfalls from rent using a line of credit...

 

[Player]

Hi ya James, and welcome to the forum by the way

What's better? Resi v's CIP? Length of which piece of string?

It depends on you and your circumstances and your servicibility and your appetite for risk.

In the CIP arena, are you looking at offices, retail, industrial?

In Melbourne for example, retail sales up until a month or so ago have been ridiculously low, 2-3 %. Those people are banking on cap growth. They may or may not get much in the next 5 year window. Not sure what they are doing now, I haven't followed for a while. I note you are in Sydney and not sure where you intend a CIP purchase to be.

Haven't looked at offices and sheds of late in the sub 500 K category, which is where I am assuming you intend to start. I do know that the better yields are in the price ranges of 1.5 M to 3 M. The positive cashflow assets are (generally speaking) from circa 5 Mill and above. And that implicates offices and sheds. Retail at that level is still lowish yields (in Melb at least) of say 5-6 %.

If you were looking at another resi with some upside from passive growth, personally I would be looking at Brisbane. It hasn't really had the run of Melbourne and of late Sydney. Melbourne is fully priced. Sydney may have more legs. Others can clarify on that market.

If you purchased another resi and waited for further growth on that one and your current one then draw out equity into an offset, you have a stronger deposit for CIP or maybe enough to buy a smaller one outright and worry about financing that later and redeeming those offset funds.

Go back into the bowels of the Commercial Property forum on this site and read as much as you can. Especially read as many of the posts that might be relevant from Dazz. You can search under his user name for his threads in particular.

Whatever you do, do not rush. Educate yourself and keep asking questions. Make some call to commercial agents and enquire after properties that may be in your ball park. Learn their lingo and the DD terminology, cap rates, etc and that way you are "doing" even though you haven't purchased. Still better than purely reading. Kind of like paper trading the assets and learning about values, leases, and so on. Two books that I recommend are "Commercial Real Estate Investing" by Dolf De Roos and "How Investing In Commercial Property Really Works" by Roth and Lang.

As for Launceston, I do not wish to offend anyone who lives there, as it is a beautiful place to visit as is all of Tasmania, however if I were to invest there on a resi property I would want a lot more than 6.5 % gross yield.

If, in your travels you find any CIP asset in a decent location, major capital city or even regional with population 100,000 and over for 8-9 % (as you intimated in your earlier post, please let me know .....I am all ears

Good luck in your learning and decision making.

 

[bene313]

Jimmy you mentioned that cashflow is an issue (hence the reason for seeking higher yields).

If this is the case, will you be able to deal with 6 or 8 months of holding costs, with no tenant? This is not uncommon for small CIP holdings, particularly in the current econ/business environment.

 

[bene313]

Jimbo, check out Trog's thread on retail CIP here:

http://www.somersoft.com/forums/showthread.php?t=58607

 

[jimboy77]

Hey guys, thanks for all the feedback (esp. Player for the detailed response). Bene - I saw Trog's thread before and it was pretty interesting. I would NOT like to have to cover 6 months rent either!!

I'm definitely not in a huge rush but I would like to put my equity to work in the near future. After researching a bit more and reading some of your comments I have to say I'm starting to lean back towards building a small resi portfolio at this stage. If I buy smart it I think it should be possible to buy a $300-400k resi this year and then another one in another year or so.

I'm not ruling out CIP (or shares for that matter). I guess it's good to know as much as possible because I suppose you never know where the next opportunity may arise. If I do happen to stumble across an unbelievable CIP under $500k it would be handy to know enough to recognise it and act on it.

For that matter if blue chip stocks take an unexpectedly large nosedive I might just forget property for now and gear into equities!

So - if I'm thinking resi again......back to trying to identify areas with high yields and cap growth potential!

....any suggestions

 

[Rob Williams]

I would NOT like to have to cover 6 months rent either!!

Why would you have to?
This seems to be the single most common argument put forward by people who don't invest in commercial.
Drive down any major road in any city. Some people see the For Lease signs and nothing else. Others see all the buildings (ie the 95% or more) of buildings that are fully tenanted. It's all in the perspective and the types of filters you apply to the information that comes to you in your research.
So, don't by the type of buildings that are vacant. Buy the types of buildings that attract good, long term tenants.
My Dad has 2 CIP's. In 40 years, he's not had a single week of vacancy.
Sure, you need to mitigate against vacancy, but if you're looking at a CIP with a view to funding a 6 months vacancy, then I would suggest you're looking at the wrong type of property.

 

[Piston Broke]

Rob have you noticed the poster is from Sydney?
Maybe you haven't noticed that in Sydney there's a whole big heap of long time empty CIP that most people (especially those who write in magazines) once called "quality CIP".
Close to this, close to that, great yield at 7% blah blah blah. and empty for 2 yrs.
And under 1mil, CIP is mostly schmucksville pretty much anywhere.

 

[HiEquity]

And under 1mil, CIP is mostly schmucksville pretty much anywhere.

Yes, I have also noticed this. Just so much rubbish out there I have found it pretty hard identifying something that stacks up. The deals get progressively better as you go up in price... there's quite a lot of attractive stuff around the 10 mil mark.... (sigh...)

I should stop looking at those - it makes it so much harder when you remind yourself which properties you can actually afford!

 

[Rolf Latham]

there is some ok rats and mice comm out there ................

Be aware though that a lender will look at the quality of the lease and the tennant with more focsu than the dirt itself

If the property has good underlying land and or improvements value, thats a bonus.

ta
rolf

 

[Piston Broke]

HiEquity it still does'nt stop me occasionally looking in that category, I just skim through it though, and only go past a first glance based on location.

 

[Indifference]

Yes, I have also noticed this. Just so much rubbish out there I have found it pretty hard identifying something that stacks up. The deals get progressively better as you go up in price... there's quite a lot of attractive stuff around the 10 mil mark.... (sigh...)

I should stop looking at those - it makes it so much harder when you remind yourself which properties you can actually afford!

I don't mean to be abrasive, but perhaps you are too particular with your search.

My CIP was on par with the cost of a resi IP (at the time), has almost tripled in value in 6 yrs (due to some lateral thought & patience), has given me a significant cash surplus over that period (Ie. income stream), and I can see no way to compare it to resi other than a development project which is a totally different kettle of fish. The trick is to broaden your search criteria, and understand how CIPs can be undervalued through under-utilisation.... this is a win for the purchaser if you think about it...

IMHO, CIP can offer very good CG (better than resi) & produce better returns (yields) however, the management effort is far greater. CIPs are valued on their return, not just capital cost (or replacement value) or prevailing market conditions. This creates at least 3 dynamics you can tweak to improve your investment... if you can align them, even better.

my 2 cents...

 

[Intrinsic_Value]

ive got one friend who is sitting on a commercial property (retail) that is vacent now for more than 10 months.

Its not residential boys, you cant just sign a 12 month lease by droping the rent a bit and hoping for 'better times next year'.

My first business was created back when Victoria was comming out of the recession we had to have.
I was a pipsqueak at the time, still relatively wet behind the ears.
The landlord said the only reason he is doing business with me was because the building had been vacent for 2 years and this was melbourne CBD

Just bear in mind that australia hasnt had a recession in 15 odd years.