Commercial property in Queensland- SWOT

People are looking for every conceivable risk and every conceivable little bump or wart. Hey - this is property investing, she's not risk free, no guarantees. No-one ever said anything about that.

I love the idea of this level of income, but I don't know if the company will go bust, or the various other risks that have been mentioned, and then it won't matter at all how much income I "did" have because I'll have none. That, I guess, is one reason the reward is greater for one commercial property against, say, two or three residential properties for the same purchase price.

This supposed 60K p.a. profit generated from this one property is like a second wage, another man on your team working for close to the Aussie average salary.....based on the investor putting absolutely diddly squat into the investment....not a brass razoo, and having the Tenant pick up virtually every cost to hold the investment including interest on the full 100% mortgage, having a free carry completely.

The profits per annum are so large that one can realistically look to paying down the loan. That can never be said about houses and flats. A house would never generate enough rent to pay for interest on 100% of the loan required to buy the house, let alone any rates, water rates, insurance or maintenance costs....so nothing left, no profit at all for paying down the loan, not for many years, and even then, inconsequentially small amounts compared to the loan size. No extra man in your corner beavering away every day to help you get out of your job.

I don't agree with your last paragraph at all. I've just done rough figures on the house we paid $156K for about 12 years ago. Well within ten years of owning it the value was $750K and the rent we get now is $600 per week. So this is the reason I trust residential properties, well chosen and with time under our belt. We've spent about $30K on this house over the years, added a deck, new kitchen etc. Cost base is about $200K and interest on that @ 6% is $12K per annum. We are getting rent of $31,200 per annum. So, this is why I'm happy with residential.

Give me a gaggle of these in the portfolio, all beavering away in my corner so I don't need to. Remember, these are tiny little entry level properties. This is the start of the road, not the end. What will blow your cookies is when you come up against properties that are 10x the size of this one, with better Tenants, better leases, less risk and 10 or 15x the free cashflow available. This is when your job becomes a joke, you can afford to give the boss the flick and start running your own life and get into some serious life changing investing.

I appreciate the higher return on commercial, but prefer residential for all sorts of reasons. I know it, the risk is less. Return is less too. But I'm not likely to ever go 6 months without a tenant.

I will never say never though.
 
I don't know if the company will go bust, or the various other risks that have been mentioned, and then it won't matter at all how much income I "did" have because I'll have none.

You'll never "know". No-one ever "knows". There are no guarantees in this game. If you're looking for a sure thing, this ain't the pond to play in. Steer well clear of this game if that is what you crave.

For most, that fear is enough to stop them dead in their tracks. For a very small group, they are able to overcome that fear.

If it's enough to stop you now, it will be enough to always stop you.

It is certainly enough to stop the vast majority of the population (more than 99.5%) who do not invest in commercial property. Take comfort in the fact you belong to the vast majority on this issue.

Fortunately, my job is not to convince you, or anyone else, of anything. My job is to sit back quietly and collect rents from playing this game.

You'll no doubt make up your own mind about what you wish to do with your affairs. Good luck with your decision wylie.
 
You'll never "know". No-one ever "knows". There are no guarantees in this game. If you're looking for a sure thing, this ain't the pond to play in. Steer well clear of this game if that is what you crave.

That is why I have stayed clear so far, and probably will not dip my toe. If it was my own money I would be gambling with, perhaps I would feel more comfortable with the higher risk.

For most, that fear is enough to stop them dead in their tracks. For a very small group, they are able to overcome that fear.

If it's enough to stop you now, it will be enough to always stop you.

It is certainly enough to stop the vast majority of the population (more than 99.5%) who do not invest in commercial property. Take comfort in the fact you belong to the vast majority on this issue.

Fortunately, my job is not to convince you, or anyone else, of anything. My job is to sit back quietly and collect rents from playing this game.

You'll no doubt make up your own mind about what you wish to do with your affairs. Good luck with your decision wylie.

Thank you Dazz. There are no guarantees with anything in life. We've done very well from residential and will stick with it. But I will never say never, and I won't risk the assets built up by my parents, and which I am entitled to only half.

There are no guarantees in any investment, but I do see much less risk sticking with what I know.
 
Has everyone forgotten what they are talking about ??

People are looking for every conceivable risk and every conceivable little bump or wart. Hey - this is property investing, she's not risk free, no guarantees. No-one ever said anything about that.

This supposed 60K p.a. profit generated from this one property is like a second wage, another man on your team working for close to the Aussie average salary.....based on the investor putting absolutely diddly squat into the investment....not a brass razoo, and having the Tenant pick up virtually every cost to hold the investment including interest on the full 100% mortgage, having a free carry completely.

The profits per annum are so large that one can realistically look to paying down the loan. That can never be said about houses and flats. A house would never generate enough rent to pay for interest on 100% of the loan required to buy the house, let alone any rates, water rates, insurance or maintenance costs....so nothing left, no profit at all for paying down the loan, not for many years, and even then, inconsequentially small amounts compared to the loan size. No extra man in your corner beavering away every day to help you get out of your job.

Give me a gaggle of these in the portfolio, all beavering away in my corner so I don't need to. Remember, these are tiny little entry level properties. This is the start of the road, not the end. What will blow your cookies is when you come up against properties that are 10x the size of this one, with better Tenants, better leases, less risk and 10 or 15x the free cashflow available. This is when your job becomes a joke, you can afford to give the boss the flick and start running your own life and get into some serious life changing investing.
I think it's been a worth while exercise here to look at both the rewards and the risks. By better understanding risks, it becomes easier to manage them, should one be in that situation.

Something that a residential property can give which I don't see much of in commercial property is capital growth. The growth I've had in my properties far outstrips the rent I've received. And it's quite easy in resi to draw on that growth without necessarily having to sell. Anything I would be able to buy in comm would be as the result of growth in other properties.

But I wouldn't feel comfortable with a property like this one with the terms as given.

Firstly, I couldn't buy it. Although I have a low LVR and excellent equity, as well as a quite reasonable passive income, that income, from vendor finance from my sold business, is not recognised by the bank so I can't show servicibility.

Secondly I'd feel uncomfortable having so many eggs in one basket. True, it will give a great income. But if the tenant did decide not to renew the next option, I would have to be finding $50K pa out of my own pocket. This is not something I could do. This is where knowing the risk and my own tolerance for risk could help. If I was to buy that property, I would be a lot more comfortable, if it were possible, negotiating a lower rent in exchange for a longer term.
 
Has everyone forgotten what they are talking about ??

People are looking for every conceivable risk and every conceivable little bump or wart. Hey - this is property investing, she's not risk free, no guarantees. No-one ever said anything about that.

This supposed 60K p.a. profit generated from this one property is like a second wage, another man on your team working for close to the Aussie average salary.....based on the investor putting absolutely diddly squat into the investment....not a brass razoo, and having the Tenant pick up virtually every cost to hold the investment including interest on the full 100% mortgage, having a free carry completely.

The profits per annum are so large that one can realistically look to paying down the loan. That can never be said about houses and flats. A house would never generate enough rent to pay for interest on 100% of the loan required to buy the house, let alone any rates, water rates, insurance or maintenance costs....so nothing left, no profit at all for paying down the loan, not for many years, and even then, inconsequentially small amounts compared to the loan size. No extra man in your corner beavering away every day to help you get out of your job.

Give me a gaggle of these in the portfolio, all beavering away in my corner so I don't need to. Remember, these are tiny little entry level properties. This is the start of the road, not the end. What will blow your cookies is when you come up against properties that are 10x the size of this one, with better Tenants, better leases, less risk and 10 or 15x the free cashflow available. This is when your job becomes a joke, you can afford to give the boss the flick and start running your own life and get into some serious life changing investing.

Dazz - are these the sort of returns or sums one should look for? Something like this seems more sustainable when starting in commercial? Thoughts?

http://www.realcommercial.com.au/property-retail-wa-kalgoorlie-500241117
 
Something that a residential property can give which I don't see much of in commercial property is capital growth. The growth I've had in my properties far outstrips the rent I've received. And it's quite easy in resi to draw on that growth without necessarily having to sell. Anything I would be able to buy in comm would be as the result of growth in other properties.

Geoff

I've seen you and others in this thread make this point and it is quite frustrating because it is the exact opposite of our experience. For six years now, since the GFC, our little gaggle of buy and hold RIPs has done diddly squat in terms of capital growth. Of course they did well up to that point but they have just maintained their position since.

But in less timeframe the value of our CIP has almost doubled off the back of a nice combination of option take-up, rent increases and plummeting yields courtesy of low IRs. With leverage, the return on equity is very pleasant to experience! While all the time there has been a couple of extra men beavering away in the corner on our behalf - I like that analogy! Given how hard things were for us at the start of this journey our current cashflow situation is difficult to comprehend. As a result it's very easy for laziness to creep in...

The reality is that both CIPs and RIPs experience the same levels of capital growth over the long term, driven overall by scarcity factor and inflation. It's just the reasons for that growth are completely different. If you pick the right RIP at the right time you will get good CGs and exactly the same thing can be said for CIPs.

The risks are just different. For me, the main difference between the two asset classes is that for CIPs you get lower leverage and need a bigger cash buffer to see you through any vacancies. In return for that though, you get a couple of extra men beavering away in the corner on your behalf!

That property looked good BTW - I would certainly have taken a much harder look if I had seen it. Those yields are getting hard to find these days...
 
But in less timeframe the value of our CIP has almost doubled off the back of a nice combination of option take-up, rent increases and plummeting yields courtesy of low IRs.

Spot on HE. This is why commercial property is the ultimate counter-cyclical play. When the economy tanks, rents drop and required yields go up. When the economy booms, rents go up and yields drop. It's a perfect storm. The combination of both factors can make you so rich in a matter of years.

Even for a random number example, if you bought a shop with the following figures:
Rent: $50,000 pa
Cap Rate/Yield: 8%
Property Value: $625,000

Imagine if the economy picks up and after 5 years the figures are like this:
Rent: $70,000
Cap Rate/Yield: 6%
Property Value: $1,166,666
Growth: 13% pa

Rent is guaranteed to go up by at least CPI each year, plus market review plus ratchet clauses. The only prohibition is the large capital required but that doesn't mean commercial isn't a fantastic proposition especially with respect to residential property.
 
Spot on HE. This is why commercial property is the ultimate counter-cyclical play. When the economy tanks, rents drop and required yields go up. When the economy booms, rents go up and yields drop. It's a perfect storm. The combination of both factors can make you so rich in a matter of years.

Even for a random number example, if you bought a shop with the following figures:
Rent: $50,000 pa
Cap Rate/Yield: 8%
Property Value: $625,000

Imagine if the economy picks up and after 5 years the figures are like this:
Rent: $70,000
Cap Rate/Yield: 6%
Property Value: $1,166,666
Growth: 13% pa

Rent is guaranteed to go up by at least CPI each year, plus market review plus ratchet clauses. The only prohibition is the large capital required but that doesn't mean commercial isn't a fantastic proposition especially with respect to residential property.

Interesting. So if one were to get into CP which part of this cycle would be best to jump in at?
 
Something that a residential property can give which I don't see much of in commercial property is capital growth.

Our experience has been the exact opposite.

We've enjoyed far more capital growth on our non-residential holdings over half the timeline.

Perhaps it's the normal human trait at play here of "you can't see because you choose not to look".

To repeat, capital growth on CIPs outstrips capital growth on RIPs.

Yet another commonly held "real estate myth" blown out of the water.
 
Yet another commonly held "real estate myth" blown out of the water.

Is that really a myth, though? 99% of the population don't even consider commercial, as you said, so a lot of people aren't even comparing, let alone coming to that (misguided) conclusion. I know it definitely wasn't even in my radar until recently. It was basically in the same league as say, investing in British Government Bonds...something that never even occurred to me.
 
Our experience has been the exact opposite.

We've enjoyed far more capital growth on our non-residential holdings over half the timeline.

Perhaps it's the normal human trait at play here of "you can't see because you choose not to look".

To repeat, capital growth on CIPs outstrips capital growth on RIPs.

Yet another commonly held "real estate myth" blown out of the water.
Forgive me Dazz.

As far as I can remember, people have always talked only about income wrt CIPs. I posted this thread (thanks for the heads up!) in order to learn more.

Then some questions.

1. As far as this particular property. How likely is growth for a property outside suburbia, where there are potentially many other comparable sites? How much could rent be pushed up at review time when there's only one type of tenant possible before expensive remediation? Is the rent higher for this property because the risk is higher?

2. If I bought a property with say six years left in the lease (say a 7 + 5 + 5), with annual rent reviews being pegged to inflation, would growth be limited to the inflation applied to the rent? So is the capital value pegged to the rent? In this situation, would a substantial increase only be likely at the time of renewal, and only then if comparable rents had increased substantially?

3. For people with CIPs, what is your experience of increased values?
 
Hi guys, I'm a complete novice when it comes to CP so correct me if I'm wrong, but as I understand it, one of the main differences compared to residential (and I hate to try to abstract ALL the differences into "the main", but a beginner has to start somewhere!) is that you need to be in a better cash flow position when it comes to CP, because when times are tough in residential you can sign someone up for a short term least and wait it out, but in commercial you really need to sign multi year deals (at a MINIMUM) and if you get someone in at a cheap rate you're kind of stuck with it for a while.

Am I right about this? What I've been taught is to get into residential to build up equity and a strong cash flow position, then expand into CP. Is this right? If not, then it's one of those early "building block" lessons that I would like to destroy before it takes root in my mind:)
 
Hi guys, I'm a complete novice when it comes to CP so correct me if I'm wrong, but as I understand it, one of the main differences compared to residential (and I hate to try to abstract ALL the differences into "the main", but a beginner has to start somewhere!) is that you need to be in a better cash flow position when it comes to CP, because when times are tough in residential you can sign someone up for a short term least and wait it out, but in commercial you really need to sign multi year deals (at a MINIMUM) and if you get someone in at a cheap rate you're kind of stuck with it for a while.

Am I right about this? What I've been taught is to get into residential to build up equity and a strong cash flow position, then expand into CP. Is this right? If not, then it's one of those early "building block" lessons that I would like to destroy before it takes root in my mind:)

jerrybee

Everyone has their own opinion on this and also their own experiences. I have tried both markets and prefer CIPs for a number or reasons. Probably the main reason would be because I can buy any level of risk I like and I can see what the market is prepared to pay for that risk. So if I feel like taking a bit more risk because I can see a more than commensurate return, then I can grab it. Or if I just want a steady 7% net cashflow for ten years with a bit of upside at the end then I can choose a property with that type of lease signed up to a quality tenant.

The CIP market offers a massive diversity of location, tenant quality, lease tenure, lease terms, industry exposure, land content, outgoings risk, financial guarantees, capital gain potential and cashflow, to just name a few. By comparison the RIP market looks very "plain Jane" - we all know the risk / reward comparison. I like the CIP market because, even though you never find a deal which is perfect, you can find one that is overlooked by others for all sorts of reasons and gives good upside exposure at what likes an acceptable risk to me.

And the compounding benefits of strong net cash flows shouldn't be under estimated while you're sitting around waiting for the next property boom. That's the sort of thing that gives you confidence to give up the day job, versus weak RIP cashflows that leave you wondering "how much is enough"!
 
1. As far as this particular property. How likely is growth for a property outside suburbia, where there are potentially many other comparable sites? How much could rent be pushed up at review time when there's only one type of tenant possible before expensive remediation? Is the rent higher for this property because the risk is higher?

2. If I bought a property with say six years left in the lease (say a 7 + 5 + 5), with annual rent reviews being pegged to inflation, would growth be limited to the inflation applied to the rent? So is the capital value pegged to the rent? In this situation, would a substantial increase only be likely at the time of renewal, and only then if comparable rents had increased substantially?

3. For people with CIPs, what is your experience of increased values?

Hi Geoff

My take on your questions:
1 - For this particular property, the answer to these questions will only be discovered from your research and due diligence. These questions are precisely the reason why it helps to wear out some shoe leather talking to people in the area / industry to find out what is going on and where the upside is. Land can increase in value for all sorts of reasons - whether it's residential or commercial. Likewise replacement costs for a building can go up for all sorts or reasons. By the way, rent isn't high because risk is high. If this is a market set rent then rent is high because that's what it's worth in the market. You have to understand the market to know whether that is the case and if not what's driving that. It's the vendor or related party as tenant scenario that can drive rents above market in order to increase sale price - that has to be checked.

2 - If everything else is equal then yes. But if cap rates / yields drop because of lower interest rates, for example, that drives capital growth regardless of what happens to the rent. It is also true that if you buy a property that has locked in a lower than market rent for a couple of years, you can wait out that time, revert the rent to market and enjoy the upside if and when this tenant or another renews on a market basis. Understanding what drives capital growth allows you to chase it, if that's what you want to do. Capital values for a property under a regressive 10 year lease will be valued on the lease while the lease for a property that only has six months to go will be almost irrelevant to the value - then it's about what the current market value of the property on its own two feet.

3 - I posted on this previously.
 
To add to point 1, I recall that rents in areas like Pinkemba for quality industrial property was quite high due in part to a lack of alternative properties and proximity to Brisbane airport. Now there's a glut.
 
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