Commercial Property Investor

[redwing]

I had a good chat with a commercial property investor today who is well on his way to obtaining his goal of $200k nett from his investments per annum

He's graduated over the years from residential investment properties, holding & selling land and buying & selling residential properties to becoming a commercial property only investor

His next goal is $250k nett

I look forward to our next chat, there's always lessons to be learnt from other investors

 

[matto_]

the end game.

NICE.

Always good to hear how others are doing.

 

[murph14]

Not for the faint hearted!

With my current level of commercial knowledge, or lack thereof, I wouldn't delve in to commercial without significant cash flow from resi investments to back me up.

 

[James m Dawson]

commercial investments

I still have a few residential investments but also have had commercial property for over 25 years , make my living from it. Its all about location , type of tenant , management and constant review of what is going on. I dont manage my properties my self , but manage the managers. I have not had too many problems in keeping the places let , I think charging the right rent is very important , I dont want to screw my tenants so they go out of business and also want the right return for each property as this is pretty much what the value is based on. It has to be a win win situation for me and teh tenants. Ive some properties that have not been vacant in 20 years ad others that have had had lots of change overs but only every few years or so.
No investment is with out risk , that is where the opportunity comes from.

But if you go carefully I think commercial is a great way to go
james

 

[Highlygeared]

I still have a few residential investments but also have had commercial property for over 25 years , make my living from it. Its all about location , type of tenant , management and constant review of what is going on. I dont manage my properties my self , but manage the managers. I have not had too many problems in keeping the places let , I think charging the right rent is very important , I dont want to screw my tenants so they go out of business and also want the right return for each property as this is pretty much what the value is based on. It has to be a win win situation for me and teh tenants. Ive some properties that have not been vacant in 20 years ad others that have had had lots of change overs but only every few years or so.
No investment is with out risk , that is where the opportunity comes from.

But if you go carefully I think commercial is a great way to go
james

Hi James

dp you have any recommendations from your wealth of experience of which commercial properties to target and why eg retail, warehouses, etc. Which class of asset has given you the best return and stability of tenancy as well. Truly interested to learn.

 

[redwing]

I still have a few residential investments but also have had commercial property for over 25 years , make my living from it. Its all about location , type of tenant , management and constant review of what is going on. I dont manage my properties my self , but manage the managers. I have not had too many problems in keeping the places let , I think charging the right rent is very important , I dont want to screw my tenants so they go out of business and also want the right return for each property as this is pretty much what the value is based on. It has to be a win win situation for me and teh tenants. Ive some properties that have not been vacant in 20 years ad others that have had had lots of change overs but only every few years or so.
No investment is with out risk , that is where the opportunity comes from.

But if you go carefully I think commercial is a great way to go
james

Thanks for the post James

My first push into Commercial IP's was from an Italian panel beater who had made his real fortune from investing in Commercial Properties, he eventually got his business partner involved then their lawyer

He is now retired, enjoying golf and life in general

He couldn't understand my interest in residential IP's where you pay rather than the tenant

Though he was investing in properties way outside of my comfort factor

From what I've seen, when it works, it works well, when it doesn't................................

 

[evan1875]

Hi James,

Dazz is one of the most well known forumers investing in Commercial RE. He posted a wealth of knowledge on this forum and we would really appreciate some in depth from other successful CIP investors.

The end game, agreed.

 

[James m Dawson]

more on my type of investing in commercial

Hi , all the above comments are great , I agree with when it works it works well.... from my point of view you can have problems with any investment , there is always risk , but that is where the opportunity is as well. But properly chosen and managed risks will be minimised .
I like owning the land and have investments that are mixed , ie shop/cafe on the ground floor with apartment above. Because I own the land , I dont have to battle with strata rules and I'm free to look for upsides and have total control. the biggest stress with property ( and anything in life i think) is when you get that feeling that you are loosing control.
I dont believe in screwing the tenants with crazy rents, recently i spoke to a guy who was very happy that he had talked a new tenant into paying about 20% over the market rent for a strip shop. He might get a short term gain , but will probably send the guy broke , then have a vacant shop. In any case when he gets it valued the valuer will let him and the bank know that he is over the top.
Then the market review will happen , say 3 years down the track and if the tenant is switched on , he will argue for a rent reduction.

I recommend to anyone starting out to take it step by step
1 work out what price range you will look in ( need 30 to 40% dep or equity)
2. Look at a type of comm that interests you , I like retail, mixed res
3. at the start focus down on an area close to home so that you can grow your knowledge quickly.
4. check all aspects of each property properly.

more later , going for a surf

 

[John M]

I'd like to offer my opinion on what type of commercial property to invest in.

When you're looking at an investment, look at what the property can be used for. For eg if there is no natural gas available it will be less attractive to restaurants and may then be most appealing to retail shops. This is fine if it's in a cracking spot but if it's in an average spot, then I would be a little hesitant. Retail is struggling more than any other business due to the massive competition in today's marketplace (Westfields are killing retail strips, as well as online businesses with no overheads which are impossible to compete with on price) - and this competition will only get more fierce.

Industrial, however, will keep on fighting. Business owners in Industrial properties making fences, storing concrete, fixing cars, running gyms etc will continue to prosper. In saying this, I have spoken to plenty of scaffolders, concreters etc who are struggling to get money out of good, long-term clients who they've never previously had trouble with.

Also, if you're buying a factory unit in the only complex built in the last 5 years in Suburb X, watch out for new developments. Don't pay an inflated price for a new unit because you will achieve the highest rent in the area, and then 6 months later 120,000sqm of land is developed and brand new factory units go up around you. If you're going to invest in industrial (or anything really), I'd be very wary of new developments in the area.

 

[James m Dawson]

totally agree with all your points jonno, I think finding a niche that you like is a great idea, your point about industrial sheds is good , here in byron it can be like musical chairs , when a new set of industrial sheds goes up , tenants want to move from their older , less attractive ones sometimes better rents and leases for them. Always good to check out how many approvals there are for new developments in the area you are looking at.
I dont focus on properties that have tenants that sell stuff you can easily buy online.

 

[John M]

totally agree with all your points jonno, I think finding a niche that you like is a great idea, your point about industrial sheds is good , here in byron it can be like musical chairs , when a new set of industrial sheds goes up , tenants want to move from their older , less attractive ones sometimes better rents and leases for them. Always good to check out how many approvals there are for new developments in the area you are looking at.
I dont focus on properties that have tenants that sell stuff you can easily buy online.

That's interesting James. I work in Western Sydney and the majority of tenants care about the functionality of the Industrial property and would rather an older building that will do the job than a new building, if it means they can get it for $10/sqm cheaper.

There are very few businesses (mostly those requiring showroom space) which will pay that extra for modern buildings.

Also, for those thinking of investing in Industrial property, don't forget to consider things like truck access. I know of one particular person who has bought an Industrial unit as an investments. Their tenant moved out and the property has now been vacant for 8 months because the truck access within the complex is hopeless. They're going to have to drop the rate/sqm by about $15 to get it leased.

Needless to say, their pockets are hurting as they are paying all outgoings and aren't seeing a return on their investment. This is also because their current leasing agent hasn't told them this, but is dragging them along broken glass telling them they should continue to advertise the property at $5/sqm higher than the going rate for a similar unit with GOOD TRUCK ACCESS..


Also, when venturing into commercial/industrial investment, please be warned that premises do not lease instantly like resi stuff does. You can own a property in an easily accessible spot with outrageous exposure to passing traffic and have the property advertised at market rate - you should still expect, in this current market, for it to take 2-3 months for it to lease. It WILL NOT lease next day like a residential property.

Even if the agent already knows a good tenant looking for exactly what you're offering, by the time the negotiations are completed, the tenant gives 2-4 weeks to leave their current premises, the leases go to lawyers (if total lease term including options exceeds 3 years) you won't be receiving a return very quickly. And then most tenants will want 1-3 months rent free depending on the length of the lease!

Just a few things for potential commercial investors to consider. I'm sure James will back me up on many of these points once again.

 

[Highlygeared]

Keep it coming guys. Most generous of you to share your insights.

Re: tracts of lands with industrial sheds and good truck access, I'm still noticing quite a lot for lease in Sydney. Probably a diff kettle of fish in Perth for obvious reasons. I'm gathering that 2-3 months vacancy is considered 'lucky' (in general) coupled with a long + option tenancy period.

However in your experience, would you consider commercial to be a better class of investment than resi (in general) despite the SANF that goes out the window everytime there's a tenant changeover? I know 8 months without a tenant and no guarantee of egtting one soon would weigh very heavily on me, irrespective if I had adequate buffers.

Also, have you experienced (again in general) better CG on your commercial properties compared to your resi props?

Thanks

 

[John M]

Keep it coming guys. Most generous of you to share your insights.

Re: tracts of lands with industrial sheds and good truck access, I'm still noticing quite a lot for lease in Sydney. Probably a diff kettle of fish in Perth for obvious reasons. I'm gathering that 2-3 months vacancy is considered 'lucky' (in general) coupled with a long + option tenancy period.

However in your experience, would you consider commercial to be a better class of investment than resi (in general) despite the SANF that goes out the window everytime there's a tenant changeover? I know 8 months without a tenant and no guarantee of egtting one soon would weigh very heavily on me, irrespective if I had adequate buffers.

Also, have you experienced (again in general) better CG on your commercial properties compared to your resi props?

Thanks

I'll leave the CG gains tax question and the redi vs commercial question to someone more experienced.

In regards to vacancies - if you have a good managing agent they will contact the tenant to ascertain whether they are taking up option/renewing lease, and if not they will start advertising the property months before it is vacant. This will significantly reduce the vacancy time - and potential tenants always seem to be more keen to take units which are currently tenanted as they think they're viewing the unit before it goes on to the market. And they know it's a good property because the previous tenant is there - plus they look at the current tenant's fit out and they already start figuring out how they would change it etc.

 

[Scott No Mates]

Also, have you experienced (again in general) better CG on your commercial properties compared to your resi props?

Thanks

I am a great believer in 'price relativity' & 'scarcity'.

Sure commercial values bounce around a little more due to the state of the economy however there is only so much available commercial land in an suburb. As the suburb becomes more desireable (either for transport links, proximity to CBD/markets etc or pressure due to highest & best use) then the price of the underlying land will move upwards.

There can be more of an upside on commercial if you put the right product into the market to get the right tenant & the right rent. Scoring an A grade tenant on a long lease will lower the cap rate compared to the similar property adjacent which has a fly-by-nighter with no security deposit or track record sitting on a short term lease/holdover.

 

[Highlygeared]

At prices < $1 mill in Syd, I think I'd struggle to get an A-grade tenant. Not sure about otehr states. Commercial scares the bejesus out of me for some reason and perhaps I'm totally ignorant, although the logical thinker in me suggests that when its good its good, when its bad, it could mean losing a few/all my props. Totally addicted to the thought of the tenant paying everything though, inlcuding land tax and keeping one-sided tenancy laws out of it...which is why I keep getting tempted.

Rental return is not the defining factor to me as to commercial vs resi bc I can manufatcure gross 8-10%s with a bit of hard work and lateral thiking with my resi purchases. Its more around perceived tenant control and zero leakages (when you have a tenant).

 

[handyandy]

At prices < $1 mill in Syd, I think I'd struggle to get an A-grade tenant. Not sure about otehr states. Commercial scares the bejesus out of me for some reason and perhaps I'm totally ignorant, although the logical thinker in me suggests that when its good its good, when its bad, it could mean losing a few/all my props. Totally addicted to the thought of the tenant paying everything though, inlcuding land tax and keeping one-sided tenancy laws out of it...which is why I keep getting tempted.

The whole tenant pays everything is overplayed.

I am finding that this is very much a factor of the market that you are operating in.

Seems that the lower end of the market ( I am around the $1mil) demand gross and can be stretched to included maintenance expenses but I suspect that the cheaper properties wouldn't even wear the add on of maintenance.

Maybe others in the field can comment.

Cheers

 

[Deltaberry]

All about value add. Kicking a comm tenant out for late exercise of lease to potentially build a small hotel in the CBD soon depending on a few things soon.

 

[James m Dawson]

my view is that what ever the total amount income is made up of ie rent , outgoings maint etc , it still has to be the correct amount of rent that you are charging. Its important to make sure that the tenant fully understands how much he is up for before he signs up. Of course the normal leases/disclosure statements show all this clearly but I some times get my agent or myself to double check that they know what they are getting themselves into. saves problems down the track.
Recently had one tenant nearly flip out when he saw the insurance amount on the forms .. over $9k , but once he added it all in , into a monthly total he was ok. It was good to remind him that he would have to keep cash aside to pay it when the bill came in.
I do prefer net leases as if the rates etc creep up I get this back from the tenant now rather than waiting a few years and having to recalculate for the increase.

 

[James m Dawson]

woops forgot to add , that the total should be the correct amount for the space , for the local market.

 

[Scott No Mates]

Or whatever the beast will bear.