Commercial props - our stories

[grossreal]

hi dazzling
good to see you are back on terra firma.
comm has got its advantages and if you get very good tennants then the vacancy rate can be lower then resi.
( mine has been about three time less vacancy, why because its not been vacant on a 5 x 5 plus they want to sign another 5 x 5) not sure how you got over the 70% that normal comm lending max's out at there are very few that will lend over 70% of purchase,
you can get higher as you refinance along the way.
my tennant pays for every thing and in the lease contract they have to total refurb upon vacation inside and out, hence they want another 5 x 5 the refurb cost is a very bitter pill to swollow but i'm happy.
in the time Ive had it its payed the loan( + plus)( they equity is over the money in).
comm does cost more money down and you don't get as high a lend but it is a good form of land banking and cash flow earner.
there are some very good small comm to look at.
If starting out look for the 250 to 300k factory units say in the 200sq mtr size they rent well and are easy to find tennants.
My .002

 

[Trogdor]

hi dazzling
good to see you are back on terra firma.
comm has got its advantages and if you get very good tennants then the vacancy rate can be lower then resi.
( mine has been about three time less vacancy, why because its not been vacant on a 5 x 5 plus they want to sign another 5 x 5) not sure how you got over the 70% that normal comm lending max's out at there are very few that will lend over 70% of purchase,
you can get higher as you refinance along the way.
my tennant pays for every thing and in the lease contract they have to total refurb upon vacation inside and out, hence they want another 5 x 5 the refurb cost is a very bitter pill to swollow but i'm happy.
in the time Ive had it its payed the loan( + plus)( they equity is over the money in).
comm does cost more money down and you don't get as high a lend but it is a good form of land banking and cash flow earner.
there are some very good small comm to look at.
If starting out look for the 250 to 300k factory units say in the 200sq mtr size they rent well and are easy to find tennants.
My .002

Sorry for the direct question - do you own any factory units in the 250 - 300k range?

What sort of yeild should one expect?
Any depreciation (what levels)?
How much capital growth have you seen? (across all commercial sectors in your portfolio)?
How easy is any capital growth recognised by the banks for the purposes of re-valuation and extra borrowings (for next place)?

Also - I have done some searches for commercial property finance - 7.99% seems to be the rate the websites say. Is this too high, or the norm?

Also - would you mind if I PMed you in the future to ask more questions based on your experiences, grossreal?

Thanks mate!

 

[grossreal]

hi Trogdor
no I don't but I have a couple in my groups who do
and will give the returns.
pm me if you want or email me @ [email protected] I will try to answer your question.
I will post here the answers to your question in a couple of days if thats ok just running a soup.

 

[Bricks & Mortar]

Posting the Answers to the questions

hi Trogdor
no I don't but I have a couple in my groups who do
and will give the returns.
pm me if you want or email me @ [email protected] I will try to answer your question.
I will post here the answers to your question in a couple of days if thats ok just running a soup.

Grossneal,

Posting the answers on the site, would be great,
It will be beneficial to all!
Trogdor, myself and I'm sure a lot more formites are interested in this topic.
We have several IP's but commercial have always been put to the background with the thought of "vacancy" signs or "to let signs" as I drive to work. Sure these signs are no longer in the same postions, but I have seen a factory vacancy sign up for almost a year. This probably isn't the norm, but unfortunately has sort of put me of investigating any further.

A mixture might be beneficial to a portfolio. The research certainly is beneficial even if we dont act on it.

Perhaps you and colleges with similar experience could elaborate on the pitfalls as well as the benefits if you get some spare time.

Welcome back Dazz
I hope the rest of the tread can be restored, without the unwanted bits, so I can begin to learn some more about commercials

 

[Trogdor]

Sounds great to me if everybody else is happy!!

I bookmarked this (now sold) as the type of thing which I would be interested in researching further (price range, yield, melbourne location):

http://www.commercialrealestate.com.au/107239

Its still very very early days in learning about this sort of thing....

Id be interested in hearing comments when you all get a chance.

Cheers!

 

[grossreal]

hi all
no problems will give an actual unit price and returns just give me a day or so.
I can post 263 wardel rd dulwich hill but most will already know its figures my others are all very low start points as they are out of developments so the number are a bit squif as the don't have a high start point.
a quick answer but will give true values later
What sort of yeild should one expect between 8 to 11%?
Any depreciation (what levels) if new same as resi but older one the tennant does the refurb to there specs?
How much capital growth have you seen? (across all commercial sectors in your portfolio) mine does have a high growth because of the squif but normally comm price is governed by the rental return?
How easy is any capital growth recognised by the banks for the purposes of re-valuation and extra borrowings (for next place) usually 70% I revalue each 3 years as I have a built in 6% or cpi which ever is higher?
hope this helps ask any question you wish here to help

 

[rj]

so it's putting 26K p.a. or $ 500 per week into our pocket.

Oh my lord! Goodbye residential hello commercial - Joanna, I hope youre ready for a lot of commercial based questions tomorrow.

As I say ....

PUT ME IN COACH!

RJ

 

[rj]

Sorry, got abit excited there.

Dazz, any chance you could post up a photo of roughly what the property looks like? Is it a large shed or a shopfront or what?

RJ

 

[Trogdor]

You are an excitable fellow, Ramone!

 

[rj]

You are an excitable fellow, Ramone!

I am arent I?

Johnny "Cashflow Positive" Ramone

 

[FrankGrimes]

Sounds great to me if everybody else is happy!!

I bookmarked this (now sold) as the type of thing which I would be interested in researching further (price range, yield, melbourne location):

http://www.commercialrealestate.com.au/107239

Its still very very early days in learning about this sort of thing....

Id be interested in hearing comments when you all get a chance.

Cheers!

I don't know alot about commercial but the yield is fairly low.. What would be the advantages in investing in a small piece of commercial real estate vs LPT's or a LPT fund? I read in API that the good returns are only available in the 800k + range (especially in Sydney).

- Both have 70% gearing
- Similar interest rates, around 8-9%
- Both return 7-10% in yield, with some capital gains
- LPT is far more flexible, you can sell units as you please
- LPT has alot less tenant risk (spread between tenants)
- Commercial property has value add potential, but far more risks involved
- You can negotiate the price on a property, not a LPT/Fund

What am I missing? I can't see the advantage in investing in something like this vs a fund/direct LPT? It just seems like alot of hassle for no gain, unless you can afford the expensive range. But you are still at the mercy of the tenant.

Look forward to your thoughts.

Grimey

 

[Trogdor]

I don't know alot about commercial but the yield is fairly low.. What would be the advantages in investing in a small piece of commercial real estate vs LPT's or a LPT fund? I read in API that the good returns are only available in the 800k + range (especially in Sydney).

- Both have 70% gearing
- Similar interest rates, around 8-9%
- Both return 7-10% in yield, with some capital gains
- LPT is far more flexible, you can sell units as you please
- LPT has alot less tenant risk (spread between tenants)
- Commercial property has value add potential, but far more risks involved
- You can negotiate the price on a property, not a LPT/Fund

What am I missing? I can't see the advantage in investing in something like this vs a fund/direct LPT? It just seems like alot of hassle for no gain, unless you can afford the expensive range. But you are still at the mercy of the tenant.

Look forward to your thoughts.

Grimey

Grimey, I have been thinking about this a lot recently.

I have come to the conclusion that you are not missing much. Except for 2 things (imho).

Firstly, and most importantly, the risk of margin calls on LPTs with 70% margin (imagine having $1M with $700K margin loan - you just wouldnt put yourself in this precarious position).

Secondly (and probably not that relavant for "youngsters"/small fry like us), is the ability to add value with direct commercial property. This is probably a theoretical point only at this stage!!

As I mentioned before I have about 72K or something in the UBS wholesale property fund which is a great performing fund, and have been trying to compare my learnings of direct commerical property with this...!! It has 70% LVR, 0.8% MER, which allows the UBS folks to select what they percieve to be the best LPTs, and a great performance history, etc

What do you think Grimey?

By the way, how is your move preparations going? I only have 3.5 more weeks left in australia! Exciting....

 

[sue78]

Would it be a PI loan or IO loan?

I saw a property for $425k returning $42k pa. If I sold my IPs and used the profit to buy that cash, I could retire on $42k a year

 

[geoffw]

PUT ME IN COACH!
RJ

Before you get too excited...

A few understandings I have about commercial property (which may of may not be right- but at least I'll start the discussion rolling)

.The higher the yield, the higher the risk (you will get less rent for the same shop for Joe's local hardware than you will for Bunnings)
.The higher risk may well equate to higher vacancy. So a yield of 9% may, in the long term, earn you 5%.
.Vacancies CAN be much longer term. If you don't have the right property, and the right tenant, you could lose a lot
.Capital growth will depend on the tenants and the rent. If you can raise the standard of the tenant, you could increase the capital growth. CG is NOT independent of rent.

I would suggest that somebody who does not have a lot of experience in residential should not get into commercial until they get at least some experience of resi. And even then, perhaps not.

 

[saucy gibbon]

Geoff has hit it pretty much on the head.

Commercial, industrial and retail property are not valued like residential property. The cap rate reflects the risk, the lower the cap rate the lower the risk. To value a commercial/industrial/retail property you need to take the net operating income for the property and divide it by the cap rate. The only way to assess the cap rate is know what recent sales for similar properties have been and that will tell you what the market is willing to pay.

And if you are talking about industrial property then use the term industrial. Industrial properties have different cap rates, different types of tenants, different outgoings and different lease terms than commercial.

While I am involved in commercial and retail properties on a professional level I do not invest in these properties on a personal level. They do not suit my investment profile at this point in time. I commend those that have made money from these investments, however I fully agree with Geoff's comments that these types of properties are not for everyone. As I stated before, they are NOT just like resi only bigger or more expensive.

 

[APerry]

Hi All,

I have a fair bit of experience working with commercial investors and developers so i thought I would put my two bobs worth in. While it is true that the there is sometimes greater vacancy risk in commercial property, this is not always the case. The riskiest properties are the smaller ones, with small tennants and short leases. If you purchase a prime property with a strong tennant and long lease there is often very little vacancy risk. Same if you purchase the right kind of property in the right area. The skills involved are not that different from those required to be a successful residential investor, you just need a bit more money.

Another factor which is significant for larger investors is that it is easier to protect yourself, in terms of liability to lenders and servicability is easier to meet if you are rent relient, if you invest in commercial. If there is a quality tennant and reasonable length lease most commercial lenders will basically asset lend, with no directors guarrentees required (non recourse finance) generally they will only do this up to 65% LVR, but it is possible to go higher. This allows commercial investors to quarrentine each property in terms of liability and also means that they do not have to disclose this debt if applying for additional loans.

If you also take into account that management is easier and yields far higher, it makes a compelling case to invest in commercial over residential property, if you have the resourses to invest in quality commercial property.

Regards
Alistair

 

[grossreal]

hi all
I agree that comm is not for everyone and does have a risk factor that is not the same as resi.
but to find good comm property you look for property that is what you class as a high grade just like resi and you use the same mind set tools that you do for resi.
so value adding,
can you add another storey.
is there requirement in the area for this type of leasing.
are you going to get a tennant on a 5 x 5 with cpi or 5% increase.
these are all things that your must already have in your mindset of investing.
as for the smaller investments more risky well I must disagree but all to there own.
direct investing against LPT it depends on your risk profil and if you are looking at value adding and the area that you are investing in.
it all comes down to.
1. your skill at picking property( and that comm or resi)
2. your research of that area
3. your time and have you got that time to look into this area of investing.
4. and your skill at negotiating as you are not only going to negotiate on price but also on rental or lease terms.
and geoff is right it is not a first timers investment choice from my view but should be look at for a more seasoned investor.
my .002

 

[saucy gibbon]

Hi All,

I have a fair bit of experience working with commercial investors and developers so i thought I would put my two bobs worth in. While it is true that the there is sometimes greater vacancy risk in commercial property, this is not always the case. The riskiest properties are the smaller ones, with small tennants and short leases. If you purchase a prime property with a strong tennant and long lease there is often very little vacancy risk. Same if you purchase the right kind of property in the right area. The skills involved are not that different from those required to be a successful residential investor, you just need a bit more money.

Another factor which is significant for larger investors is that it is easier to protect yourself, in terms of liability to lenders and servicability is easier to meet if you are rent relient, if you invest in commercial. If there is a quality tennant and reasonable length lease most commercial lenders will basically asset lend, with no directors guarrentees required (non recourse finance) generally they will only do this up to 65% LVR, but it is possible to go higher. This allows commercial investors to quarrentine each property in terms of liability and also means that they do not have to disclose this debt if applying for additional loans.

If you also take into account that management is easier and yields far higher, it makes a compelling case to invest in commercial over residential property, if you have the resourses to invest in quality commercial property.

Regards
Alistair

Yield comparisons do not reveal the true difference between resi and commerical.

A resi property's value is mostly independent of yield.

A Commercial properties value is completely dependant upon cap rate which reflects the passing yield.

The cap rate is determined by investors, and cap rates change. You can do the sums yourself, calculate the effect of a .5% change in cap rate and what that does to your lvr if you have it maxed out.

 

[FrankGrimes]

Firstly, and most importantly, the risk of margin calls on LPTs with 70% margin (imagine having $1M with $700K margin loan - you just wouldnt put yourself in this precarious position).

Stick to 65% and make sure you have a LOC available if a margin call arises. BT still allow 10% buffer, so really the loan is 80%. Margin loans are a lot more flexible in other ways, no bank approvals, can capitalise interest..

Secondly (and probably not that relavant for "youngsters"/small fry like us), is the ability to add value with direct commercial property. This is probably a theoretical point only at this stage!!

Yep this the only advantage I can see. But this also involves a lot of effort! I try to keep things simple.

As I mentioned before I have about 72K or something in the UBS wholesale property fund which is a great performing fund, and have been trying to compare my learnings of direct commerical property with this...!! It has 70% LVR, 0.8% MER, which allows the UBS folks to select what they percieve to be the best LPTs, and a great performance history, etc

I’m with Vanguard, but damn wish I wasn’t! I’ve just been looking at the UBS stats and that is some impressive performance. Am I reading it correctly 18% over 5 years, with 0.8% MER AND no buy/sell spread? That’s incredible (I really hate buy/sell spreads). Bugger direct commercial with returns like that in my opinion.

I think commercial has a lot of potential in the higher price ranges, such as 1M + (as Dazzling has proved) but I’d still have to be convinced I’d be better off investing directly in commercial when I can rely on a professional to do it.

By the way, how is your move preparations going? I only have 3.5 more weeks left in australia! Exciting....

Getting there, I moved home with my parents for a while to get plenty of money together. The other ½ is getting her HPC (health professionals council?) complete and she will start looking for work after that.

 

[Dazz]

A Commercial properties value is completely dependant upon cap rate which reflects the passing yield.

We haven't found that to be the case at all. It's often quoted as common knowledge, and I believed it as well before venturing forth.

The elderly Greek chap who owns a bucketful of vacant land next door to our factory has seen the same capital appreciation on his dirt as us, despite us being able to lift the nett rent and improve the tenant quality and length of Lease. The value of the underlying dirt is independent of what is sitting on it - if anything. It also, if bought wisely, is the major value component of the prop, just as it is with wisely purchased ressy props.

Con's gross yield is 0%, his nett yield is negative after outgoings are factored in, he doesn't have a cap. rate and yet is still receiving marvellous growth (far more than on his house he reckons). He bought the dirt for $ 4 / sqm back in 1978 and it's now valued at $ 170 / sqm. That's 14.3% compounded per annum over the last 28 years.

I wish my parents were as wise to invest in a 0% yielder such as that way back then.