First commercial investment - advice sought

[adamwex]

I have 3 mil in cash, 500k in shares and can borrow 1.9mil. I am 40yo supporting wife and 4 kids. I do not currently work and do not wish to return to the workforce.

I am looking for a secure cash flow that beats bank interest and will keep pace with inflation. In a few years I will have more time on my hands to develop property. Have overseen a few residential renos and not averse to property development.

Some alternatives I am considering:
1. Find freestanding shop(s) in a desirable area to reside and put shop-top housing to add residential income stream.
2. A mixed tenancy free standing building perferably with some residential component
3. Long lease quality tenant eg bank in busy area
4. Buying close to train station in Sydney with a view to residential development under new LEPs allowing 4 storeys.
5. Any other ideas?

I would be very interested in how others would approach this.
Thanks for reading

 

[Aaron_C]

All sounds pretty good but I would say development is a bit harder for you due to lack of cashflow. Lack of cashflow is the number one killer of would-be developers so perhaps a passive investment in commercial real estate would be a good fit.

 

[china]

I have 3 mil in cash, 500k in shares and can borrow 1.9mil. I am 40yo supporting wife and 4 kids. I do not currently work and do not wish to return to the workforce.

Do you own any property that you can leverage off? How did you get to such a large cash holding?

 

[adamwex]

We own our house (3mil) and 3 investment residential units (2.3mil). The loan facility of 1.9mil is the max I could borrow on a residential mortgage using our house as security to purchase a commercial property.

I could potentially borrow more but it wouldn't be a residential mortgage and I'd have to pay higher rates.

Over the last few years our plan was to upgrade our house (thinking the prestige end of the residential market was soft) so I've been just accumulating money in the bank. In my industry there were good times over the last few years however the well is now running dry and I would rather have a secure income stream to live off and stay in our current house.

 

[WillG]

We own our house (3mil) and 3 investment residential units (2.3mil). The loan facility of 1.9mil is the max I could borrow on a residential mortgage using our house as security to purchase a commercial property.

Does your 3mil cash include the property you are living in?
Are your residential units mortgage free?
How much investment income do you need to live on?
How much net investment income are you currently receiving?

 

[adamwex]

Everything paid off and 3mil cash is sitting in a bank account earning 4%.

Net rent received is about 70k pa.

I will be paying 4 lots of private school fees soon so income of 200k pa (indexed) would be the bare minimum.

I am looking at a building on a main road leased to NAB with 9 yrs to go on current lease and 3 x 5yr options. There is a lot of interest I reckon it will sell at 4-4.75% net yield. I know people will say I'd be crazy to buy commercial at 4% yield however it does give me the desired income stream. Even if the tenant moves out in 9 yrs it is a 500sqm corner block single level in a 3 or 4 storey zone near train station on a busy Rd. Seems good to develop?? Do you think that would be a good fit and what minimum yield should I buy at?

Thanks for all advice.

 

[Aaron_C]

I know people will say I'd be crazy to buy commercial at 4% yield however it does give me the desired income stream.

It's all relative. Now with commercial rates being circa 5% a yield of 4% doesn't look so crazy.

 

[WillG]

Everything paid off and 3mil cash is sitting in a bank account earning 4%.

Net rent received is about 70k pa.

I will be paying 4 lots of private school fees soon so income of 200k pa (indexed) would be the bare minimum.

Are your $500k in shares throwing off any dividends?

I assume you have the $3mil cash divided between you and your wifes account to help spread the income and manage tax. Is the $70k from the IP income evenly spread between you and your wife?

Besides the kids schooling, what risks are you most concerned about? How much cash reserves will you need - $200k to $300k?

From your figures so far you should be able to get > $200k passive income(before tax) while determining the best investments for the $3mil.

So as it stands, almost half of your passive income is effectively indexed due to its derivation from shares and IP's

I wouldn't be tieing up the $3mil in a single commercial IP as you will have less flexibility.
I would always keep a proportion in cash/term deosits(perhaps $1mil) for both liquidity and to take advantage of cash rates when they increase.
I would invest the remainder in a variety of smaller resi IP's, index funds & direct shares for diversity and tax ie.. franking credits, depreciation etc

 

[adamwex]

Thanks for your well reasoned advice WillG.

I worry if Sydney's housing affordability keeps getting worse I will need to help my 4 kids buy their homes. So at the back of my mind I am thinking I must keep my assets increasing on pace with Sydney land values.

I realise there is a lot of hysteria about property prices but I would like to hold more land in Sydney. I think long term there would have to be increasing demand on a limited supply of land. Also buying into an area that is undergoing rezoning appeals. My 3 resi IPs are all strata units which I regret.

My attraction to commercial is the tenant pays land tax in some cases. Therefore a true net yield in line with bank interest is possible with the underlying asset appreciating.

I am thinking a freestanding Sydney resi IP would probably net yield only 1-2% net of land tax and others outgoings??

 

[adamwex]

Thanks for that reasoned response WillG.

I am concerned about Sydney housing affordability for my 4 kids and wonder if they will need my help to secure their homes in 15-20yrs time. So at the back of my mind I feel I should try to keep my assets on pace with the Sydney property market.

My 3 resi IPs are all strata units. I would like to hold land in Sydney as long term it seems demand is only going to increase for a limited supply. Land tax smashes what little yield houses offer as rent. If I could find a commercial IP with a tenant paying land tax I could get the bank interest yield and have an appreciating asset.

Long term in Sydney how has commercial property appreciation rates compared with residential?

Thanks again for all advice

 

[PrimeCommercial]

Long term in Sydney how has commercial property appreciation rates compared with residential?

Thanks again for all advice

Terrible over the last 7-10 years.
In the small segment of the commercial property sector I work in, commercial property has now just recovered to where prices were 5-7 years ago.

 

[TPI]

Hi adamwex,

You're in a very good financial position already - well done!

Have you investigated whether banks will give you a stand alone commercial property investment loan rather than you having to tap into the equity you have in your home/resi IPs?

Eg. Take the $3M cash in your savings account, keep $500k as a cash reserve, and use the remaining $2.5M for the deposit + stamp duty costs on a commercial IP at 70% LVR, generating an 8% net yield, with commercial property interest rates of 5%.

So this could give you a ~$6.9M commercial IP (preferrably with more than one tenant and varying lease expiry times) with a net income of $552k pa, and interest costs of $242k pa (on a $4.83M loan, ie. at 70% LVR), so a net income of $310k pa.

You would still have the $500k cash reserves earning you interest (20k pa based on 4% interest rates), the $500k shares earning you dividends (20k pa estimate based on 4% yields), the 70k pa net income from you resi IPs, and the untapped equity ($5.3M) in your home/resi IPs to borrow against and use later on as well.

So this is 310 + 20 + 20 + 70 = $420k pa, before utilising the equity in your home/resi IPs.

Or... can you only get a line of credit against your home/resi IPs as you are not actively working now?

If this is the case then you could instead use the $2.5M cash with the $1.9M in borrowed funds against your home/resi IPs that you have mentioned, so a total of $4.4M to spend on a commercial IP inclusive of stamp duty costs...

 

[Deltaberry]

I know people will say I'd be crazy to buy commercial at 4% yield however it does give me the desired income stream.

4% yield is ok depending on location.

I'd much rather have 4% yield in a very good spot with growth potential, than 10% yield in some rural town.

But that's just me.

 

[Rolf Latham]

We own our house (3mil) and 3 investment residential units (2.3mil). The loan facility of 1.9mil is the max I could borrow on a residential mortgage using our house as security to purchase a commercial property.

I could potentially borrow more but it wouldn't be a residential mortgage and I'd have to pay higher rates.

Id be looking at my borrowing strategy............ within reason, id gear the commercial as high as I could with a facility that allows redraw or ideally an offset.

Dont buy an asset with cash if you dont need to

If you are concerned for the future - then plan that way.

Never assume you can get borrowings when you NEED them, let alone when you want them.

For someone with your reosources, the maxim of borrow money when you dont need it applies more than most


ta
rolf

 

[adamwex]

A few years back CBA did a personal line of credit if secured by residential property for up to 50%. They didn't ask questions about your income nor what you wanted to do with the funds. The interest rate was comparable with the cheapest mortgage rates.

Sadly it seems that kind of product is gone.

Has anyone had experience with property investment in NZ? A friend is very happy with his resi IP in Dunedin. Apparently no stamp duty, capital gains tax or land tax and higher yields than here. The capital appreciation doesn't seem too shabby either.

The downside would be the currency risk and getting ripped off trying to bring it back into AUD. I would think you might lose 1% simply with the banks exchange rate margins.

 

[HD_ACE]

Has anyone had experience with property investment in NZ? A friend is very happy with his resi IP in Dunedin. Apparently no stamp duty, capital gains tax or land tax and higher yields than here. The capital appreciation doesn't seem too shabby either.

The downside would be the currency risk and getting ripped off trying to bring it back into AUD. I would think you might lose 1% simply with the banks exchange rate margins.

yeap. 8 9 10 % yield fairly easy in major hubs.
dunedin should be able to achieve high yields taking advantage of student accomodation. And renting rooms out seperatly.
The no cgt would only apply if your living there I would imagine and not if your investing from aus.
Cheaper to get into and stay in the market compared to here. And still had %100 loans a feww years back. But are now controlling amount of loans above 80%.

cheers

 

[James m Dawson]

hi adamwex , a couple of quick points , I have several comm properties with apartments above and one where im building 3 more residential units over the carpark at the back - the plan is to strata them for flexibility with financing / sales later on. re bank tenants as investments make sure that the space is flexible and can be converted easily later on - could cost a bit to remove a large safe for example. I would still focus on at least a 7 - 8 % net return.
you might want to consider a 7 or 8 shop shopping centre as well - if they are well located as an island type zoning in a suburban area they can be a safe bet , also often with redevelopment potential later on.
I like the sound of the numbers in TPI 's comment.

 

[Terry_w]

Serious amount of cash. The first thing you do, before you do any investing is to consider some asset protection, estate planning and some tax strategies. THere are some ways to greatly improve things.