How did you start?

[Aaron Sice]

Unsure whether this is the right place for this topic, but happy for it to be moved.

I've spoken to a few commercial investors and there seems to be a running trait - almost all of them started their investment career in residential.

Whether by choice or accident they've ended up in commercial - and the running commentary is the same; it was hard to secure the first deal so they started investing in a more 'favourable' environment.

Knowing what you know now, do you feel this is true today?

I'm at a crossroads and while I have a cocky attitude in that I'm confident I can do well in my upcoming resi adventures, the ideals and notions behind commercial really appeal to me.

My thoughts were to build a resi base, the liquidate and move into purchasing a comm property outright, use the title and go 50% into another. Pay that 50% debt down with the excess income and use both clear titles, again, to go head-long into another.

Rinse, repeat.

I think this is a good strategy from this side of the fence, but if you had your time again, what would you do? Start in resi and move to comm or start outright in comm? What comm property type would you target first?

 

[INVSTOR]

Hi Aaron, Although I'm not experienced with comm properties at all, my grandfather invested in comm properties so I've always had a small interest. My thoughts are, if you a businessminded (can be a hard-****), pay attention to detail, can understand legal jargon, can reasearch the market well ( vacancy, what attract tenants, recognise faults with properties, read leases), why not buy commercial? I think it's a bit scarey that you could have a vacancy for a long period (i'm not sure if my mum brainwashed me with neg thoughts when I was growing up complaining she had no income when one of the properties was vacant for a long time!) Everything my grandfather bought was sold off - bugger. My uncle was the main benefeciery and bought a $5mill property about 6 years ago. I think you are smart enough to handle what I think it takes to go commercial - my novice opinion! Actually, you've got me thinking to do the same now!! Do i really need my half mill ppor bringing in $400 per week. It's a bit of a no brainer!!!!

 

[Aaron Sice]

Thanks for the reply

I'm okay with everythign you mentioned, i guess as a risk mitigation factor i'd really like to own at least one outright upfront.

that way, if it is vacant, there's no pain. i can use it for parties and warehouse concrete pad burnout competitions...j/k.

shame those properties were sold off - was probably designed to be some kind of legacy.

 

[INVSTOR]

What price range are you looking at? I don't think it's a bad plan to own one outright. I think it would be OK to have a couple of resi too, maybe later if you want to own comm outright.

Yep, shame everything was sold off, it was set up for future generations!

 

[Rixter]

Resi or Com???? always remember each is just a vehicle available to take you to your destination (what ever that is for you).

Which one to take is a choice under pinned by your knowledge level, current financial position, time frame and personal risk profile.

I hope this helps.

 

[HiEquity]

I think this is a good strategy from this side of the fence, but if you had your time again, what would you do? Start in resi and move to comm or start outright in comm? What comm property type would you target first?

Hi Aaron

Just noticed this thread. We are mere babes in this game so my comments are probably premature but that doesn't stop me having an opinion.

- If I was starting out again, I would go straight into CIPs and bypass the resi stuff entirely. CIPs are available in all shapes and sizes but the cashflow is nearly always higher than RIPs due to the fact that the competition is less without the mums and dads looking for their PPOR and behaving emotionally. It may take a bit longer to save up the equity but reasonably high leverage is still available for those with reasonable incomes. The superior cashflow allows the portfolio to grow just as fast without hitting serviceability ceilings - just need to have sufficient buffers to cover reasonable vacancy risks.

- As we have a resi portfolio already, the costs of liquidation are just too high. It's easier and cheaper for us to just leverage what we already have and use that equity to buy CIPs. Transaction costs kill a lot of value in this game.

- As to which CIP to target, the one that gives the best tenant, highest return and best potential for capital gain for the risk. That could be anything - office, industrial unit, shop etc etc etc. Such is the diversity of the properties in this field that the potential for vendors and others to misprice risk is reasonably high but that sword cuts both ways of course in that you could end up paying too much as well as too little. The governing legislation for the property is also a factor as others have pointed out previously but in my amateur view there is a level of return which justifies that risk as well so I'll make no blanket statements - each property is a unique value proposition. Some are just more attractive than others...

Just my 2c anyway...

 

[Aaron Sice]

2c welcomed. thanks Antony.

i'm not after blanket statements just the notion on what someone would do if they had their time again, so thanks a bunCh for answering the question

i guess i'm really at a crossroads - i understand how to turn a serious buck in resi but i wonder if it's worth it.

 

[HiEquity]

i guess i'm really at a crossroads - i understand how to turn a serious buck in resi but i wonder if it's worth it.

Hi Aaron

I assume you mean active rather than passive resi strategies? When we came to that cross road, it helped us to put a realistic value on our own time and make a realistic assessment of the time it takes to develop these opportunities and compare that to the post tax, post transaction cost returns in a dispassionate manner.

When those costs are included the equation for active renovating / developing / etc strategies for us rarely stacks up. Better for us to just take the passive investing options and keep plugging away in a reasonably well paid job which, while I enjoy it well enough for now, would not be my choice of past time if we were financially free. That way at least when I get home I can just play with the kids while they're still young and they enjoy hanging around with their old man... rather than be trying to chase up all the things needed to make these deals happen. I had quite enough of that palaver already with being in the middle of settlement of our latest deal with a newborn in the house! Not recommended...

You seem to have a business which could be grown significantly? A strategy where you secure some passive investments so you can then concentrate on growing the business could be an option to consider? Most rich people seem to have got that way through their business...

Just some thoughts as they occured to me - obviously I have no idea really...

 

[Rolf Latham]

Hi

I have a few clients that have done ok out of comm.

Couple of things that come to mind

1. You need good equity to get into decent deals , with maxish lvrs at decent rates of 70 %

2. decent supplementary income is needed. While the assets that you currently hold produce more income than you could possibly spend on toys, lenders will often still want u to run your business or PAYG job.

3. Sub 1 mill comm is often sub-optimal in many ways, the current sweet spot for max bang for buck seems still to be around 5 to 8 mill which is teh area that blows most mum and dads out, but doesnt attract the institutional investor.

Please note these are NOTHING but generalisations, for there is a decent deal almost everywhere, but decent isnt really what makes for rapid growth, unrecognised potential often does.

PS, I would not buy assets outright and try to get cash out in the current environment.

ta
rolf

 

[evan1875]

HE, your opinion is really interesting. Could you elaborate on how you would bypass investing in RIP and building up a decent portfolio all together before going into CIPs? The servicibility may not be an issue but how do you overcome leverage? 70-75% vs 90-95% is a big difference especially when starting out.

Maybe a combination of RIP and CIP to start with and then gradually move into CIP?

Currently working on a sub 1m CIP, yeah, one of those... I am just starting out. A timid first step i guess. But don't have the equity to go further and i guess little mistakes would be easier to correct than big ones.

So will cop a lot of lessons I am sure. Actually already writing down a list of things that could have been done better so far. Hoping to learn the ropes through this.

My thinking - while not a multimillion dollar 17% net 11k/wk deal, it still beats B&H RIP for yield.

I clearly can see the difference between investing at the 5-8m level and the sub 1m level from searching the web and reading posts from here.

Although they come in different sizes, I am always pondering if CIP can be too early for someone like myself at a certain stage, as existing equity could be better leveraged into RIPs. If not, why is there such a consistent trend that most CIP investors started in RIPs?

Thanx Rixter, wise words.

Identifying unrecognised potential in CIP to manufacture growth, well one word comes to mind, DAZZ. (Unfortunately not much else comes to mind. It's not looking at an old house and picturing putting in a new kitchen.)

 

[bene313]

They might come in all shapes and sizes, but I haven't seen any 500k storage boxes delivering a good yield. Maybe one needs to look harder. On top of the average yield, 165k down and subject to finance.

I know some are doing just what you suggest HE - Trog is a good example. But even Trog is netting around 7% from memory. Now you can get pretty close to that in a dual-occ resi deal, plus the 165k down becomes 65k. So for me, as much as I'd like to pursue comm, it's gonna be resi and some dabbles on the ASX for now until the equity shows up.

 

[Ausprop]

takes a while but is worth getting there. Our comm property is now yielding close to 20% in only a few years. Got a problem with the tenants? Default their credit file and call a lawyer and send the tenant the bill... now I know how it would feel to be a bank!

 

[RPI]

I think resi can be useful tool to build equity for a deposit for commercial.

Would I do resi again, to start with yes, but would start in commercial as soon as I could

 

[Trogdor]

We bought our first CIP in late 2009 and have just gone unconditional on our second. My thoughts:

If we had our time again, we would have gone to CIP sooner. We don't have many resi at all, but thats still too many.

Our resi investing demographic was inner city ring (i.e. 5 - 10km from CBD) in blue chip stuff. For example - while we were working o/s we used Metropole to source a resi IP for us, so you would understand what type of resi we have. So far stable and good CG, but very ordinary yields. Why? Two decent incomes, ability to NG, and didn't want to stuff around with collecting 10+ piddly properties for 200k each in Frankston, Melton, etc.. (no offence for those who do and make money out of it, but we didn't want the work of managing such a "large" portfolio and the administration and maintenance that went along with it).

Fast forward with continuing with this strategy - you could NEVER retire off rent, LOE is a joke in my mind, and I didnt want to gamble on liquidating half the portfolio down the track - and end up having to buy shares and CIP then for income - why not just do that from the start - have the end game in mind and work backrwards??

So we decided to keep the little resi we had, and expand into CIP and shares. Shares are a story for another day - so will focus on the CIP.

The first thing is - what is the worst that can happen - its vacant. If you structure it so you can claim tax deductions when vacant - run the numbers on an inner city resi IP cashflow with a tenant, vs a vacant comm IP and getting tax deductions back, not much difference.

This should get most people "comfortable" that a vacancy is not the end of the world if you structure it all correctly. If it has a tenant (which it should for most of the time) its obviously MUCH better that resi for cashflow. Im not planning on vacancies - but for the first couple of CIPs I know I'm "insured" for them from tax deductions if the worst is to happen.

Next step is to pick the type of property - I'd suggest people that for smaller $$ value (say under $1.5m) retail is a good step. You can get quality properties whereas in the office and industrial I'd want to be spending more than this. Its funny - on this forum people have the perception that due to the retail leasing acts retail is just like resi - I'm not sure if thats true. The cashflow is net and a lot better when compared to resi, which is what matters to me. Acknowledge there are more tenant protections that office / industrial, but thats fine for me.

All I can suggest is look at a lot of different types of CIP at the start - and find a type that you are comfortable with (e.g. retail, medical, office, warehouse, factory, etc..), and then research that type in a geographic location (e.g. a specific suburb or two) - then become an expert on $/m2 lease costs for these, $/m2 sales prices, cap rates, and recent sales and leases before you buy - in your new "sector". Also make sure to get as many leases (attached to contracts of sale) for your sector - and make sure you understand how they work and whats "market" for your sector.

Out strategy has been to buy smaller size / higher $ rent per sq m properties, in solid strips, next to a big centre (i.e. Centro, Westfield, that sort of thing) in a specific resilant area. Barely any maintenance if vacant, low vacancies, reasonable yields, some depreciation (though not great) does the job to get us into CIP.

14 months post settlement of the first its still all going to plan, so thats good.

The other advice I'd give is that once you get one or two CIPs - a lot of pressure comes off your shoulders. You realise you can simply make P&I payments on them and in 15 or 20 years you can put up your feet and retire without doing a thing more - as the cashflow is so good. Of course you can get there a lot sooner or end up with a much bigger portfolio - but knowing this takes a lot of pressure off, adds a lot of SANF, and does away with this crazy high LVR accumulate 1 a year resi mindset. When you think about it, in many ways CIP is a lot lower risk !!

Anyway - not sure if that helps Aaron - but its my $0.02.

 

[Trogdor]

My thoughts on this:

Hi

Couple of things that come to mind

1. You need good equity to get into decent deals , with maxish lvrs at decent rates of 70 %

I'd say 75% LVR would be max for comm deals from my experience with the right lenders.

2. decent supplementary income is needed. While the assets that you currently hold produce more income than you could possibly spend on toys, lenders will often still want u to run your business or PAYG job.

Yes, but only while accumulating CIPs - make sure to get a loan without reviews and with a 25 year ammortisation (not a 5 year bullet loan for example) if this is a concern.

3. Sub 1 mill comm is often sub-optimal in many ways, the current sweet spot for max bang for buck seems still to be around 5 to 8 mill which is teh area that blows most mum and dads out, but doesnt attract the institutional investor.

From my experience I'd say around 600k is the minimum to avoid crap. There actually is a lot of decent stuff out there in the 600k - 1m range. I wouldn't discourage people who don't have 5 to 8 mil to spend (or even $1m) !! Get out there and look if you're curious.

 

[Aaron Sice]

.

Next step is to pick the type of property - I'd suggest people that for smaller $$ value (say under $1.5m) retail is a good step. You can get quality properties whereas in the office and industrial I'd want to be spending more than this. Its funny - on this forum people have the perception that due to the retail leasing acts retail is just like resi - I'm not sure if thats true. The cashflow is net and a lot better when compared to resi, which is what matters to me. Acknowledge there are more tenant protections that office / industrial, but thats fine for me.

thanks for the explanation there Trogdor - the bit i highlighted in your quoted post nearly rings true for WA, anyway.

there's a new structure in WA that allows me to add about 60% yield to resi development properties - so they're definitly profitable now.

maybe a mix of the two, i dunno. some days it's too damn hard to even think about and you end up with analysis paralysis.

 

[Trogdor]

there's a new structure in WA that allows me to add about 60% yield to resi development properties - so they're definitly profitable now.

Could you please elaborate more on this?

 

[evan1875]

Hi Trog,

what is the structure you use for your retails to claim deduction on interest when vacant?

i remember you got 7% for prime retail. do you aim for a min cash on cash return?

 

[Trogdor]

Hi Trog,

what is the structure you use for your retails to claim deduction on interest when vacant?

i remember you got 7% for prime retail. do you aim for a min cash on cash return?

Hi - unit trust, 50 / 50 with wife and I, borrowings in our names. Property held by unit trust (we own the units 50 / 50). Quite simple.

We're in the process of finding a tenant ahead of settlement - depending on how much discounting on rent we'd end up at 6.8 - 7% yield (hoping for a shade higher than 7.0%).

No minimum, but I'd be reluctant to go below around 6.3% net. First CIP was at 6.34% day 1, and after 14 months now on 6.65% on initial purchase price. Also happy with this.

 

[JIT]

Hi - unit trust, 50 / 50 with wife and I, borrowings in our names. Property held by unit trust (we own the units 50 / 50). Quite simple.

Trogdor, apart from the negative gearing, what are the other advantages of this structure as opposed to buying in joint names 50 / 50?

Is it the ability to transfer units later to a SMSF or DT without stamp duty?

Land tax savings?