How did you start?

[Trogdor]

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?

* Land tax savings (no double counting, each get a separate threshold in Vic)
* GST compliance is within the trust - simpler
* My understanding is some increased flexibility to loan to the trust and take money out later on.

I'm not sure if you can transfer units later on to a SMSF - I would think not, but thats not important to us we're relatively young and many decades (3+) away from "superannuation age" retirement.

You could just as easily buy in your own name. The point I was trying to make is that yields are so bad on resi that a temporarily vacant CIP with your increased tax refund puts it almost on par !!

 

[JIT]

* My understanding is some increased flexibility to loan to the trust and take money out later on.

I think this is the ''re-financing principle''.

You could just as easily buy in your own name. The point I was trying to make is that yields are so bad on resi that a temporarily vacant CIP with your increased tax refund puts it almost on par !!

Sure that makes sense.

 

[HiEquity]

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.

Hi evan

I've only once paid LMI to achieve higher than 80% leverage so I might not be the right person to ask. In any case, in my view the benefits of high leverage are greatest in a strongly growing market so as to get that exposure and maximise the equity.

Again, in my view, that may be some time away so, if I was starting again, I wouldn't be in a rush to gain the biggest exposure possible as quickly as possible if it meant compromising on cashflow. I would happily trade off less exposure for greater income and use that income as a form of leverage, allowing you to buy more, sooner, with better cashflow in a nicely virtuous cycle. It may be a strategy that would seem to start off slower but it wouldn't be long, in my view, for it to overtake a resi strategy with worse cashflow. Of course both of these are passive strategies - if you choose an active investing path the world could well look completely different.

Further to all that, I would also stress that a 7% gross yield on a RIP is a very different experience to a 7% net yield on a CIP. I can't count the number of times I have seen both myself and others under-estimate the true cost of ownership of RIPs. Totalling up the real numbers at the end of the financial year soon makes the difference very clear...

 

[bene313]

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.

Ok so the LVRs are one thing. What about availability of finance? What sort of incomes are necessary to get into what sort of deals?

Say there was 200k cash available for a deposit + costs on starter CIP worth 650k. Assuming borrower is single with no other debt servicing obligations, what sort of salary is required for the CIP loan? What about larger deals?

 

[Trogdor]

Ok so the LVRs are one thing. What about availability of finance? What sort of incomes are necessary to get into what sort of deals?

Say there was 200k cash available for a deposit + costs on starter CIP worth 650k. Assuming borrower is single with no other debt servicing obligations, what sort of salary is required for the CIP loan? What about larger deals?

Have a play for yourself bene - click on the "Debt Service Calculator":

http://brokers.adelaidebank.com.au/commercial_loans_process_ss.html

Or speak to a broker who *specialises* in commercial loans.

 

[Wunderbar]

Commercial properties in the 'mum-and-dad' affordable range tend to be very bad investments. You need to go beyond this to get a good deal and avoid long vacancies.

 

[Trogdor]

Commercial properties in the 'mum-and-dad' affordable range tend to be very bad investments. You need to go beyond this to get a good deal and avoid long vacancies.

What personal "experience" do you have in this sector Wunderbar?

Care to share more?

 

[evan1875]

Ok so the LVRs are one thing. What about availability of finance? What sort of incomes are necessary to get into what sort of deals?

I think the gross rental income will contribute a great deal to the servicibility. Hence the importance of finding a decent yield.

 

[evan1875]

Commercial properties in the 'mum-and-dad' affordable range tend to be very bad investments. You need to go beyond this to get a good deal and avoid long vacancies.

is 1m the magic number here, wunderbar?

 

[lizzie]

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.

what interest rate are you paying? is the net including after mortgage repayments? just curious as i can get 6-7% net, before interest payments, on well located resi atm without the vacancy risk.

as much as i'd like to get into commercial, i'm looking more at small warehousing rather than retail as i suspect retail will follow in the very popular trend of countries such a japan, where they have department stores with one of every item/size in stock for the consumer to look at/try on, but then you have to order online (either at the store of at home later) and the item is delivered.

except for clothing (which i like to try on) almost every purchase i make, computer/books/whitegoods/linen etc, is ordered and bought online - including my firewood yesterday.

i think warehousing (for me personally) is the way to go.

 

[Trogdor]

what interest rate are you paying? is the net including after mortgage repayments? just curious as i can get 6-7% net, before interest payments, on well located resi atm without the vacancy risk.

as much as i'd like to get into commercial, i'm looking more at small warehousing rather than retail as i suspect retail will follow in the very popular trend of countries such a japan, where they have department stores with one of every item/size in stock for the consumer to look at/try on, but then you have to order online (either at the store of at home later) and the item is delivered.

except for clothing (which i like to try on) almost every purchase i make, computer/books/whitegoods/linen etc, is ordered and bought online - including my firewood yesterday.

i think warehousing (for me personally) is the way to go.

No, yield is yield - i.e. before any mortgage payments. Im paying 7.1% on the portion secured against other resi, and 8.65% / 9.35% on the portion secured against comm (fixed / variable).

You are doing well to get 6 - 7% net on resi - as that would be 8 - 9% gross at least, if not more. If you don't mind me asking - what price point is this? Im not interested in collecting many low value IPs - nor IPs in small towns or mining areas - as these have significant risk of their own. Thats the demographic you usually find these types of resi IPs in, though I could be wrong.

I hear what you are saying though I don't think small warehousing would address this either - competitors to traditional retail would usually run pretty big operations - not low end smaller warehouses. For example the department stores you mention would be using mega-warehouses. As an aside, when did you observe this in Japan? I was last there in 2008 and did't see this, though admittedly that was quite a long time ago now.

Our retail is also in an upmarket seaside area not too far from Melbourne, and where a lot of people holiday and retire. Retail is as much a pastime / hobby as a necessity for the locals, so can't see people swapping from their botique shops selling high end clothes / shoes / jewerly / homewares to shopping online !!

 

[Wunderbar]

What personal "experience" do you have in this sector Wunderbar?

Care to share more?

Glad to. Commercial properties, once empty, can stay empty for months, even years. Everyone knows this. I know plenty of people who buy properties on good yields (8%+) and then have the tenant leave only a few months later even though the 'lease' was still in-force.

Unfortunately, when you are purchasing a commercial property you have no idea what the financial situation of the tenant is like. You don't know whether he's been late with the rent, what his takings are each week. Sure you can drive by and sit outside the shop and check - but how can you be 100% sure?

Commercial landlords in the 'affordable' range generally only sell if they know the tenant is in bad shape. But they won't tell you this - and you, the sucker who bought it, are left carrying the baby and have paid a 'good' price for it.

 

[BuildingBlocks]

Should we be working out how to invest in factories in China instead?

 

[Trogdor]

And its all the same, across all areas and sectors?

Even if you are on a strip which gets only a couple of vacancies a year, which never last very long?

And when you get a copy of the bank valuation it supports this and states that there are low historic vacancy risks, low vacancies, and minimal incentives required in the event of a vacancy, with a 1 -3 month likely period for tenancy replacement....?

Also interestingly enough in my experience when tenants do want to leave on top quality strips they are often offered "key money" from people wanting to take over the leases.

Thafs why I like good retail CIPs. Very different to a showroom / warehouse on some back highway in the sticks.

Nah - nothing to see here, CIPs are all too risky unless your leasing a whole shopping complex to Coles on a 25 year lease !!

 

[Wunderbar]

To buy on a good commercial strip in Melbourne you need to pay 4-5% yield (Swanston St shops command 3.5%). How is that a good investment?

 

[Trogdor]

To buy on a good commercial strip in Melbourne you need to pay 4-5% yield (Swanston St shops command 3.5%). How is that a good investment?

Its not. I agree.

But there is more to life than Swanston St, Chapel, Lygon, etc...

 

[Wunderbar]

Of course. But what I'm trying to say is that the way to make big money on commercial property is not to buy purely based on yield - as a high yield usually means something is wrong with the tenancy. Not always, but it usually is the case, especially for lower-priced CIPs.

 

[Trogdor]

Of course. But what I'm trying to say is that the way to make big money on commercial property is not to buy purely based on yield - as a high yield usually means something is wrong with the tenancy. Not always, but it usually is the case, especially for lower-priced CIPs.

Agree with that. If you're way higher than market yield for that immediate location, often what you say is right. If its enough of a bargain you just need to go into it with your eyes open and a plan (i.e. know realistically how long it would take to re-let and how much you could achieve - NOT just how much its currently rented for !!). If you can't tick both those boxes, then its very bad no matter what the current yield is!

Couldn't agree more with that.

 

[Wunderbar]

Ideally you purchase a good CIP in a good location at a higher yield when the economy is in the *****. Then when the economy recovers, your rent goes up, cap rates fall, and your value goes up by 5x. But that's extremely hard to find.

 

[Trogdor]

Ideally you purchase a good CIP in a good location at a higher yield when the economy is in the *****. Then when the economy recovers, your rent goes up, cap rates fall, and your value goes up by 5x. But that's extremely hard to find.

Exactly. Just like shares. Earnings go up, and P/E multiples expand. You get a double whammy.

2009 saw this for the Aus equities market because its global.

I don't think comm property has had this for a long time in Aus (though I'm not that old so could be wrong - was 1991/2 the last time?). I can't see it happening again for at least as long as the mining "boom" continues.