strategy thoughts.

[Aaron Sice]

just after a general concensus on what some more experienced commercial folk think is feasible or not - by experienced i mean have, or have had, one or more properties, because that's 10x what i've got.

i have a decent chunk of equity that i'm releasing by selling my home.

i'm reasonably clued up, by my own admission, about what rents well (sizes, location, requirements etc) in what sectors of commercial in Perth. i have a good understanding a some decent commercial contacts to have a good starting point.

my proposed strategy is to buy something around the $500k mark to begin with and 50% LVR - being i'll put in 50% deposit out of my own cash. for the particular sector i'm currently pursuing, i should see a 10-12% yield on gross cost (including my deposit, not just the LVR'd bit ).

i don't plan to touch the extra income coming in; rather i'd pay down the principal ASAP plus with a bit of my own cash.

by this reckoning at approx 8% budgeted bank IR + income + some more of my own cash, it should take around 5 -6 years to pay down the bank's 50% owed.

now stick with me here. i know you're all screaming to the rooftops "what the f__k are you thinking?"

so then i then take a clear and un-encumbered title and use it as a 40% deposit on the next place, leveraged into a $1mil property.

40%? yes, (80% of 50%) is 40%. They may leverage the existing product at 70% instead of 80% but i've heard from BankWest and RAC that they'll look at 80% if unencumbered.

i stop putting in my own cash and use all surplus income to pay down the initial deposit, again should take around 5-6 years at 10-12% yield by paying interest only and adding the surplus cash solely from the property income to the escrow outside of the IO contract.

so in 12-13 years i should have 2 unencumbered commercial properties spitting out cash; of course, this hinges on watertight leases, paying tenants, continued bank finance and a continued demand for the type of targeted property, but is the sole reason i've chosen these particular types of property.

round it up to 15 years, just to be safe. i'll be 45 then.

a 1.5mil comm portfolio, unencumbered, putting out 10-12% yield at today's rates is a pretty enticing setup.

the growth i see for the coming 15 years in the type of property i'm chasing is decent, as are the yields, so goodness knows what 15 years away will be like.

but make the cents (sense) work now and the dollars will look after themselves.

so.....thoughts? pie in the sky? breakthrough? conservative? optimistic?

 

[Piston Broke]

I don't think there is anything wrong with your line of thought, but it does really depend on the type of property, general and local economy.
I just would'nt make growth assumptions based on what happened the last 10 yrs.
Also 500k is just a number, and from what i see there's not much of what I'd call "good" CIP at that price.

 

[Gools]

10-12% nett return on a $500k property. Doesn't sound like the markets I know. I thought you had to do much higher than that in price to see that return. Nice snooping.

Gools

 

[Aaron Sice]

Snooping? What?

Without going into an excessively long post about my strategy, I'm confident in a minimum 10% yield.

The primary goal is cash-flow, not CG.

 

[evan1875]

aaron, are you talking about 10% net or gross for a 500k property?

 

[younguns]

Do you mind me asking what industry you are looking at Aaron? We are looking to get into commercial some time in the next 12 months (fingers crossed!) with a similar amount of cash to play with.

Cheers
YG

 

[Piston Broke]

I'm confident in a minimum 10% yield.

The primary goal is cash-flow, not CG.

What makes you so confident?
CG can also bring cashflow btw

 

[BV]

Aaron
We live in uncertain times so we need to be thinking outside the square to make any decent money.
Your strategy sounds good to me.
As long as you pick the right industry and the right area you'll be ok.
Are you doing it alone?

 

[AAA]

Aaron, I can see your line of thought.
So you want to pay down the $500K loan for peace of my mind in case there are no tenants.
But from what I understand, with no tenants in place, 30% deposit and negative gearing, a $500K property might not be hard to hold.
So why not have a two year interest buffer saved up and buy the better ($1 Mill) positive cash flow CIP at the start instead of waiting for 5-6 years?
I might be missing something so bear with me.

 

[Dazz]

Hi Aaron,


As discussed yesterday, your strength lies in carving up blocks of land.


Your conservative strategy sounds OK to start with, but because of your underlying talents in carving up properties, I'd be targeting something like and old shed on industrial land that in a few years time can be strata'd up and improved that way.


I'm hesitant to agree with you on a 10+% nett yield in your 500K price range, it certainly wouldn't be normal but stranger things have turned up on an individual basis.


You have all the tools - go to it man.

 

[Aaron Sice]

Subdivision is where its at for me, but I need 10-20x what I currently have to make it work, so it'll be a long way off yet unless I can do a few deals of exchange of services for a cut in the deal etc. I do a few of those in larger, resi subdivisions and developments but it's not every day you get someone buying a 5 or 10 mil commercial subdivision in Wangara and then requesting some kind of basic JV because they're short on cash....! Chances are they're already cashed up so they don't need my "help" funding the soft costs, if you get my drift.

 

[Aaron Sice]

I'm hesitant to agree with you on a 10+% nett yield in your 500K price range, it certainly wouldn't be normal but stranger things have turned up on an individual basis.

You have all the tools - go to it man.

key word there is individual. This isn't a JLLS or Knight Frank mail out kinda deal.

 

[Aaron Sice]

Aaron, I can see your line of thought.
So you want to pay down the $500K loan for peace of my mind in case there are no tenants.
But from what I understand, with no tenants in place, 30% deposit and negative gearing, a $500K property might not be hard to hold.
So why not have a two year interest buffer saved up and buy the better ($1 Mill) positive cash flow CIP at the start instead of waiting for 5-6 years?
I might be missing something so bear with me.

It's not even peace of mind, it's so I have an unencumbered title to secure an LOC against for a bigger deposit on a larger property....doing my best to avoid x- col but that could be shot down in flames because I'm no comm finance guru!

 

[Aaron Sice]

What makes you so confident?
CG can also bring cashflow btw

....seeing similar properties renting for what I can change these types of properties into.

Its more than just tenant+bank+property deal, it involves a rezone but understanding and navigating Local Govt policy is my edge there. When you've seen some of the crazy spot zonings like I have in my targeted areas you'd probably understand a little deeper' but that's all I'm willing to give away.

 

[Aaron Sice]

Aaron
We live in uncertain times so we need to be thinking outside the square to make any decent money.
Your strategy sounds good to me.
As long as you pick the right industry and the right area you'll be ok.
Are you doing it alone?

As much as physically possible. Happy to JV with someone but it would need to be some stonking returns to make the extra risk worthwhile, unless it was the right person already able to understand commercial, ie not my dad, for example.

 

[Rixter]

Just remember, the smaller the CIP the higher the risks. The real money in CIP is made at the top end (just ask the big players) which also presents the lowest risk.. catch 22 tho creating/having the capital to get in up there.

 

[Dazz]

.....if that is the case, and I don't think it is true, how does one overcome the catch 22 ?? Obviously all of the "big boys" haven't let that catch 22 stop them, as by definition, they have broken through.....and hence it isn't a catch 22.

 

[Piston Broke]

....seeing similar properties renting for what I can change these types of properties into.

Its more than just tenant+bank+property deal, it involves a rezone but understanding and navigating Local Govt policy is my edge there. When you've seen some of the crazy spot zonings like I have in my targeted areas you'd probably understand a little deeper' but that's all I'm willing to give away.

I understand what your saying, in which case the current return may be improved over time and not a major issue. But the leases may have been entered into at a time when the market was more buoyant and not reflective of current rates.
Still it's a higher risk in that "amateur hour" market.

 

[Rixter]

.....if that is the case, and I don't think it is true, how does one overcome the catch 22 ?? Obviously all of the "big boys" haven't let that catch 22 stop them, as by definition, they have broken through.....and hence it isn't a catch 22.

Exactly my point Bobby..some had to start from scratch through the higher risk and up into the lower risk big end. By Catch 22 I mean cant start at the top without enduring the higher risk lower at some time.

 

[Aaron Sice]

I understand what your saying, in which case the current return may be improved over time and not a major issue. But the leases may have been entered into at a time when the market was more buoyant and not reflective of current rates.
Still it's a higher risk in that "amateur hour" market.

Exactly, it's still amateur hour, competing with small business and mum'n'dad investors, I mean the best yield I've seen, off the shelf, is 6.2%, which in no way reflects the risks involved at the bottom end of the Market.

There's maybe 2 or 3 at most of this particular positioned property in each general industry region, so it's going to be pulling teeth until I can secure one.