Success of Commercial Property in SMSF

[danwatto]

Hi All

I'm thinking of using my new SMSF as a way to try out commercial property without slowing down my residential investment or using up any equity.

Has anyone purchased commercial property in their SMSF and how satisfied are you with the result?

Excluding setup costs (I already have an smsf setup), was it much more costly for the advice required?

Was it much more difficult than buying a commercial property outside of super?

Any other advice?

Thanks

 

[Redwood]

Hey there,

The benefit of commercial property is the ability to own your own business property through your SMSF and lease it to your business. This is easily done. Other commercial can be seen as a opportunity to access a cheaper investment than resi - with a higher yield....

The key consideration in investing in commercial property through your SMSF is whether you will be purchasing using cash or finance. The adv of commercial is higher yield but finance can be more expensive. For example, banks will change a higher application fee, interest rate and legal costs, which makes you think 'what the hell?'.

So the alternative is "related party lending", this is perfect for a business owner where you are leasing the property from your smsf and you avoid ridiculous interest rates and app and legal fees by borrowing from yourself....at a 'commercial' rate. This is a popular strategy including for ME so I am happy to share....be sure you register for GST and have a awesome lease agreement.

So - what now?

How much do you want to spend? lease to a related or non-related party? whats your investment objective and timeframe of course?

All these are important in determining your investment strategy for your SMSF to invest in commercial property. I have done it but its not simple......with so many considerations.

Oh and set up costs... for me - Redwood does this so all good, for bare trust and SMSF you are looking at $2.6k and with no finance around $900 for a corporate trustee plus acquisition costs which will vary including stamp duty, conveyancing and finance costs

I hope that helps....

Cheers, Ivan

 

[danwatto]

Hi Ivan,

My SMSF is already setup and running as a cash/equities investment strategy, so those costs are not important.

Although I only have about $130k, I was thinking of switching to commercial property instead of equities to get some better return, but also as a learning experience before I use my "real" money in commercial property.

I was thinking to borrow and leverage into a commercial property, but already after some initial investigation I can see the costs mounting, valuations, due diligence etc.

So now I may just look for a cheapie that does not need borrowing, and earn the 7% returns, plus some non-leveraged CG while I build up the balance a bit more.

But what I'd really like to hear from others is their experiences doing this as an investment - i.e. not leasing back to their own business.

I do not have my business, and would be purchasing this purely as a tenanted investment for my SMSF.

Thanks

 

[Redwood]

Have heaps of clients that have purchased Commerical for a higher yield....I think "Scott No Mates" is the master for commercial but the advantage is that you have the opportunity to earn a higher yield than a resi investment, however with finance the costs are higher including set up, but depending on the size of the investment and location, if you donot have a long term tenant you are at risk of leaving the property vacant for a long period of time.

There are a heap of opportunities for the small office i.e 50 square metres with fitout that are leased for 3+3 at 7% net and you only need to use $150k to $200k, you obtain a great yield however capital growth may not be achieved.

Comes down to an effective cash flow analysis and of course the right selection and location.

I'd used leasing to your own business as a way to cut the finance cost.

Have a search ard your area for a 50 sqm office and see what yo u can find, the newer the office the better the depreciation benefit.

Hope that helps

Cheers, Ivan

 

[Paul@PFI]

Commercial is VERY different. Leases are longer and yields arent same as the tenant usually pays all outgoings. Finance is harder. For a SMSF in major cities the LVR can be as low as 60% v's 80% resi and thats with a brilliant lease. Bank guranatees issues, legals etc all are obstacles.

Commercial comes with far greater vacancy risks. Nobody MUST live in it like resi. Fitouts leave damage and can cost 10,00's just to strip out and dump OR it can take months to find a replacement tenant.

Agents in Cmml are a different breed.

Commercial take due diligence and is way different to resi. That why the yield is higher. Have seen many SMSF clients burned with no tenant and a loan that burns up contributions or other revenue. Have to say never seen a resi SMSF burned though.

 

[danwatto]

I just don't think resi is suitable inside SMSF, as it is low income.

I'd rather buy my resi in my own name, and commercial or shares in SMSF.

Also I don't want to get resi in SMSF because cannot draw out the equity to buy more..

 

[Player]

I just don't think resi is suitable inside SMSF, as it is low income.

I'd rather buy my resi in my own name, and commercial or shares in SMSF.

Also I don't want to get resi in SMSF because cannot draw out the equity to buy more..

You cannot draw equity with commercial property in SMSF either.

 

[danwatto]

You cannot draw equity with commercial property in SMSF either.

I know, but it's not required whereas for my resi strategy it is required.

Commercial strategy is income/yield and resi strategy is growth and compounding equity..

 

[Player]

I know, but it's not required whereas for my resi strategy it is required.

Commercial strategy is income/yield and resi strategy is growth and compounding equity..

Gotcha. I misinterpreted your post. It's good you have a strategy I have both resi and comm in SMSF. Don't discount commercial as a growth asset though. If you can find something that is underlet then come rent review time you will have gained growth from the new rent base over and above annual adjustments.
Good luck.

 

[danwatto]

Thanks Player
I saw some of Dazz's posts saying the same thing that he had gotten good capital growth from Commercial.

Do you try and realise this growth to allow more leverage by selling the property within your SMSF? Or just keep every property as a standalone income investment?

 

[Scott No Mates]

Why bother selling? Sure you may not be able to release the equity in the asset, however buying/selling costs will eat into your capital and returns and you will need to be cashed up when you buy the next one which means sitting on cash once you've sold and getting a poor return on the cash.

 

[danwatto]

That's what I was thinking although I haven't done the scenarios.

So, since commercial produces good positive cashflow, a strategy of buy and hold, plus using contributions plus accumulated cashflow to buy further cashflow commercial properties may be the only property I get in the smsf.

The rest being in shares.

 

[danwatto]

Are you guys doing this? Holding commercial IPs in your SMSF?

 

[Scott No Mates]

So, since commercial produces good positive cashflow, a strategy of buy and hold, plus using contributions plus accumulated cashflow to buy further cashflow commercial properties may be the only property I get in the smsf.

The rest being in shares.

Diversification - good leveller having % in shares. Balances out the 'what if I don't have a tenant for 6 months + agent's fees + incentives' scenario (it does happen).