What to do with $1mil?

[Aaron_C]

JWR,

This is different from the sharemarket. You are dealing with people, customers, businesses. As I keep saying, businesses/tenants at the lower end of the market are, generally speaking, the ones who have the highest tenancy risk. Since your tenant's rent IS your CIP's value - why would you want to ever put this in jeopardy?

 

[JWR]

Agree with what you are saying. But that is generally speaking and there are exceptions.

I just think its better to test the water before putting everything into one transaction.

Would my coffee shop under the office tower example be too high risk of 'bad' tenants in your opinion? Or how about a shop which Dominos Pizza leased out (or something similar.) That wouldn't cost you $1M I assume and is pretty risk free.

 

[Aaron_C]

It's too big an amount of money to 'test the water'. You either get it right, or you don't.

As for your coffee shop example, it might be OK but coffee shops are notoriously unprofitable (just check the no. of businesses for sale that are cafes).

 

[JWR]

Most businesses are unprofitable or just enough to break even.

That's not the concern though.

There will always be demand for these types of businesses as there will always be ambitious young businessmen trying to succeed. Therefore as soon as one tenant moves out the next will move in with a new brand and plan.

The example above would allow you to test the water in a safe way without exhausting all your funds; hence I believe that to be the superior option rather than spending all your money on one site.

 

[lizzie]

I was more thinking about a national bank in a medium sized town (ie, Orange-sized) - rather than fly by nighter's - or a known freight company etc.

I do not like retail, or discretionary spending outlets, as such, especially in current conditions.

 

[Melbournian]

Lizzie, be mindful of income coverage of the asset also.

Dazz has a very informative post here:

http://www.somersoft.com/forums/showpost.php?p=846367&postcount=10

Personally (and we are all different), I would leave some powder dry out of the deal and go for a smaller asset. You need buffers. I would also be stress testing interest rates at higher than circa 7 %.

Your numbers need to add up and no doubt the MB's can elaborate on that also. It is a different lending game as Dazzs's excellent post points out.

I am also looking where we are now. Brissy and the decent peripheral biz parks and enterprise precincts along the M.1. from Gold Coast thru to metro Brisabane. Plenty of vacant assets trying to sell and plenty of lease backs also. Be wary of the latter that the rent isn't too high (at outset) to cap the purchase price up so the vendor (your tenant) doesn't get too high a sale price (and you pay too much).

I have come across quite a number of these and selling rea's will play dumb pretending to not understand the formula and the cap rate games they are trying on for the seller. This can be overcome by ratchet clauses for rent review time (if agreed by seller/tenant) and if the jurisdicttion allows. You cannot use ratchets with many retail properties in most states for properties under a certain size.

Be sure to research current lease rates per sq m to ascertain if tenant is paaying on the money; too much; or, too little. Best the latter for market review time. Rents can increase and by (cap rate/yield) implication value of the asset also goes up.

Best of luck.

this is smart advice, everyone is different, the nathans, dazz, aaron_c, everyone of them has their own niche as to whether it is acceptable risk/return/stress to yourself is something only yourself could answer

 

[el caballo]

I keep thinking back to KiethJ's great thread where he explains how he took his resi profits out via LOC and bought the banks when they were yielding more than their loan rates. They doubled from there and he retired comfortably. Banks are yielding more than their resi LOC loan rates today so it makes you start to think about it...

Sounds like a good plan ....

 

[AJ76]

Just an idea

Hi Lizzie,

Just an idea, deposit of $500k and buy a $3m CIP with a 50% money partner?

Not sure if the numbers work like that but you could potentially buy another one with someone else and diversify that way.

AJ76

 

[Edmond Dantes]

Shares were mentioned, briefly. But the more I think, why not shares?

Ups:

- income
- No tenants
- No worries that tenant wont pay
- No leases
- No bank reviews every year
- No issues of trying to sell quick if you need to.
- Possibility of capital appreciation

Cons:
- GFC and share prices sinking? But would you be worried if you're focusing on income (dividends)

Now, if I do a comparison, I see more downs in buying a CIP, and riskier since you don't have experience. I think the experience needed to buy high quality, high yielding shares is much less than successfully purchasing a good quality CIP at a decent price.

Perhaps I'm missing something big, but even though I like property for the possibility of leverage, once I'm at a level that I can sell out and have a decent amount of cash left like you have, to me shares are a better option.

hmm....

 

[BMan]

Most businesses are unprofitable or just enough to break even.

That's not the concern though.

There will always be demand for these types of businesses as there will always be ambitious young businessmen trying to succeed. Therefore as soon as one tenant moves out the next will move in with a new brand and plan.

The example above would allow you to test the water in a safe way without exhausting all your funds; hence I believe that to be the superior option rather than spending all your money on one site.

i think if your going to do that your wasting you time
the point of lizzie wanting to go commercial is the big $$ income
buying a small place where the tenants are going to struggle you wont be making big returns, whats the point? might as well get a few more resi's and be the same off or better because she knows what shes doing in that area

i think if your going to do CIP u need to be committed
no point going small and then having the trouble that comes with that type of CIP

as for the thread title

if i had a million id have it in a high interest account and live off the interest
anything over 50k and im better off
and that can also include purchasing a few ip's (with loans) as the interest in the million is covering the costs anyway (it would be like working a full time job for me)
could also then spend time renoing houses for 3-6 months of the yr with all the spare time you have and relax for the remainder

not it might not be the best financial move but an relaxed one

 

[JWR]

BMan,

If you'd read the earlier post I wrote - I was just stating Lizzie should test the water FIRST as she has no experience in this area.

After she becomes competent she may like to move away from residential and into commerical (as long as the numbers work.)

I was merely stating this as a risk mitigation strategy to avoid the wrong investment and lots of lost $$$

Regarding shares - I personally can make more money dollar for dollar in shares (and I think most people could if they knew what they were doing) - however you don't get the benefit of leverage (safely that is.) Of course you can get a margin loan of 3 or 4:1 - which if you stick to the banks and a few others you should be ok - but you can probably make more money at 10:1 in residential property. That's the benefit of residential property over the long term so I would be sticking to that. However if you were going commercial at 3:1 or so it may be advantageous to build an equity portfolio with a margin loan - as diversification. Again though, you must learn about it first or else you will get burnt.

 

[lizzie]

After she becomes competent she may like to move away from residential and into commerical (as long as the numbers work.)

Been doing resi for 10+ years ... think I'm competent now ... although comm is a big step up.

Liking the idea of quality shares with good returns more and more ... might as well become a leech on the banks instead of the other way 'round

 

[Macca]

The biggest problem with one big Commercial or Industrial is the possibility that the tenant does not renew.

I realise that I am stating the bleeding obvious but until you have had that sinking feeling of driving past your empty building for a year or two then it really doesn't hit home.

I had the only empty shed in a busy complex for 18 months during a small slump in the economy. If we do hit hard times the business confidence falls and people won't sign up for long leases.

Of course the larger places will be on longer leases but they too eventually expire. If it is a govt tenant it is quite likely they will move to the newest, more expensive building in the area. A refurb won't keep them there as the other new building looks nicer.

If the economy is expanding then Com or Ind is good but when it contracts it can take a long time to rent one out, tricky stuff IMO

I realise that Dazz has had great success mainly in WA but it has been boom times and he caught it just at the right time. Good on him for having the guts to jump in boots and all but if you read his early posts he was keeping it all afloat working on the rigs ?

The story of emptying one of his purchases is a great yarn but could Liz physically do that, I think not. Could you employ someone to do that, unlikely.

The SANF is much higher with a mixed bag of resi IPs in the long term than one big building IMO.

When you have an interest in RE as I do, it is noticeable driving around most of the towns/cities in OZ that in almost every town there is an area that was a good spot once, now it simply isn't so any more. Can't move the buildings, can't find a tenant, hard to sell because no tenants.

Lizzie, coming from Newie, I know of families that 20 years ago bought Hunter st Com props as a retirement plan

 

[redwing]

After ammassing a certain amount of net worth in resi property, I'm going to start thinking about how to turn that into a more efficient income stream. Shares, commercial? Yep, that's where my head is at.

In time I'll think about cashflow investment options such as high yielding shares. But even if I did nothing I could retire on my resi investments in time as I'm only 40 at the moment.

I keep thinking back to KiethJ's great thread where he explains how he took his resi profits out via LOC and bought the banks when they were yielding more than their loan rates. They doubled from there and he retired comfortably. Banks are yielding more than their resi LOC loan rates today so it makes you start to think about it...

Cheers,
Michael

I'm sure many of us ponder the same thing (at least I do)...I go back to Keiths thread for a review every now and again as well as the one below from Peter Spann (both looong threads)

THIS is why I changed my tune:

157 properties @ an average price of $350,000

$54,950,000 in property.

Total borrowing: $35,700,000

Equity: $19,250,000

Interest bill: $2,674,875 p.a.

Total income $50,240 per week

Total interest cost: $51,439 per week.

Other costs (approximately): $1,099,000 p.a.

Shortfall: $1,161,348

Estimated capital growth: $4,320,000 p.a. at 8%

Share portfolio required to generate sufficient income to cover shortfall (approximately): $6,000,000

Or:

Sell and use profit to combine with covered call portfolio (approximately $26,000,000) at 24% p.a. equals gross yield of $6,240,000

Capital growth estimate 3% p.a. $780,000

Net cash flow gain = $1,920,000 + franking credits of $720,000 p.a.

Total gain (capital + income) = $3,420,000 p.a.

Debt = ZERO!!!

Now, it didn't turn out exactly like that but I am sure you get the picture!

Though the ongoing turmoil in the marketplace still has me with a large amount of funds sitting on the sidelines and only partially invested at the moment

Articles of 50 Best-Value shares this week evolving into 100 Best-Value shares next week, has me as the chicken (involved) rather than the pig (commited) in the old joke

Diversification at such a low value in CIP is suicide...you will get crap tenants who will leave after 3 years after enticing them with 6 months rent-free periods...forget it.

As per the above by Macca the intial threads by Dazz were (and are still) a great read as he purchased "The Shed" and moved forward from this momentum, posting but the up's and down's (in effect I guess, using the 3 years to his adavantage).

 

[JWR]

Hi Lizzie,

Just reread your quote box of me.

I didn't mean you weren't incompetent in resi but rather comm property.

 

[MichaelW]

FWIW, I just calculated my "do nothing" strategy of just sit on my four resi rentals in Sydney with my paid off PPOR in Brisbane. Rent them out for the next 20 years until I retire at age 60.

That's about as conservative as it gets. But assuming 3% inflation and rents rising in line with that, then they will be paid off in 20 years time and yielding me $140K pa in Net Present Value net cash flows ($290K in actual rental cash flows with no interest).

Its always good to step back and look at your baseline scenario. If I do nothing else on the investing front and just use my surplus income to pay down the loans slowly over the next 20 years then that's where I'll end up. I've used a very conservative assumption around how much is surplus annually to be able to be put towards paying down loans. I didn't even factor my wife's current $80K pa income as she'll probably quit work next year. Of course, my surplus cash flow is exponential as the more you pay down, the less interest the loans incur and the more surplus is left in subsequent years.

All good. Nice to know that my investments have got me to the point where I could retire on $140K pa as a household in today's dollars. That would be enough for me, and excludes Super which would be more on top.

Cheers,
Michael

 

[lizzie]

Hi Lizzie,

Just reread your quote box of me.

I didn't mean you weren't incompetent in resi but rather comm property.

oh - okay - just read that way.

We're similar to Michael ... if we did absolutely nothing we'd have a pretty good, do what we like income - and even better after super kicks in - so it's got me wondering how much we really need, and why risk what we have?

Probably helped that hubby and I challenged each other to think about what we would do if we won the $10mil powerball. If money and working
wasn't a factor. Surprisingly the replies were relatively cheap to implement.

Sure it wouldn't be 5 star Europe, but house sitting would be fun. Sure it wouldn't be owning a massive mansion in Mosman, but I think I'd prefer 10 acres out of town with an "on grid-no footprint" eco house. I don't want to own a Ferrari or helicopter ... but I do want a Jeep Wrangler in hot red before I die!

 

[MichaelW]

I'm sure many of us ponder the same thing (at least I do)...I go back to Keiths thread for a review every now and again as well as the one below from Peter Spann (both looong threads)

Though the ongoing turmoil in the marketplace still has me with a large amount of funds sitting on the sidelines and only partially invested at the moment

Articles of 50 Best-Value shares this week evolving into 100 Best-Value shares next week, has me as the chicken (involved) rather than the pig (commited) in the old joke

More food for thought...

The bull's running late, but it's worth the wait

If it could wait until the end of 2012 I'd be happy. Will have a fair bit of equity then and even more if I considered conservative margin lending again.

Cheers,
Michael

 

[Player]

The bull's running late, but it's worth the wait.......................

Cheers,
Michael

It's having a bear nap

 

[Deltaberry]

The biggest problem with one big Commercial or Industrial is the possibility that the tenant does not renew.

That's why the OP should go for prime site commercial property. If the tenant doesn't renew, there's a queue of people lining up to take over the lease. If you knew how to operate businesses, you could even take over the place yourself and run with it.

In one of the buildings which we owner-occupy, we get approaches from hotel operators/restauranters/developers a lot to take over the lease. Some of these guys are pretty famous names in town too. So you'd never have to worry about the tenant not renewing (not that it's a concern since we are the tenant).

As with residential, it's all about location. But even more so for CIPs. Need to think from a business operator's perspective and ask yourself, "if I was operating this business in this location, will I survive?". Every time we buy a CIP (and we tend to focus on CBD buildings hence there's a retail shop element to it), the first thing we ask is "would I want to run a business here?"