What to do with $1mil?

[Deltaberry]

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.

It'll be a big concern - for us at least - if our tenants keep breaking even or lose their money. Sure there's always some ambitious, young guy out there thinking he can do it where other people can't.

But really, there's not many of those. And in between waiting for one, you have to provide various incentives to lure them in because the guy across the road is offering 6 months rent free One of my friends opened a restaurant a few years ago at a newly developed shopping centre (which we tried to buy but got outbid, but that's another story) and was given 6-months rent free. He took this site over another one right on the corner of Chinatown and Russell St in Melbourne CBD because of the favourable terms. Anyway my friend ended up selling his business in 6 months (at a small loss) and the place has been vacant since and the new tenant has taken the shopping center to court to sue for misleading and deceptive conduct and hasn't paid rent for a good year now.

Indeed quality of tenant is important. Some of our places go to people like Nandos or Subway. And that makes a big difference. In contrast, another tenant operating a Chinese restaurant at a place of ours recently left. He brought in one of these young ambitious guys (we didn't offer him any incentives as he simply bought the lease from the previous tenant). To be honest, we were pretty reluctant to sign over to him as the guy was inexperienced, but the good thing was he had millions to waste and we upped the rent and got an unusual bond term etc out of him. But still, if you give me the choice I'd cut rent by $10k and get another Nandos in.

 

[JWR]

Hi DB,

I wrote above that these cafe's would be located below big office towers - so that is why the demand would always be there even if they are unprofitable.

I think its quite a risky venture owning a comm property (and leasing to a cafe) in a suburban location. Even at Bondi Beach where I live there are quite a few vacancies along the main strip (and a couple for a few months now) - and it is probably because the rents are sky high. One of my friend's parents own a clothing store at Bondi Beach and the rents are about $10k a week I believe (or maybe per month ). Nonetheless very high for around 60sqm.

On the other hand my best friend's father has recently developed a new shopping mall along Bondi Beach and has leased all shops (and sold a few apartments above the mall and one $7M penthouse) within a few weeks. Perhaps this is because it is modern and new (and a slightly better location).

These clothing shops that operate along there wouldn't be making a huge profit though as they sell overpriced junk - and some of their target market (tourists) are not coming in numbers like they used to.

So perhaps the moral is that quality in good locations will always be leased.

 

[JIT]

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....

I have to agree with Edmond Dantes on this.

I think the average RIP investor is much better off learning about shares and redirecting their equity here for income.

With CIPs you need to look beyond the initial purchase costs and interest rates and consider whether you have the capacity to stay afloat with an extended vacancy period, P&I repayments, annual loan reviews to market etc...

 

[capitalist]

He took this site over another one right on the corner of Chinatown and Russell St in Melbourne CBD because of the favourable terms. Anyway my friend ended up selling his business in 6 months (at a small loss) and the place has been vacant since..

Was that on the north east corner ?
That intersection seems like a good location but i remember it as a busy heroin dealing area and not sure if it's changed much.

 

[capitalist]

I have to agree with Edmond Dantes on this.

I think the average RIP investor is much better off learning about shares and redirecting their equity here for income.

With CIPs you need to look beyond the initial purchase costs and interest rates and consider whether you have the capacity to stay afloat with an extended vacancy period, P&I repayments, annual loan reviews to market etc...

Sounds like you've gone off CIP's ?

 

[Deltaberry]

JWR - personally we avoid suburban CIPs, retail ones at least. I'd imagine vacancies will be a big issue for these retail CIPs. I drive past some of these apparent shopping districts in Melbourne (eg Bridge Rd, Chapel St, Glenferrie St, High St Malvern etc) and I see so many for lease signs.

Re shops underneath offices, they're not easy to operate. Your trading hours are really limited. Your only opportunity to make money is Mon-Fri and you don't have night trade. So rent would accordingly be low (otherwise your tenant won't be able to survive). Ideally with CIPs, they also have development potential which a ground floor underneath an office tower won't offer normally.

capitalist - that's right it used to be a drug hub, but that was over 10 years ago. The place is much more vibrant now and much safer and you don't see drug trade any more. I think the ethnic groups doing drug trade have been pushed back to their suburbs (eg Footscray, Springvale) by two aggressive councils.

 

[lizzie]

Hi DB,

I wrote above that these cafe's would be located below big office towers - so that is why the demand would always be there even if they are unprofitable.

Sounds good in theory - but not long ago someone on here started a thread about a really popular coffee shop. The owner sold out, the new owner dropped the standard of service and everyone moved their custom to another coffee shop nearby - so the once popular coffee shop is now virtually deserted.

Now that the custom has moved - if the new owner closes/sells (at a substaintial loss), there may not be a new owner willing to take over.

 

[Aaron_C]

Having a business that is continuously sold and re-sold because it doesn't make money is not a good tenant. I don't care where it's located...

 

[Bon]

Buy the banks. They're yielding 10% odd franked at the moment aren't they, with definate growth upside potential too...

Your head is where mines at right now too. Will be interested in the outcome of this discussion. 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.

Cheers,
Michael

Seriously?

You know their offshore credit has basically dried up at this point in time.

The world is entering a period of deleveraging... growth is more likely to reverse.

 

[JWR]

I guess I will have to keep my opinions to myself

No seriously thanks for the feedback guys.

Lucky I won't be investing in comm property anytime soon!

Coffee shops under office towers could turn into eateries at night (perhaps with only a few staff) - employees working late would grab their dinner on the way out and passers by on their way to the nightlife may stop by (in Sydney at least - not sure if other CBD's are designed differently)

 

[Bon]

Dude, the building a coffee shop occupies would be way less than $1 million to buy? Unless you're leasing to the next Campos, Single Origin, Shenkin, or Mecca... a coffee shop is more than likely to go bust.

 

[JWR]

I never said it would cost $1M - in fact if you read earlier in the thread, I used the example of a coffee shop as a way to not spend the $1M yet still get a 'taste' of the commercial property game.

And also I was saying that due to the area of the coffee shop, it is likely other young ambitious businessmen will come along and lease it out when one goes bust (though that has been ridiculed above - I still think its a good strategy though

Regarding Banks - I agree with you. They are seriously overleveraged at the most conservative of times - and have razor thin margins so are likely to go bust at the first sign of credit defaults (i.e. USA). Luckily regulations are better here but still the risk is there.

Invest in QBE instead - cheap at the moment - and strong dividend. They hold all their float money in cash and always seem to wriggle their way out of paying anyone!

As the perceived risk gets higher (i.e. after QLD Floods) they just raise their premiums and nobody says a word. And if they do there's not too much quality competition. Bear in mind they are only 25% based in Aust - the rest is in Europe and America. Also bear in mind there is heavy inside ownership from management, they have great longstanding management and they are one of the best companies in the world in terms of acquiring other businesses for sensible prices.

A global downturn would benefit QBE in the long term as they have huge wads of cash and when they smell blood they will cherry pick the best components of the best global insurers and buy them to add value to existing shareholders. Over a long period one of the best companies on the ASX.

 

[lizzie]

Doing some sums earlier ... some family owns a couple of ip's in ski country. At cost to buy - quick tart up - even if rented only 5 nights a week during a 16 week period would throw off more than 10%/yr income.

Is also in a semi-popular summer fishing area so more than 16 weeks possible.

Hubby not keen - but an interesting option to consider.

 

[Aaron_C]

Careful lizzie - those are considered specialised securities so you can't get much leverage at all off them.

 

[lizzie]

Careful lizzie - those are considered specialised securities so you can't get much leverage at all off them.

They'd potentially be mortgage free ... but are not ski lodges - rather stock standard, run of the mill houses in a small township, with school, pub and shops, between a Coma and the skifields, and minutes from Lake Eucumbene.

Doesn't matter anyhow - hubby not keen. Was interesting doing the sums tho as another "option".

 

[JIT]

Sounds like you've gone off CIP's ?

No, still planning to buy a CIP, maybe later next year if my finances allow it.

But shares can give you the income, and income growth, without needing the leverage, so from a risk-adjusted point of view I think that they can be better for most RIP investors... if they take the time to learn a way/develop a system that works for them to invest in the sharemarket.

No point making comparisons to Dazz who was at some point earning 50k per month in the Middle East, if you're in this league through your PAYG or business income, then maybe CIPs would be the way to go for you.

 

[Aaron_C]

No, still planning to buy a CIP, maybe later next year if my finances allow it.

But shares can give you the income, and income growth, without needing the leverage, so from a risk-adjusted point of view I think they can be better for most people if they take the time to learn a way/develop a system that works for them to invest in the sharemarket.

What rubbish. The 'income', or dividends from shares, are at the full discretion of the company's management. If they have large capex expenditures, reinvesting profits or just have a bad year, they will stop/reduce the dividend. Happens all the time, and will happen again for sure. Just look at the banks and REITs in 2008/09.

As for leverage, shares have great leverage if you know how to use them. Macquarie Prime offers 90% LVR on top ASX50 stocks. Once you factor in stamp duty etc on property, equities leverage can be far better than property. The secular bear market we are in favours trading rather than 'buy and hold'. I think if you are used to the long-term strategy of property you will be a very bad share investor. Likewise if you are used to a short-term trading strategy from the equities market you will most likely be a bad property investor.

 

[JIT]

What rubbish. The 'income', or dividends from shares, are at the full discretion of the company's management. If they have large capex expenditures, reinvesting profits or just have a bad year, they will stop/reduce the dividend. Happens all the time, and will happen again for sure. Just look at the banks and REITs in 2008/09.

As for leverage, shares have great leverage if you know how to use them. Macquarie Prime offers 90% LVR on top ASX50 stocks. Once you factor in stamp duty etc on property, equities leverage can be far better than property. The secular bear market we are in favours trading rather than 'buy and hold'. I think if you are used to the long-term strategy of property you will be a very bad share investor. Likewise if you are used to a short-term trading strategy from the equities market you will most likely be a bad property investor.

Aaron,

I never said the income was guaranteed!

There are really not that many options available for passive income for most RIP investors.

Shares or CIPs...

If you don't have the $5M to purchase the kind of CIP you think is worthwhile, what else would you suggest one does?

Residential property, for the most part, is woeful as an income producing asset, and businesses are for the most part ''active'' assets.

What else do you suggest?

(This is not a shares thread, so if you want to discuss this in more detail then maybe start another thread.)

 

[Aaron_C]

People always assume that shares are the 'default' asset class to invest in if they don't like property (commercial or residential) because they are 'high growth'. I find it extremely annoying because that is simply not the case.

At the end of the day, you either invest in business, which the stock market is a derivative of, or property. Whichever class you invest in requires research and an undertaking of risk. While I prefer property (personally), I get annoyed when people simply assume that the sharemarket is 'easy' and 'high growth' just because that is how big fund managers have promoted it. It is far from the case. You can argue the same thing applies to property but at least I have a better level of control over it.

 

[Nathan]

$1,000,000 would net a $100,000pa in residential using just that and no loans. Say properties with 10 - 15% yields and 5% for running costs, no need for finance.....