Apr 24, 2022
Welcome to the Australian Property Podcast - Hosted by Jonathan Preston.
So in today's episode i want to discuss at what point do residential investors pivot over to buying commercial properties please note as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions so basically today what i want to talk about is basically at what point you may want to consider pivoting over to becoming a commercial property investor um instead of residential so um i see this pathway quite a lot a lot of people uh you know they start out sort of thinking that they'll buy a bunch of residential properties that they've got capital growth is the um the key idea and obviously that um you know has a lot of upsides um probably you know as you may be familiar with by now the downside is around serviceability um and also cash flow can be more challenging and residential as well um so we do see a lot of more seasoned investors eventually move over to commercial uh whether it be because they want the yields or because they need the yields um but it is something that i see pretty regularly once people get to a certain size as an investor and so what i want to discuss specifically today was actually a transaction that i saw through an investor group basically it's a commercial property near cabulcha the purchase price was 1.8 million and there was a traded on a 6.75 net return um there's over two years left on the tenancy um and that's of a five five-year lease um and basically it has like the tenants want another 12-year lease and then um 15 years of options on top of that as well so basically at a 1.8 million purchase price uh the 6.75 net is a 122 000 a year and he noted the financing was at a blended rate of 2.64 that's based on 100 lend part of that is equity pulled from a residential property and the other um is against the property itself and this estimates that it um leaves a net rental income return of 75 000 a year after all outgoings and interest costs as well um so much credit to the investor who um did do actually this transaction um and uh he's not my client or anything like that so i'm not um disclosing any information that's not public um and basically you can see in this example i really like this transaction because in a single transaction by utilizing the equity in a residential property by doing 100 lend and then getting those high net yields um you can drastically change your cash flow position and then you know potentially your lifestyle accordingly um i think a lot of investors you know they accumulate some millions in terms of net worth and then they look at their portfolio and realize that they've got you know millions in equity um and the cash flow position it's not as strong as they'd like it to be and that you know they don't want to work forever and so i think that is one of the things that starts to draw people to commercial and obviously if they tap out um serviceability and resi you know that's something else as well um but you know for a lot of people you know 75 000 a year net adding that to your income you know can be a substantial change um so i think that this is quite an interesting transaction um now in terms of the risk side you know i always like to present the downsides as well as the upsides um so first is that you know the type of property here this is a retail property and you know i think most people would agree that shopping is inevitably you know moving online um even for groceries and even if you look there are all these companies now that specialize in doing small time grocery deliveries as well so um in addition to you know potentially amazon entering that space um we've got all these smaller players who are doing the shorter time frame deliveries for groceries as well and that's in addition to menu log and you know breeze and everyone uh moving into grocery delivery too so there's a lot of space a lot of competition in that space um and so that's one of the concerns that i have around retail now the good news i guess with this transaction is that it sounds like you know the switch to going to 100 um you know e-commerce online shopping for groceries will probably take some time and it sounds like the tenant is confident the next 20 years are gonna be um you know similar to perhaps the last or at least that there's going to be enough um you know foot traffic to to be able to keep the business going um and if you are able to keep the tenant in there for 20 years at those kind of net yields then you know there is potentially enough for you to um to make a substantial um you know benefit on the transaction um so some other risks to concern yourself with here um it is important to note this is a high leverage play so basically you know if the rates do spike up or if the tenant actually stops paying that's going to be a big cash flow drain every month as you service that mortgage um without the rental income now another thing um that i want to note here is that in commercial um you need to typically find properties that are decent and one of the traps i think um is that you know sort of mom and dad investors who go into commercial often they're sort of sort of fighting out for the lower value properties whether that be regional um with sort of a weaker tenant or um you know maybe it's like a retail shop that's struggling to get enough tenants or maybe it's an office in an area where you know there's a shift of of um you know trend toward work from home and not as much office demand so you know these are some of the issues that you may run into when you look at commercial properties in the um you know price bracket of say up to two three million um the thing is in that space you know the stuff is low value and so there is you know potentially quite a big number of people that can buy those properties and then also if you get to a certain level and you know i don't know exactly where the level is but perhaps it's 10 million 20 million 30 million there's a level as well at which it becomes large enough for the big institutional players to get involved um and then you know they typically want to transact you know much are willing to transact at much lower yields for this kind of asset um and so i think there is potentially some kind of sweet spot in the sub couple of million price point in that you're not playing against too many institutional investors as yet um but you do need to be careful that you're not buying yourself a property that's not going to be very useful in 10 or 20 years time and this so you don't sort of buy yourself a trap i think that's a key thing and i think one of the key things you know with commercial you know some people will be attracted to the idea that there is a pretty low entry price in some areas but i think it is important to know that you do want to make sure you are buying a quality asset um that is going to you know withstand the test of time and and everything like that so um i hope that this helped some people today um if you'd like to get in touch i'd love to hear from you please send me an email at jp australianproperty.com or give me a call on oh four two three four seven five double three six and please note as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions thanks so much for tuning in as always