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Chapter 1: What is the main topic discussed in this episode?
it's the real estate podcast brought to you by ray white the largest real estate and property group in australasia and welcome to another episode of the real estate podcast available on iheart radio also on google and apple podcasts or wherever you get your podcast from Well, coming up in just a moment, we're going to be talking to Scott O'Neill from Rethink Investing.
And it's a good one in terms of commercial property because we're going to be having a look at three of the biggest commercial mistakes that people can make when purchasing commercial property. And we're also going to have a look at that all-important due diligence and three of the most important steps.
And to round it off, we're going to have a look at three tips for negotiating, which is very, very tricky. So let's welcome in Scott O'Neill.
Chapter 2: What are the three biggest mistakes people make when purchasing commercial property?
G'day, Scott. G'day. Good to be back. Thanks for having me. Well, it's a Thursday. We've got you back on for Let's Talk Commercial. And firstly, let's have a look at those three biggest commercial mistakes that people can often make.
Yeah. So this is something I've witnessed many times over the years. When commercial investors first come to this space, they are chasing only yields. They've got that number, whether it's an 8% net return or a 7%. They've got this magic number in their head, and that's what they want to hit. I think that's what I fell foul of.
The first year I started investing in it, I just looked for the highest possible yield and I didn't look at quality as much. I guess if you're comparing a good quality 6% net yield versus a risky 8% net return, there's a lot more risk in the 8%. And your tenant may not stay there forever paying that high rent.
So to novice investors, it's not only about the yield, it's about getting a good quality return, one that's bankable, that's going to keep getting paid Yeah, sometimes you need to go into the, you know, I guess a better quality suburb, a longer lease. All those other factors come into play. It's not just yield. It's about the reliance on that yield that comes through.
So big message for first-time investors that you want the best quality return, not only just the highest return. And the second one, and it's something I've come across lately because I think there's a lot of seminars out there telling people to chase value-add properties.
And this is one of the biggest mistakes I see where people come to commercial properties so fixated on adding value to properties, they buy poor quality property in the first place just to add value.
And for me, it defeats the purpose because if you buy well in commercial property, you're going to get a fantastic return through natural measures, which is just the high rent value versus the purchase price. These are going to make you very good capital growth figures as well.
If you're buying in a blue chip market where there's a lot of rent growth, yield compression, you're going to be making double digit returns without lifting a shovel. It's just something I've witnessed a lot over the years where people will come, generally inexperienced investors who try to buy a vacant property and trying to fill it. They're just getting too adventurous for themselves.
And sometimes that just can cost more money. The vacancies might be longer than they think. Why is it vacant in the first place? These are the questions you've got to ask rather than just looking at a value-add place. So If you're an experienced commercial investor and you're repositioning an asset, that's a different ballgame.
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Chapter 3: How can first-time investors avoid chasing only yields?
You know, it's difficult and this is why there's professionals in this space. Like this is not just finding what the latest four bedroom house sold for and pay a similar amount to it. You've really got to do the math. If you can't understand the local leasing market then you're probably not going to be able to offer from a position of strength. Second is understanding the yields.
Now, this is, again, similar to the leasing market. It's just another gauge on how to offer. If you understand that, like, you're buying a childcare and all the childcare's in that area is selling at 5% net yields, you can then divide the rent on that property by 0.05, so 5%, and that will be the number you need to offer.
So that's called working out the cap rate of the market, the capitalisation rate. But the best way I've always been able to negotiate is understanding these two things and being confident. So when I understand the market, we're actually a lot more confident in how we offer and that authority will actually help you negotiate.
So if they come in at the, you know, an agent negotiates back at a silly number, you just use your facts and figures you've worked out from these first two, you know, understanding the leasing markets and the cap rates. And all of a sudden you can use that, you know, spreadsheets or whatever to actually give back to the agent or the owner to show the logic in your number.
You know, that's been a very big strength for my career as a commercial buyer's agent because I'm not influenced on the price. I sort of know the price through just looking at the data. Again, that's why I like commercial property because there's less, you know, emotion in the market. You know, like what a pretty four-bedroom house is going for.
Like, you know, that could go 20% over market because two families fall in love with it. commercial, families don't fall in love with it. It's all a bit complicated, but once you get the hang of sort of mixing those three options, the confidence and also measuring the leasing market versus the yield, you'll never overpay for a property again.
Wow, there is such a lot of key information in there which you have covered on the commercial side. So once again, thank you for coming on to the Real Estate Podcast, Scott, and we'll talk next time. Thank you for your time, Craig. Appreciate it. We connect you to the best real estate information across Australia, the Real Estate Podcast.
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