Chapter 1: What should investors consider when buying commercial property?
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 we're talking to scott o'neill from rethink investing welcome to the real estate podcast scott thanks for having me back appreciate it i thought we'd have a look at the industrial property particularly if somebody is thinking about buying let's say a million dollar industrial
property what sort of deposit should they be sort of thinking about if they were to buy a million dollar industrial property?
Yeah so to answer your question most lenders require 30% down now you can actually get up to 80% loans in commercial so but one of the big differences with commercial versus residential is you can't get those 95% loans or 90% loans like you can with residential so there is a little bit more cash you've got to put down to get the deal done So the million dollar property, you'll need 300 grand.
Now there's costs as, you know, same with residential.
Chapter 2: What are the deposit requirements for purchasing a commercial property?
You've still got the same ratio as a, you know, for the stamp duty. So on a million dollars, you're talking probably around 40, 45 grand in terms of the deposit for your, um, Stamp duty as well. So you're up to, and then you've got your, all your legal fees and building and pest costs. So that all might add up to a total, including your 30% deposit of 350.
Chapter 3: How does commercial property income compare to residential property?
So you'll need 350 grand cash to, to purchase a property. But the good thing with commercial is you're dealing with much higher returns. So that million dollar property might give you a 60, 65,000 net return. This is after outgoing. So the tenant pays all your outgoings. And that is the biggest difference from a commercial lease to residential.
Because the tenant for a residential house won't pay anything. You know, you literally, they're paying a gross lease. In commercial, a net lease means the tenant pays building insurance. If there's strata, the tenant will pay the strata.
Chapter 4: What factors influence the value of commercial properties?
If there's land tax, the tenant will pay your land tax. If there is maintenance, the tenant will pay your maintenance. So you can see there's all these costs that unfortunately will creep up to you with many different types of residential properties. But commercially, it can be kept in check due to the lease. And that means that, let's say we're getting 65 grand income.
So that's a 6.5 net return. That's great. quite typical of what we're seeing across the board. Now yields are getting lower. So even if you look at a 6% net return, that's after all those costs.
Chapter 5: How can due diligence protect investors in commercial real estate?
So they're very good numbers. Then you've just got to look at how much mortgage you're going to be paying. You're probably only going to be paying about a 20, 25 grand mortgage on those costs as well. So You're left with $35,000, $40,000 of passive income. So, you know, that's all $700, $800 a week in your pocket clear after mortgage, after outgoings from a million-dollar purchase.
Now, you compare that to residential. If you spent a million dollars on a two-bedroom unit in Sydney and then you've got to pay
thousands of dollars each quarter for strata and then you've got all your you know rental management you've got all your other maintenance costs and whatnot that come with it you're normally negatively geared so the fact you're going to be up nearly 800 a week clear that's the number one reason people jump over to commercial because mathematically it makes a lot of sense and it's a way of building an income a true income one that you can actually retire on if you if you buy enough of this stuff
which is very hard to do in the residential markets now.
Chapter 6: What types of commercial properties are currently in demand?
You're there only for growth in residential. And if the rent ticks up over the decades, then that's what you're there for. But it's a lot more instant. But yes, it's more capital intensive. So that's the great barrier to entry we find with commercial.
See, the way that you've explained that, I think for our mum and dad type of investors, and we talked about this last time on the podcast, especially the mum and dads who just can't get their heads around it, preferring to stay in that residential market.
But the way you've described that, those are kind of like handlebars that they can kind of grab hold of and get some sort of a sense of, okay, right, the upside of this is there is this real upside and maybe it's not as a scary proposition as what I first thought it would be.
Yeah, exactly right. And it's a good thing to think, all right, I could buy a break-even property in residential if I'm lucky or buy something that'll give me 800 a week clear.
Chapter 7: Why is investing in commercial property a good option for mum and dad investors?
And that makes a huge difference. That's a 40 grand pay rise per annum that you can literally create through dropping 350K cash on a deal.
it doesn't really end there as well because you're going to get capital growth on top of these numbers like there's there's a lot of capital growth for the right assets and you know it's one of those big myths out there that commercial property doesn't grow in value or it gets less like if you know all you got to do is look in whatever suburb you live in and look at the value of whatever commercial property you find and it's probably a quite a high value in most cases and
Commercial property values are attached to their yield, their income, the cost of building, how hard it is to replace that type of property. The different leases on properties will add value. For example, a lease for a medical tenant will be worth more than a no-name lease. I guess a food-related type business or a fashion shop. So different types of tenants hold more value.
It's due to the strength of the lease and how predictable the rental income is. Like a dentist, for instance, highly valued. If you've got a dentist tenant, they've probably spent a lot of money on a fit-out. They might have a 10-year lease.
That tenant is not going anywhere, especially because they're not really going to get damaged by the economy ups and downs as other, I guess, discretionary spend-based tenants would be. So I guess you sometimes got to simplify it and just think, how hard would it be to re-let this property if it's in a great location with a great tenant already in there and it's a prominent position? Then
probably not going to be as hard as you think but if you're around the corner in a back alley and that thing went vacant that's a very poor retail shop which you know i guess it's just like residential there's a there's blue chip and then there's properties you'd never go near even if you you know got it for half price so it's it's important to think like a tenant as well when you buy
And talking of that very thing, the blue chip, when you're doing your due diligence, I mean, that is the nuts and bolts of it, having the dentist whereby you can say, right, well, we know we've got that guaranteed income. And particularly if they're two years into a 10-year lease, I mean, that makes it very attractive if the numbers stack up.
Yeah, exactly. And that's the great thing about, well, not the great thing, but a convenient thing about COVID is you can see the impact that these crazy times have had on the tenant's ability to pay their rent. Because as part of due diligence, you should always ask for tenant ledgers or proof of income from your tenants, from the current vendors. And
If they can show you uninterrupted income that's been perfectly paid for the last two to three years, that's a pretty good assumption to make that they're probably going to do the same thing for you when you're their landlord.
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