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 iHeartRadio, also Google and Apple Podcasts, or wherever you get your podcast from. Property portfolios, they are a curious thing.
For example, last year, a very good mate of mine was talking about the property market to me and just how much of a crazy time he was seeing his residential investment properties increase. Now,
I knew that he had around 10 residential investment properties and at the time I had no knowledge of his commercial property investments until he accidentally slipped it out about owning an industrial cluster of four workshop properties that he had bought a few years ago.
So I asked him what was the big secret and why he hadn't mentioned it to me, and he said that he was unsure back then on the returns, but now he's recently bought two more similar properties, and one of the main drivers for him, as he told me, was that he has managed on two of them to get 10-year leases and on the other two, 5-year leases.
So I thought that story would lead quite well into our podcast series of Let's Talk Commercial with our resident commercial property expert, be it with a broken arm and a carbon fibre joint, Scott O'Neill from Rethink Investing.
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Chapter 2: What insights does Scott O'Neill share about commercial property?
G'day Scott, welcome back to the Real Estate Podcast. G'day, thank you for the introduction again, appreciate being here. And is that something that you've sort of heard about as well like with that friend of mine and the way that you know he's had a bit of a change with the way he views industrial or in this case commercial property?
surprised how many people already have looked at commercial property like it's not mainstream like residential where you you know you go on to the mainstream articles and sponsored by realestate.com or domain or whatnot they're all talking residential all the time commercials in the background and most quite experienced investors have dabbled in it to a degree and I
Like that's one of the reasons you just mentioned, long leases. It's very attractive, especially when you're, you know, particularly dealing with large value properties. You like to know there's a long lease attached to it, protecting your income, giving you a return. It's definitely one of the reasons. And yeah, there's many more we can go into as well.
So do you think the worm is turning a little bit, Scott, with more residential investors now turning to commercial property?
Chapter 3: How are residential investors shifting towards commercial property?
Yeah, look, I've seen this firsthand. So like I'm in the business of helping people acquiring commercial property and we're literally seeing about the volume. It's about 40% more than it was this time last year in terms of what we're purchasing for our clients. That's just in dollar amounts. And we're really just seeing an explosion of, I guess, extra interest in this department.
And one of the main reasons, I think, is the interest rate talk. As interest rates, you know, the threat of the interest rate rises increase, people start looking at their residential portfolios, which may already be negatively geared or at best evenly geared, and think, what would an interest rate rise do to my portfolio? And it's going to make it harder to hold.
So you immediately think, where can I get better cash flow? Because that will support a higher interest rate environment.
Chapter 4: What are the yield returns for commercial properties in 2022?
And that's where commercial is quite literally a fast track solution to that. You're going to be dealing with much higher incomes on the assets and an interest rate rise really won't scare you when you're sort of hearing the numbers we're talking. It was interesting talking to the mate of mine because I said to him, well, what have you got in there in terms of tenants?
And he was able to actually get a mechanic in there. And then off the back of that mechanic, he got another mechanic. So there's actually two mechanics out of those four in the same block. Yeah, look, a lot of these businesses feed off each other and they obviously have different specialties. Like car yards are another example. You see them all lined up in a row.
They bring their clients to a certain location and that sort of helps it.
Chapter 5: How does location affect commercial property yield returns?
Even fast food, you often see a Hungry Jack's next to a KFC. You know, one's chicken, one's beef. They feed each other. So it's about sort of bringing customers in. And once you sort of understand the specifics of the types of business you're invested in, it can actually give you a lot of comfort in terms of like releasing these properties too.
I have no doubt the property your mate's owning, it's probably going to be good for a lot of other types of tenants too. Okay, yeah, so we've got more people interested in commercial property. Perhaps for our listeners, let's break down what they can expect from yield returns, maybe in 2022, for certain types of commercial property. Yeah, so real quick background.
So we're purchasing around sort of 40 properties per month for our clients on average. And this is just my anecdotal evidence of what I'm seeing in the market.
Chapter 6: What costs should you consider when purchasing a commercial property?
So in Sydney, like yields can be as low as 2%, but most sort of between 2% and 4% net. So obviously that's not super high. It's in fact, one of the lowest yielding markets in Australia, as is Melbourne, which is quite similar. You go to places like Brisbane, you can still find yields anywhere from 5% to 7% net return.
Our average purchasing yield in Brisbane in 2022 this year is 6.1% at the moment. So we're still seeing good yields. That's industrial, that's neighborhood shopping centers, stuff like that. Now, yields will vary depending on length of leases and quality of suburb and whatnot. I'm just generalizing here. If you go to sort of the, let's say, Perth, it's quite similar numbers to Brisbane.
You might find the yields are slightly higher, so you can get over anywhere from 5.5 to just over 7%. Adelaide, interestingly, is a tight market now. One of the main reasons for that is we have found that the stamp duty concessions, like you don't pay stamp duty in that market for commercial, has made a lot more investors go there.
So yields are probably about a percent lower for an equivalent purchase in Perth or Brisbane. So you're sort of working off fours to six if you're lucky in that market, but most stuff's around five. These are net returns. This is after like outgoings as well. So don't get this confused with a gross return in residential.
Like when an agent in residential quotes you a 5% gross return, it's really about a 3% net return. or even lower, probably a 2% net return, because you've got to take your rates, your maintenance, your rental management, all that needs to come out of it. These numbers I'm quoting are after those costs.
Tasmania, so you've got Launceston and Hobart, you're probably working off yields anywhere from 5% to even up to 8% in those markets, so higher, and those sort of numbers are kind of replicated across the major regional markets across Australia, so places like Townsville, Rockhampton, Toowoomba, you know, Burnigo, Ballarat, they're a little bit tighter on the yield.
But long story short, there's a yield out there if you want it, but there's tighter yields in the capital cities. So how many did you say in terms of properties you're buying every month? Did you say 40? Yeah, so February 2022, a day ago, was $40 million and total value was $93 million in that. We are very busy. We buy a lot in this space and we've been doing this for many years as well.
I'm surprised you've got time to talk to us on the podcast. That's a lot, isn't it? We've got a very good team and we're a well-supported acquisitions team and specialty due diligence team, which is important. You need specialists to go through individual assets and pick things up that a busy salesperson might not. So checking the numbers on the assets, the legalities.
So there's a lot of back end to make that work, but we've set it up to do so. Okay, well, yeah, that's definitely keeping yourself busy. So how much cash flow, let's say, could you expect from a $1 million purchase after 100% of the outgoings and mortgage have been removed?
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Chapter 7: What cash flow can you expect from a $1 million commercial property?
So that means you need a 30% deposit. Now, I'm assuming a 30% cash deposit is used in this case. So you immediately need $300,000 to buy it. Now, New South Wales stamp duty for a million dollar purchase is $40,000 or just over. You're up to $340,000 costs involved.
And then these other costs such as solicitors, valuation and whatnot, like there's probably another $5,000, $6,000, $7,000, $8,000 in that as well. So total outlay to purchase a million dollar property will be $370,000 max. Now, how much cash flow do you get out of that? I'm assuming a 6% return because that's our average yield for our company. So 6% is more than achievable in 2022.
So 6% is 60 grand income on your million dollar purchase. Now your mortgage on that, remember we took out a 700K mortgage. I've assumed a 3.5% interest rate. Again, people might say, oh, that sounds low. average mortgage is still under 3% for commercial for this purchase right now. So I've allowed a few interest rate rises in that. So we're talking 24 grand or 24,500 interest costs.
So your minus 24,500 from 60K, it's leaving you 35,500 income per year, which equates to $682 per week, clear. That's after every single cost, including your interest, So it's nearly a 700 per week, a little bit of pocket money for taking that 700k out loan. So it's a very good return on your money.
Chapter 8: How does commercial property investment compare to residential in terms of cash flow?
And you remember, if you're buying a million dollar residential property, you're probably negatively geared 10 grand. So we're not negatively geared, we're positive 35k a year. So it's a big difference in cash flow. Okay, Scott. Well, thanks again. Once again, it's been insightful and thanks for coming back onto the Real Estate Podcast. I'll let you go and do some more work. Thank you very much.
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