Have just finished searching the forum for info on commercial property and whilst it has been the subject of regular discussion the info dosen’t really answer my questions.
Given the current residential rental situation with the average rental returns around 6% why not go commercial and get 15-25% returns? Commercial properties also usually have longer term tenants. I understand there are a variety of other factors such as 70% finance, but am I missing some other important considerations? I have no experience in this regard but I have noticed that quite a substantial amount of portfolios don’t include commercial properties and I wondered why. Hopefully someone can help me out.
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]I think from what I have read, it is harder to get info/research on com prop so most people buy through an agent.
As with anything else higher risk is higher returns. Com prop is more volitile and can go down in value more so than res prop. If you lose a tenet you could be vancant for longer periods.
Josh
Josh,
yes I agree, there appears to be slightly more risk. At the moment however, I notice a lot of investors heading rural in pursuit of 10%+ returns. As I see it the Capital Growth on rural would in most cases be similar to capital growth on Commercial only the +CF on commercial is nearly double!!!!!WAF, I think it’s because not as many people understand commercial as residential. We all live in a house/unit so we know what to look for.
With commercial it’s very different. There also aren’t many books on the topic. The finance can be more difficult to secure, plus they are higher rates. One other problem is that often the prices are much higher ie starting at $1M.
There are more strata units etc. that you can now get for <$100-200K, but again, not as many real estate agents, so it’s harder to find the deals.
Yes, some peole do it very successfully, but I think it’s a matter of biting the bullet and having a go. A lot of people having got into commercial will never touch residential again – because of the reasons you mentioned.
Cheers
MelWith commercial it’s very different. There also aren’t many books on the topic.I recommend this great book to anyone that hasn’t read it yet:
“How Investing in Commercial Property Really Works” by Martin Roth
what is the different between commercial property and industrial property?
Warm Regards
ChanDollars
[Keep going, you’re nearly reach the end of financial freedom]Commercial property can offer higher returns versus residential, but the up-front cost can be substantial in order to secure and retain a quality tentant [T/I or “tenant improvements”] – this is often influenced by supply/demand.
Commercial is also more of a numbers game than residential. Costs/profits are generally measured on a square foot/meter basis, with several scenarios available for managing overheads.
It pays to have an understanding of economic/market conditions that may influence tenants/demand. Unlike residential where [almost] everyone needs somewhere to live, many businesses, specifically smaller operations, don’t necessarily need a commercial space when faced with difficult times.
And you will generally pay more for a commercial property, which will be factored into the equation if comparing with residential. Although, in many cases commerical does offer a ground lease option which can be cost effective and increase your ROR [rate of return].
— Michael
Chan$
Although I don’t deal in industrial property, I understand the difference is minimal.
Industrial tentants are generally longer term, and often have to comply with enviromental/local government regulations which do not apply to commercial tenants. Because of this, they can be more costly to secure in terms of T/I and/or meeting regulatory requirements.
The industrial sector is also more cyclical, where commercial tenants are generally more effected by the economy.
From an IP perspective, the objective is the same – limit risk and maximize ROI.
— Michael
To which I like to add : it appears to me that industrial tenants have more choice to find suitable locations than it is for a retail shop operator who wants to, needs to, be in the shopping centre.
(I am talking about smaller industrial unit type of investments (which I assume most people here may be buying) rather than larger premises.)
So it is (in my opinion) easier to find a tenant for a shop than it is to find a tenant for an industrial property.
Admittedly I have no practical experience in industrial property and am very biased towards well located retail shops.
Pisces133
>>why not go commercial and get 15-25% returns<<
Waf, returns of 15% (let alone 25%) aren’t so easy to obtain for a small investor unless either the location is not the best or tenants are hard to come by.
The higher the return usually the higher the risk.
Pisces133
Thanks all for the informative posts, I expected to get some clear cut reasons as to why to avoid commercial property, whilst I got some great advice it appears that as melbear put it
” WAF, I think it’s because not as many people understand commercial as residential. We all live in a house/unit so we know what to look for.”
I would tend to agree and and as a result would not rule out commercial property as an investment. Whilst myself and my partner are just starting (two neg IP’s) I believe diversification is the way to go and at the moment tend to source +CF properties whether they be rural residential or rural/metro commercial.
Finally thanks again for the help and ideas[
]I just bought my first commercial last year.
I think youve got to be ready for it. If my tenant moved out I would have to pay $2800 in interest to the bank every month without income where as if a tenant moves out of one of my houses it will only cost me $700 per month.
Now if a residential tenant moves out I expect to get another in 4 weeks
If my commercial tenant moves out I expect another tenant in 4 months. So I have to come up with $11,200 in the mean time.
I am getting 9% plus great depreciation in a good location. I would think a 25% return in commercial would be a very risk filled proposition. Be sure the tenant is not the vendor!
MJK[
]A few months ago saw a group of 3 shops in an established Melbourne suburb up for sale. The sign said $100k pa rent/year.
Residential yields in the area are around 3-4%. So allowing for the higher yields for commercial and the risks of nearby Chadstone expanding, I thought maybe it would go for a bit over $1m.
I stumbled across the auction during my lunch hour. Imagine my surprise when it sold for $2.2m, ie a yield of just 4.5%! Definitely negatively geared even if tenants pay outgoings!
Haven’t been doing much reading on commercial property, but a light industrial type property (eg one that would house a mechanic or panel beater) appeals to me more than retail. Only a gut feeling and more to do with a relative’s past success than any rigorous study.
Regards, Peter
I own a self storage complex and 3 blocks of flats that all have property managers.
I get phone calls from the property managers on the blocks of flats frequently. The usual tenant wear and tear mumbo jumbo.
I never here anything from the self storage manager.
Guess were my future investment funds are going?Peter it may well be possible that the buyer is looking at the property with different eyes i.e. perhaps the property can be redeveloped ?
Is it possible to build new shops with a number of flats above them ?
Pisces133
DarrenB,
What sort of return are you getting on the self storage complex. And what sort of outgoings.
Did you develope this investment or did you buy it as a going concern ?[:o)]Sounds Interesting[
]MJK
Hi all,
From what I have read, If you can find a tenent that will pay all outgoings (rates repairs etc), long lease, not currently owened by tenent, you might do OK.
As MJK One of the big risks is the vacancy period, Due to the higher costs large repayments may be required, AS long as you can cover this you would probably be OK.
As Mel mentioned the lack of info does stop some people and this is why an agent might be a good investment.
As an aside to Peter, I have heard that a sizable number of people have been moving from residential to com props and pushing the yeilds down. This was in an article in AFR a few months ago.
Josh
MJK. I bought it 15 months ago as a going concern for 390k, at 50k gross rent/40k net. I am currently in the process of further developing the property and increasing it by 50%.
It is a cash cow and has alot less headaches than residential.
In the states, self storage is considered the most blue chip of all commercial investment.
If you can afford to buy one/develop, I recommend it.Darren, to have an on-site manager means that one’s building must be pretty large to be able to pay for a permanent attendant.
How large is the town, how big is the building, was it producing a profit when you bought it, if not, then ? how long did it take to get it to the breakeven stage ?
I am sure that many people would be most interested in learning a bit more about your particular venture.
The good part about this business is that you can expand and yet run the business with the same number of staff.
Pisces133
Darren,
Thanks for your reply.Sounds a great investment.[^]
What do you mean by gross & net ? Are you talking about outgoings or GST?
Do you have one tenant running the business or are the individual customers your tenants.
MJK[
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