Hi Guys,
Recently I sparked an interest for commercial real estate and I am wondering what some of the negatives are?
I can see online that the rental yields can be quite good, but something tells me I'm missing some important points. A few things that crossed my mind that I could be totally wrong are:
- Finance may not be as easily attained on commercial?
- Commercial real estate may sit empty for longer while waiting for a tenant?
- Capital growth as strong?
- Capital outlay greater than residential?
- Higher insurance?
These are just some possibilities creeping in my mind and I'd love to be wrong about them all.
Jamie
Hi Jamie
The biggest problem is that in most cases the value of the property is determined by the return. So if you had a property renting for $20,000 a year on a 10% yield then the value would be $200,000. The problem is what is the building worth if you loose the tenant. In 1990 I worked for a commercial developer and saw what happened when the commercial markets collapsed. Many people lost there life savings.
Certainly Blue chip are great but the entry point is a lot higher. So you could put your money together and buy a larger commercial product.
I also deal in the United States and specialize in commercial properties there. Because the price points are lower there are some great buys there at present with the markets now in recovery.
Also keep in mind if you buy an apartment complex with more than 5 apartments it is considered to be a commercial property. With commercial we can borrow 60% of the price at a rate of around 5% on a non recourse loan meaning that the loan is only against the asset.
Everything comes down to due diligence.
Nigel Kibel | Property Know How
http://propertyknowhow.com.au
Email Me | Phone MeWe have just launched a new website join our membership today
bullet46 wrote:Hi Guys,Recently I sparked an interest for commercial real estate and I am wondering what some of the negatives are?
I can see online that the rental yields can be quite good, but something tells me I'm missing some important points. A few things that crossed my mind that I could be totally wrong are:
- Finance may not be as easily attained on commercial?
- Commercial real estate may sit empty for longer while waiting for a tenant?
- Capital growth as strong?
- Capital outlay greater than residential?
- Higher insurance?
These are just some possibilities creeping in my mind and I'd love to be wrong about them all.
Jamie
Hi Jamie,
You can't really pigeon hole commercial property under one banner. Everything you have listed may be true for some properties but not for others e.g.
1. Finance – it easier to finance some commercial properties than it is residential, you don't even always have to guarantee commercial loans.
2. Leases are generally much longer than for resi properties and, depending on the type of property, demand can be extremely high (how many vacant supermarket buildings have you seen?)
3. Growth is based far more on commercial factors than are resi prices. If you have a long lease with increasing rent built in you will most likely have steady capital growth. High leasing demand has a greater impact on price than it does with resi property. You shouldn't assume growth will be lower, its not always the case.
4. You do need more capital. To buy quality you generally need a lot more because not only are possible LVR's lower, but better quality properties are generally quite expensive.
5. Tenants usually pay outgoings, so things like insurance, land tax etc don't come from your own pocket.
I hope these comments are of assistance.
Hey guys,
Exactly the information I was after, thanks!
Jamie
Generally in Australia the entry point for commercial property is a lot higher than residential. especially when you are talking about blue chip property.
Just this week we closed a deal in Florida, it was a 3 story office building that we brought for 1.4 million dollars with $660,000 down with the balance funded for 4.75% for 36 months. When this property is fully let the cash on cash return will be around 35%.
So there is nothing wrong with commercial real estate however you must look at each deal on its merits. The above deal will also increase in value for 1.4 to around 1.8 million and that is a conservative figure. So if you are interested in commercial do your research carefully look at properties were demand will be strong.
Nigel Kibel | Property Know How
http://propertyknowhow.com.au
Email Me | Phone MeWe have just launched a new website join our membership today
Generally the main concerns with commercial IP's are that:
- They can sit vacant indefinitely
- Capital growth is not generally consistant, some properties wind back whilst others are sluggish. Quite different from the residential market.
- Higher deposit requirements and different lending with regards to rates, products, loan terms etc
In saying that, I've seen some great deals purchased, so long as the fundamentals are strong, long leases in place with favourable terms for the landlord, it's well worth the consideration.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Asset values are based on several factors but sustainability of the income stream is extremely important – hence market value equates to the value based on achieving the market returns not some inflated amount (eg unwilling tenant tied into an above market rent).
First thing to consider is how easy it would be to find a replacement tenant. The value of the tenancy determines the value of the property. A multi tenant property reduces the risk, such as a small suburban shopping centre or multi tenant showroom.
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