Hi Guys,
I was just wanting to know what members thoughts are on commercial property?Good Bad?
and if there are any smallish investors who have a mix of residential commercial?
You are at the mercy of the economy with commercial.
My parents had a mix with owning a shop and a residential in the one property. When the bank pulled out of the country town it was in, the tenant also left and the next tenant struggled to pay the rent.
Retail Property is hard as I have seen a lot of empty small shops with for lease on them.
Retail shops you have to ride the tenant's business success or failure.
Not sure on Warehouses or self storage places they may be different.Like any investment, location is a key factor in the amount of risk involved – capital cities/suburban industrial/business zones etc are givens. Unlike residential other factors come into play (like the economy/bank sentiment etc) however you will need to be more financially independent to support long-term vacancies ie lower gearing – just look at any of the stable REITs 40-50% gearing only to support a greater degree of vacancies over any given period.
I know of several investors who do not have any residential in their portfolios.
Does anyone know how interest rates differ for commercial property versus residential? Also, what are the LVRs for commercial property?
Hi,
Investment in commercial properties typically exist in the retail, office, and industrial property markets. We will not go into the other property types of tourism and other type.All commercial properties share a common perspective. It is to derive means of profitability. The ground principle provides assurance that business aspirations are well met on the part of businessmen and the person who had invested in the whole infrastructure unit. Different properties have various functioning methods, few professionals like to buy or take it on rent.
Commercial Property – love it !!
If you like property in general then the benefits of commercial over residential are many – I think that some people don't want to make the jump in into commercial because it is a little more expensive (accountants, lawyers, the banks gouge a little more as well), there are more matters to consider and research and the physical appearance…..funny but I know investors who would prefer a nice 3bed, 1 bath with a hedge and backyard that yields 3% rented to students , then a concrete, industrial shed that yields 9% leased to a national tenant (and you don't have to mow concrete !) – because they understand you need a house and it looks nice, they don't take the time to get into comm prop.
Important – tenant, tenant, tenant…..location slightly less important but certain locations will attract certain tenants, so it is high on the list.
Having a one tenant building is sometimes like owning 1 share – but having many tenants involves more admin (leases, renewals, rent follow-ups etc) or engaging a property manager (another cost here).
The good thing at the moment is that the commercial property market is bouncing along the bottom, which means yields are up and prices down (inverse relationship) so don't be in a hurry, kiss a lot of frogs, take a lot of site inspections, review a lot of tenants financials if you can get them….. on your side, make sure you have the cash or access to it, so when you do see an opportunity you can negotiate hard, so when the comm prop market does turn (and it will) you will reap the rewards.
Commericail LVRs are around 65%, if a company or trust is involved expect a bank to give you a thorough enema and ask for g/tees from everyone over 18 with an interest over 10%. Rates will generally be 1.50% – 2.% over the residential rate. If you looking at bank funding while Int Rate is important, consider the conditions and term as well, as these can have a more onerous effect. some banks simply aren't renewing expiring loans forcing hasty refinances or sales – your best defence is cash in terms of paying off principal or having it available to reduce the loan.
O
Hi Fredo,
Commercial property is definitely more tricky than residential! Yields are far superior to residential property but this does come with increased risks. Vacancies are one of the biggest but like most property if you buy well you can minimise these. A big plus for commercial that I don't think has been mentioned yet is that you have far greater rights as a commercial landlord than a residential landlord without the residential tenancy act coming into play.The other is that commercial property (providing it's not strata titled) can have more upside and value-add opportunity too. For instance, you could buy a warehouse and raise the roof to add ceiling height which would increase the end usability, add in a mezzanine level and depending on the floor space ratio could extend the building footprint which would increase the rent you could charge. With the right commercial property you can make minor changes and increase your yield by a couple of percent. Capitalise that at 7-8% and you can work out the extra value you've just created. ($10,000 pa in increased rent capitalised at 8% adds $125,000 to the property value).
secureserver1 wrote:Capitalise that at 7-8% and you can work out the extra value you've just created. ($10,000 pa in increased rent capitalised at 8% adds $125,000 to the property value).….provided that it can be capitalised in perpetuity not just for the short term of the lease. That is, if the improvement will diminish in value to zero over 3-5 years you cannot claim it to add value past the useable life.
The good things about commercial is when its tenanted and they pay it is good when its tenanted and they don't pay it is bad when it is vacant it is bad. minimum of 30% up front deposit required from bank, you wana have some savings for a rainy day when the property is vacant, Ive done 2 buildings vacant in one hit 9 months and 12 months, it hurts the piggy bank. good things is when they pay and if there a good tenant you are normally in cashflow positive
Resi doesn't stay vacant as long but your yeild is not as good
good thing is its cheaper deposit to get in
bad thing is you have to top up the mortgage every week.they both have there goods and bads, I like commercial because its a lot more straight forward in most cases
Scott No Mates wrote:secureserver1 wrote:Capitalise that at 7-8% and you can work out the extra value you've just created. ($10,000 pa in increased rent capitalised at 8% adds $125,000 to the property value).….provided that it can be capitalised in perpetuity not just for the short term of the lease. That is, if the improvement will diminish in value to zero over 3-5 years you cannot claim it to add value past the useable life.
Just to clarify, I'm referencing the increase in capital value at the time – on an 'as is' valuation using the capitalisation method the increased base rental would positively reflect in the property value if refinancing, or sales price if selling.
Commercial property has both its ups and downs, like Ii has longer leases tha residential property and the rents are higher.
But the downside is that is vulnerable to economic downturns and lacks in liquidity.If you own the building can you claim any depreciation if it is new? What are the tax benefits?
Well commercial property is very good in my opinion that's because it gives you money and your investment is safe plus the profit
I am new in property investment and I want to know that to invest a very first property in my life. So, give me a guideline is it good to buy a commercial a property for just investment. And through this investment business I will gain a profit or not? Try to help me if possible.
it depends totally upon your comfort level with risk, your expectations for returns, your pain threshold & deposit.
Olli wrote:Commercial Property – love it !!If you like property in general then the benefits of commercial over residential are many – I think that some people don't want to make the jump in into commercial because it is a little more expensive (accountants, lawyers, the banks gouge a little more as well), there are more matters to consider and research and the physical appearance…..funny but I know investors who would prefer a nice 3bed, 1 bath with a hedge and backyard that yields 3% rented to students , then a concrete, industrial shed that yields 9% leased to a national tenant (and you don't have to mow concrete !) – because they understand you need a house and it looks nice, they don't take the time to get into comm prop.
Important – tenant, tenant, tenant…..location slightly less important but certain locations will attract certain tenants, so it is high on the list.
Having a one tenant building is sometimes like owning 1 share – but having many tenants involves more admin (leases, renewals, rent follow-ups etc) or engaging a property manager (another cost here).
The good thing at the moment is that the commercial property market is bouncing along the bottom, which means yields are up and prices down (inverse relationship) so don't be in a hurry, kiss a lot of frogs, take a lot of site inspections, review a lot of tenants financials if you can get them….. on your side, make sure you have the cash or access to it, so when you do see an opportunity you can negotiate hard, so when the comm prop market does turn (and it will) you will reap the rewards.
Commericail LVRs are around 65%, if a company or trust is involved expect a bank to give you a thorough enema and ask for g/tees from everyone over 18 with an interest over 10%. Rates will generally be 1.50% – 2.% over the residential rate. If you looking at bank funding while Int Rate is important, consider the conditions and term as well, as these can have a more onerous effect. some banks simply aren't renewing expiring loans forcing hasty refinances or sales – your best defence is cash in terms of paying off principal or having it available to reduce the loan.
O
This is a great post, aprt from nthe section on finance. 70% LVR is not a real problem, and given yields are pretty strong at the moment can often be done using just the rental income, as long as there is some quality in the lease and tennant. Rates are around 2% over the 90 day bank bill, a lot less for quality applications. Sub 8% is very possible. Non recourse lending is still acheivable below 60% LVR.
I have purchased a few commercial properties, you are at the mercy of the economy
My belief is with the web building traction the retail space is shrinking. I like the idea of industrial (warehouses)
Amongst my my many landlord clients, some swear they will never buy commercial again, while others love it.
Had one that could only get finance for 5 year term, and had to renew at the end of 5 years.Definitely a lot more tricky and risky than residential, but if you get the right one and the right tenant, can be very profitable.
We also have the luxury of acting for tenants to commercial properties, and sometimes run into a landlord that needs a good beating as they ask for everything under the sun just to get into their property.Definitely a lot more tricky and risky than residential, but if you get the right one and the right tenant, can be very profitable.
We also have the luxury of acting for tenants to commercial properties, and sometimes run into a landlord that needs a good beating as they ask for everything under the sun just to get into their property.Commercial property has different value, the income that a piece of commercial property produces directly related to its usable square footage, this is not always the case with residential.Because commercial property helps diversify risk. Cash flow is often greater with commercial property, the yield is often higher per square foot and in initial investment basis than it is in residential. If you lease or rent a multi-unit commercial property, you have more tenants to generate income.Commercial property leases are generally much longer, this helps with the stability of your cash flow.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
