John & Paula,
You will be lucky if anyone out there can tell you what the future holds. Most of the crystal balls were wired up for the last millenium and don’t seem to function correctly any more.
That said, all the information I’m hearing across the ditch (NZ) is that the heat has gone out of the Australian market. This does not mean there are not good deals to be had but the “hold it and hope” strategy might not be the wisest move. I suggest you pick up a copy of “$1,000,000 in Property in One Year” by Steve McKnight. This is full of good ideas and strategies for prospering in a cooling market.
Apologies for my earlier sarcism and best wishes.
Julian2

I might have missed something, Milzy, but I thought this thread was supposed to be helping to solve a problem for DNL.
If you have your own question why don’t you post it as your own question rather than tag it on the bottom of someone elses? You might get more help.
It seems like there are people toying with getting into commercial property without first having done their homework, and without having developed a general understanding of how commercial property works.
Commercial property is not residential property and it operates to a different set of rules to residential, as per Steve’s comments earlier.
Rules regarding residential property generally treat tenants as imbecilic morons incapable of standing on their own feet without help (not that they usually are) and landlords as merciless money grabbers that would do anything to stomp on the rights of their tenants (not that most would) whereas the rules for commercial property generaly treat both parties as equals. This is a significant but often overlooked difference.
My experience as a commercial property owner (NZ based) is that tenants usually pay for all the outgoings ie rates, insurance, R&M and the landlord pays for structural repairs, therefore it is quite easy to work out one’s return on investment. That said, if you as landlord sign a lease where you pay all costs associated with the property then it is assumed you have gone into the agreement with your eyes open. Returns, expressed as yeilds or cap rates, are measured nett of all costs.
Unless there is residential property as security, or unless an investor has a significant history banks will take into account the lease when determining the amount they will lend, and therefore a property that is untenanted will be unlikely to secure the same degree of financing as one with, say, a six year lease in place. Rights of renewal mean nothing to banks (and nor should they to investors) as they only favour the tenant – giving them the right, but not the obligation to renew the lease. In looking at a lease you want the most frequent rent reviews but the least RORs.
Location is of primary importance with a commercial property, particularly with retail or office space, and a vital consideration is the likelyhood of tenanting the property – at the same or better rates – should the current tenant vacate at the end of the lease.
Best wishes to those of you entering the exciting arena of commercial property. Like any business it is important to do your homework first.
Julian

I realise that the majority of readers to this site will be Australian, but for any kiwi readers out there the structure for buying properties can be quite different, due to different rules with regard to Capital Gains Tax.

The starting line you have passed by taking the first step with your financial education. Keep it up. You will surprise yourselves at how much you can achieve if you apply yourselves.
Perhaps a good thing to do would be to determine exactly where you are now (financially) and where you would like to be in, say, ten years time. Don’t be too unrealistic or you might end up putting yourself off. Then break down the progress into yearly increments. Then break down the first year into monthly increments. The first month into weekly increments. The first week into daily increments. Now you know what you are going to do tomorrow towards achieving your 10-year goal – so get up in the morning and make a start.
It might not seem like much but tomorrow’s effort is a very important step. Keep it up and reward yourself with little treats for reaching milestones along the way.
Best wishes.
Julian.

Like I said I am very much looking forward to reading the book, (copy ordered) which I imagine is very inspiring. I understand the title is about controlling $1m worth of property – and presumably all properties in the book offer positive cash-flow, which is no bad thing.

And I take Lucifer_au’s point that nett worth can vary considerably without any change to the income stream due to extraneous factors such as changes to government legislation.

But I stand by my assertion that the two most important considerations must be nett worth – in case one wished to cash-up, or more likely to borrow against the equity – and the other cosideration is the cash-flow which provides the income stream.

If you have a positive cash flow of $100k and $1m of equity it doesn’t really matter, apart from the extra work, whether you control $2m of property or $5m – in fact it may be, in many cases, much better to contol $2m because your gearing is at 50% and therefore your risk exposure is lower.

I take the point, also, that valuing a property is subjective. Valuers will even admit that!!! But if Steve was to write another book in say five years time about those same mappers and the properties they originally bought, do you not think he might make some “subjective” judgements about how those properties had moved in value? We would expect his determination not to be perfect, but rather indicative. Otherwise, unless some properties had sold, the original purchase price would be the only figure we had to work with and it wouldn’t appear the mappers had made much progress apart from the cash-flow received.

Please, however, do not misinterpret my comments to imply any negativity towards the mappers – who have undoubtedly done fantastically well. Nor any slight towards Steve.

At the end of the day it’s not how many properties you own, nor the purchase price of the properties, but what the ones you do have are doing for you.

Julian.

I agree that commercial property offers fewer headaches, but there is a whole new world of learning. And banks require higher deposits.

Purchasing a commercial property with a substantial multi-national tenant is perceived as rock-solid. However dealing with multi-nationals or even big national companies can have it’s downside. They employ property managers who know every clause in the lease inside-out, and they know how to play hard ball – which they do. Mind you once the agreement is in writing there is seldom cause for concern provided you are happy, or reasonably happy, with the clauses in the lease. The important thing is to be fully conversant with the details of the lease when you purchase with a sitting tenant, or when you sign them up as a new tenant.
If you were wanting to buy a property with McDonalds as a tenant you will find they periodically come up for sale here in NZ, though invariably with a very low cap rate due to the perceived security of tenure they offer. However their stand-alone buildings often have that “McDonalds” look to them and this may make them less desirable to other tenants should McDonalds walk at the end of a lease period. Personally I wouldn’t touch a McDonalds building, as I think better value can be had elsewhere – but I possibly stand in the minority.
Julian.

Not sure about the points, but I know someone who maxed out two cards ($10k limit on each) and withdrew the cash for a house deposit. He actually paid his deposit in folding stuff. It probably wouldn’t work for most due to the high cost of credit on the cards but he made it work for himself until he could re-finance at bank rates. This guy arrived from Africa with very little – but hit the deck running as soon as he landed here (NZ) and is now (presumably) a good deal better off than many kiwis.
Julian2

I look forward to reading the book, and realise that having $1m of property in one’s portfolio could be a significant milestone …but is it necessarily? If there is a coresponding $1m of debt the net worth to the individual is less than zero – thanks to duties and costs.
In the mathmatical game of investing surely there are only two items of worth, one being nett worth (assett value minus debt), and the other being positive cashflow. Everything else is superfluous dross designed to impress others.
I’m sure in the cases within the confines of this book the participants have all built up significant equity and I realise there is value in learning to negotiate deals and obtain finance – but so often the overwhelming emphasis seems to be on aquiring truck loads of properties with fingers crossed for capital gain.
Your thoughts, please.
Julian2

Cap rates vary with supply and demand. Two years ago I was buying good commercial/retail properties @ 10+% cap, but those same properties would sell @ around 8-8.5% cap. High demand properties with lots of upside (ie beachside locations) can sell for below 5% cap, but these appeal to developers and speculators more than investors. This is for NZ, but I imagine Australia is similar, although I tend to believe cap rates are slightly lower in Oz.
Julian2

Hi,
It must be remembered that there are four partners in Steve McKnight’s business unit – his business partner and two wives.
This ability to pull together as a team, and work to a common goal is not emphasised enough, but I believe is one of the keys to achieving the meteoric growth they did. It works out to 32.5 properties per person, or just under 10 properties per person per year – an amazing result in itself, but not as impressive sounding as 130 properties.
In fact I would argue that it would be harder for an individual to move from a standing start to 32 properties than it would for four co-ordinated team players to purchase 130 properties.
With four players on board three can be bringing home the bacon while one is sourcing properties, and I think I remember reading this is how Steve and the team worked.
Another thing to remember is that it’s not a race, and the name of the game is not to have the most properties, but to have the best quality of life – whatever that means to you.
Cheers, Julian2