Hi All,
I'm interested in investing in commercial property, and while I generally know what to look out for and where to begin prior to investing, my main concerns are mainly financial –
1. How to actually get started without a lot of (and if I can avoid it, any) capital input from me (I'd be relying on the banks for this exercise);
2. Whether I'll need any deposit to initiate something so big and financially important (or can I just rely on Mortgage Insurance?);
3. Should I really be that brave (or perhaps stupid) and invest in something that will more than likely not return as much as what the bank would otherwise want from me, in terms of monthly payments (e.g. a 6% yield against a 10-11% bank interest)?;
4. I have a house with plenty of equity in it, but do not wish to use it as equity or security against a loan for a commercial property (I'm guessing this won't be in my favour, but I really don't wish to risk my residential property!)
5. I have a Family Trust set up and was thinking how that will be of help/use prior to purchasing such a large investment (perhaps for Tax purposes mainly and how that will affect the amount of tax that will be paid annually).Those are my main issues really. There have been some great posts in this forum, but none I saw that address the monetary side of it – i.e. deposit, return/yield vs. bank repayments, etc.
Any input will be greatly appreciated!
Thank you
One comment – if you're thinking a CP investment returning 6% p.a makes sense it doesn't make sense to me. CP is riskier – potentially longer vacancies and the return needs to reflect that.
That's the yield I've seen mentioned in articles about this sort of investment. Whether that's real and actual in the current market conditions, I realise I need to do my research on that. My main concern, as mentioned, was that it won't make sense to have such a return p.a. against a potentially double interest rate!
I would rather invest in Westfield Trust… 8-9% yield.
CP is very risky type of investment… just becareful
With an interest rate like that I'd like to know whom you bank with? Is there such a Bank?
That's the interest rate I was quoted a couple of years ago by a broker. It was either incorrect or not fully explained to me (apparently it's that high, from what he told me, because the risk with these type of investment properties is also higher). I'm only sharing the information I have, but still not getting anywhere with regards to my questions being answered…
Yes… commercial rate is around ~8-9%
shangrila00 wrote:Hi All,I'm interested in investing in commercial property, and while I generally know what to look out for and where to begin prior to investing, my main concerns are mainly financial –
1. How to actually get started without a lot of (and if I can avoid it, any) capital input from me (I'd be relying on the banks for this exercise);
Banks will generally fund up to 70% so you will need to stump up 30%.shangrila00 wrote:2. Whether I'll need any deposit to initiate something so big and financially important (or can I just rely on Mortgage Insurance?);
LMI is no substitute for a deposit, refer #1shangrila00 wrote:3. Should I really be that brave (or perhaps stupid) and invest in something that will more than likely not return as much as what the bank would otherwise want from me, in terms of monthly payments (e.g. a 6% yield against a 10-11% bank interest)?;Which banks are lending at 11% on commercial? If you shop around, you will find plenty of commercial property with net yields of 7%+. These properties are leased (often with reasonable terms remaining ie 3+ years). Most commercial properties are advertised on the basis of net rentals (regardless of the lease being a gross rent). Prices are quoted as ex gst (though if they are leased they can generally be purchased as a 'going concern'.
shangrila00 wrote:4. I have a house with plenty of equity in it, but do not wish to use it as equity or security against a loan for a commercial property (I'm guessing this won't be in my favour, but I really don't wish to risk my residential property!)You will have to provide the equity or deposit from somewhere.
Hi, all the comments are right and very kind too, especially Scott.
You have plenty of equity but do not want to risk your house. Then WHY are you considering direct investment at all?
You don't want to put in any cash and you expect a lender to fully fund your purchase?
How are you going to repay the loan?
Commercial loan rates are generally 2-3% higher than home loans. I'm paying 9.5% flat to a private lender.
You need to sort your own confused state of mind so that you ask questions that are more rewarding.
KY
I'm well aware of the risks, but I choose to minimise them as much as possible! Hence being sensible by choosing not to risk my actual house on something everyone knows is riskier!
Not confused at all – just more cautious (who doesn't want maximum output as a result of minimum input?). All right and kind comments, but yours!
Good luck!
Spot on!
If you are highly leveraged and using mortgage insurance you are still responsible if the deal goes Pear shaped. Even a mortgage insurance company can still persue you for additional losses over the amount risk they may agree to underwrite.
If the figures you are working on are 2 years old it is worth starting from scratch with you research. The world is a different place to what it was 2 years ago. Your broker was spot on about those rates, but they have since changed. The yields have also increased in many areas (mostly due to falling property prices and rents locked in with long term leases). There are areas where yeilds start from 9%.
To invest in commercial property you will have to willing to risk some capital. The way of reducing your risk is by doing your homework.
A good starting point is to look around at different types of commerical property in different areas. Find out what the current yields are, details of the lease and the company leasing it. Then go and speak with a broker and get current rates.
When looking at the properties weigh up the different options. You could have a brand new shop built specifically for a particular tenant on a busy road close to the CBD selling for the same price as 8 industrial units in the outter suburbs. Whats the chances of all 8 units becoming empty compared to the 1 shop. If the shop becomes empty how easy is it to relet if it has been custom built, compared to releting an empty unit. Research the company and industry of the tenant as well as the area. Is the company a national brand or a small family buisness. If it is a large national business is it possible they may consolidate and merge multiple locations? Is it in an "recession proof" industry ie a wholesaler of medical supplies.
Using a family trust will be beneficial once purchased but will not make it any easier to purchase the CP.
Once you have done all of the research and worked out what capital will be required (normally 30%) then you will have to make a decission on your level of comfort with what you are risking (ie a loan secured against your home) compared to what the benefits are (possible CF +ve and future growth potenital).
If this is something that you aren't comfortable with then it may be the wrong investment at the present time. If you want to get into CP in the long term without risking PPOR then you could look at investing in residential properties and building equity so in future years you can use your IP's equity to secure a CP.
In the present climate, the banks aren't willing to take 100% stakes in something they don't get 100% of the profits.
Thanks, gibbo1! Most useful answer so far (still thanks to most who replied). Time to update my research.
Thank you!
Hi, tell me when you find a commercial property with good leases selling @ 9% net yield. I'll pay you finders' fee.
KY
Client of min won't go into it for less than 14%- mind you it does involve a bit of building.
Development work at sub-25%, not worth the risk. Faced with a project which has kicked off about 2 years ago, rising interest rates (now a reversal), a price correction in the market of 20+% and slowing demand, they would be out the back door by at least 6%.
The prices of commercial property seem at their bottom level, so this is the best time to invest. But I wouldn’t advise you to take loan more than 50% of total investment because probably you wouldn’t get the return more than the total interest of 50% value.
As has already been pointed out you wont find any lender offer much more than crica 70% so will need to come up with the deposit from somewhere.
Mortgage Insurance is not available for Commercial deals so is not an issue.
Rates have fallen a little to what your Broker original quoted but to be honest as the number of Commercial lenders has also fallen dramatically the remaining lenders left in the market place can charge what they like for the business and do.
Richard Taylor | Australia's leading private lender
There are still some very competitive banks out there that will lend on a Commercial Property.
As Richard advised most lenders will only lend a maximum of 70% against the commercial property, and you will need to come up with the remaining 30% deposit yourself plus costs.
Some clients will look at taking out a line of credit / investment property loan against their residential property to cover this shortfall of 30% (If they have the equity and serviceability to do so)
Some of the key components that you need to look at when investing in a Commercial Property is the tennant that will be renting the property from you. You need to look at the strength of that tennant and what type of industry are they in. As well as this the term of the lease. Is it a 2 Year lease without any options, or is it a 5 Year lease with two 5 Year Options etc. All of these components will take away some of the risk from investing into the property.
Your concerns that you may receive a similar return on your investment through another investment stream in comparison to the rental yields. I guess the thing that you need to consider is that over time you should receive a capital growth on your commercial property.
The two major down sides in investing in commercial properties is the initial capital upfront that you need to place into the purchase and the risk that the property may remain vacant for a longer period of time than say a residential property.
At this present stage there are some banks out there in the market that could lend money at around 6.00% variable which is an extremely competitive rate.
Hope this helps you out a little.
Over the last 5 years some commercial property has been marketed in our local area.
It's become a frequent pattern that a tenanted property goes on the market with around 12 months or less
remaining on the lease.
It's marketed with " a good tenant in place" who pays all outgoings etc.
Funny how so many of them are vacated by the tenant when the lease expires, without the tenant renewing the lease
by taking up the option to renew.
It must be that over time, the tenant has established a relationship with the landlord who got the whisper, so the property goes on the market while it's tenanted to avoid the forthcoming vacancy period.
There's one scenario to avoid.
Also, we've found that if using residential property as security for a loan for commercial property, some lenders will finance at residential rates. That's a saving. And you can split the loan and use a line of credit like an offset account.We're into motels. If anyone's into the same, PM me pls.
Good luck.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
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