I’m currently developing a passive cash flow plan which will be using commercial property as my instrument to achieve this. What I am trying to determine is what rental yields experienced commercial property owners are achieving in Australia. I am not focused on capital appreciation, purely maximum rental yields to achieve passive cash flow.
Any advice or experience would be much appreciated.
Thanks,
LizIt varies widely. Depending on the purchase price, security type, tenancy etc.
You can easily find some properties which are 10-12 with tenancies not worth the paper they are written on, likewise you can find blue chip national tenants with multi mil tenancies for 5-6%.
In general however I’ve found clients are achieving near on 10% yields if they are buying in the 2mil-3.5mil bracket, as it removes a lot of smaller investors, but too small cap for some of the institutional/private equity investors.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
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Are you borrowing to fund the purchasing or are you using cash/ line of credit etc.
I am borrowing up to 80% depending on the LVR
Liz I would suggest a wider understanding of commercial property before you head into it.
The rules aren’t residential rules .. and my overall suggestion is to own multiples to offset vacancies in a single investment.
The lending criteria is different .. all purchases include GST, the overheads are usually picked up by the tenant .. and the period of vacancy between usage is usually significantly more extended.
My suggestion is where residential you look for a minimum return of about 5% (you know you’ll usually get slightly less than this unless the suburb is unwanted) you should be aiming for a minimum 7-8% return on commercial .. balancing out risk factors and extended vacancy with a larger income.
Again .. same as residential .. the aim is to keep the commercial tenant happy and there as long as possible to achieve both remuneration .. regular usage maintainence .. and capital growth all in the one hit. What is different .. is where you allocate 2.5%-3% (build up to at least two months if you can) safety margin on a residential .. you should allocate a 5% (allow for 4 months) safety margin on a commercial property – it is THAT much more risky.
Along the same note .. when the market is down on commercial .. as it is at the moment .. the best buys will hit the market and its the right time to take advantage of them.
Diversify your risk .. extend your capability and knowledge to an area you understand and eventually OWN .. and you’ll do just fine.
The overall perspective for commercial is because its more risky .. its an area that does best for people who already have a reasonable residential portfolio to fall back on and offset against vacancies. However .. for the budding entrepreneur who knows his market thoroughly .. it can be a fast growth area to wealth.
KNOW AND UNDERSTAND YOUR MARKET IN COMMERCIAL AND ITS EFFECTIVE COMPETITION IN THE SURROUNDING AREA.
unlike residential .. if the rents are too high or unattractive compared to street activity … people will walk to where the biz takes place. Its really that simple. Know when you are competitive on what you are offering .. and when you are not.
Good luck.
When buying commercial property in Australia you need to be careful with the type you buy. Generally a blue chip commercial property is a lot more expensive than a residential one. Be careful when buying things like cheap warehouse because if there is a downturn in the economy these properties lose value quickly.
With a residential property the value is in the land and the building in commercial it is normally based on the cap rate. So if a building is rented for $25,000 and sells for a 10% cap then it would be worth $250,000. The problem wit this type of invest is what is the value if you lose the tenant.
I personally buy commercial property in the United States where we get higher returns for a much cheaper acquisition price.
Nigel Kibel | Property Know How
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I have investments in commercial properties both directly and through syndicates.
My direct properties return direct yields of around 12% (which is high through negotiation, market timing and selection) and through borrowing 65% at 5% my cash on cash (coc) returns are above 20%. Typically commercial returns I would expect are 8% but as per above posts it depends on the tenant, area, property type and details of the lease. Lease is critical to closely examine as well as the real history of payments.The syndicated investments have built in borrowings of 40-50% and are returning 10-13.5% + capital growth
Direct single tenant investments are more risky in terms of possible vacancies, but through leverage and self management I get high coc returns.
The syndicates investments provide a good but not fantastic yields, but have a low aggravation and risk factor as the are multi tenanted and managed by someone else. I just get the quarterly payments to my accounts with no hassle.I don’t think you can readily get 80% over loans on commercial properties like on residential so it may be unrealistic to expect you can gear the properties to that extent.
I would recommend you start with a syndicated loan investment as you can start with lower capital like $100K and gain exposure to commercial returns while relying on the experience of the investment company.You can also invest in commercial through listed property investments on the asx. Yields are typically lower but you can trade in and out I a matter of days.
Regards
Brendan
Risk = Reward in most instances. As mentioned here, there are 10% yields available. As an example you can purchase a $2.8 million industrial holding in Hallam on a 9% yield but should the tenant vacate there would be a likely vacancy of 6-12 months (sometimes even longer). So it is not only the yield you have to look at, but you also need to understand WHY a property may be returning a particular yield.
Offices are typically more secure than industrial with lower vacancy periods, therefore sharper yield in the 6-7% region may be expected (depending upon price bracket though).
It is very hard to generalise ‘commercial property’ as there are a variety of sub-markets each with their own drivers.
xdrew – you are incorrect stating that all commercial property transactions attract GST. If the property is a ‘going concern’ GST is NOT payable.
Hi Liz ,
I would say start smaller to get experience. You dont have to go 2 to 3 million to start out in commercial.
I like to get a smaller unit and split it and fit it (within reason) .This creates some vision for the tenant
and reduces there outgoings but increases the landlords.
Just make sure you have some foot traffic whether thats just passers by or via surrounding offices .
you can get 9 to 11 % net through these optionsLuke Taylor | Hope Property Investing
http://hopepropertyinvesting.com
Email MeProperty Support,Strategist and Buyers Agent
agreed Blackangus – vacant properties attract GST, already tenanted ones do not
Hey Liz, I’m just starting out with commercial (bought a commercial investing training course – see the James Dawson thread in this forum).
I’m finding that even sub $1Mil there are properties that can achieve 10% yields. Also, talking to my finance people – For properties under the Million dollar mark I can get 70% – 80% LVR making it much more accessible than it used to be.I’m looking at mostly retail – preferably with a res component – like a chip shop with an apartment above. Not a huge amount around but they are there. I have also been looking at factory comm Prop with shop front – but you definitely need to choose your area well for that.
Anyway I digress – to answer your question it all comes down to the lease you can negotiate – if you negotiate hard and esp if you have a property which is high competition… like a shop in a medium town high st – where they are not going to be adding more shops anytime soon, you can negotiate pretty hard and make up whatever deal you want… that should help you get 10% (even more over time).
(AS I said I’m only just starting out with Commercial – But I have done due diligence on about 15 possibilities so far and these have been my findings – Hope it helps)
Hi experts,
I am starting out on CP myself and seem to have run into some common problems and will like some advices from the experts.1. Most CP are going for auction these days and despite commercial being commercial there are still people bidding down the yield
to level that I have given up. So how/where can you still source/find good CP for yield and growth potential?2. Like someone mentioned already the $2m – $3m is probably a good range due to lack of competition. But does that not become a challenge
when it comes time for me to sell, assuming if I have enough $ to get into CP in that range to start with? So as a vendor/seller, how
do you deal with the lack of buy side competition?3. Doing due diligence on the tenant itself is as important as the property, if not more so. Is there anyone out there who provides
tenant due diligence as a service, including its business strength, growth prospect, profitability, cashflow, debt etc? I am not
talking about publicly listed company so some of the above data may not be easily available.4. Once I have started off on a small CP, how to I scale it up into the $2m-$3m range CP with blue chip investment with quality tenant
or what many always coin the term national or international tenant? Is there a scale up blue print when it comes to CP investment?Thanks,
FXDFX – generally to attract a blue chip (or quality tenant) you need to have a decent asset – that does not necessarily mean expensive, large or A grade.
These tenants looking for well located, well maintained, good presentation etc. I have one client who has had a publicly listed building supplier for the last 20 years and more recently in another a string of no-names until an Foreign listed company moved in followed by another of the same ilk – with zero vacancy at change over to boot.
If you want growth look to areas which are under redevelopment pressure (not just via rezoning but also due to functional obsolescence).
As for dd on the tenant – won’t be forthcoming if it is a privately held company. You could ask but until you’re under contract, it would be unlikely that the tenant will provide you with any of its financials.
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