EPISODE 16: Expert Advice for Commercial Real Estate Investors - Property Inc
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[ Podcast Transcription ]

This is the Commercial Property Investing Explained Series brought to you by Steve Polisi. Find out how commercial property really works and start investing like the pros. Your education starts now.

Welcome to the Commercial Property Explained Series with Steve Polisi and Andrew Bean. How are you, Stevie? I’m good, man. I’ve got a, what a seven week old now. So just the usual, not sleeping, trying to feed, cleaning poos. That’s pretty much daily life now and fitting and work around it. That’s it. So it’s been a, what is it a month now?

Months as we last spoke to you. Sorry. Yeah. What have you learned? And have you any, had any aha moments in that one month since we last spoke? No, I’m really good at changing diapers, but besides that, you just learn it as you go. Like, she just wants to be held most of the time. So every time you’re like, Oh, I’ll put her down.

It’s easy now just to keep her in your arms and let them sleep as opposed to going through the faff over and over again. Yeah. All right. Quick question. Are you using Huggies or are you using Aldi nappies? I’m actually in the UK at the moment. So their one’s called Pampers. Oh, really? People get a bit funny about like what quality nappy they want to put on their child.

The Aldi nappies are like Considerably cheaper. And at the end of the day, the baby is just wearing it for a short time and literally going to the toilet in it. So it’s not much of a big difference to spend that more. I imagine as long as it keeps the Poukainos in and the wee, that’s, that’s all and then not give a rush.

Oh, you have some serious Poukainos, uh, you know, in your future. I can, you know, to test that. So who, who would have thought like, was it 14 episodes ago that this would become baby chat and we would use the word Poukaino on the actual podcast. We’ll make a short for this, for the Facebook and Insta. That’s it.

All right, mate. So we have an absolutely ripper show lined up for the listens today. And it’s all about actually getting questions from the listeners and answering them ourselves. What do you think of that, mate? Yeah, I actually love this one. This is going to be some really good quality stuff and I’ve even had some of my clients text me some questions as well.

So we’ve got the questions from the forums and personal ones as well. So it should be good. Yeah. So we asked the commercial property community private Facebook group to give us their burning questions and Steve and I would answer them on the next podcast. And Steve’s also, as he said, he’s got some questions from his clients as well.

So we’ll jump right into the first one, which is absolutely a really, really ripper question and it does get asked a lot. It’s from Harrison Gorman and it basically says, A person has 1, 000, 000 in cash to invest in a property. Would it be wiser to do a 1, 000, 000 deposit on one property? Or try for three, 330k deposits on three properties.

Yeah. So as you mentioned, I get asked this almost every single day because it’s the burning question for most, especially if you’ve got a fair bit of equity or cash there. And the answer is it actually depends. So there’s a problem in kind of each one. So let’s just say, If you use that one million, you broke it up into multiple properties.

So let’s say you could probably get 3 million properties quite reasonably comfortably there. So with a million dollar asset, you’re going to get a decent lease. So you’ll get like a three, four year lease, but you’re not going to get a huge tenant. So this is going to be most likely like a little warehouse in like a capital city, for instance.

So you’re going to have a slightly smaller grade tenant. The negatives with smaller grade tenants is they go one or two ways. They either grow and they outgrow the space really quickly. All they close up shop because they’re not making money as most small businesses fail. So you’re actually going to have a high turnover of tenant.

The good news is vacancy rates are really tight for those smaller, like little industrial assets and things like that. So most of the stuff I’m buying, we’re seeing like less than a month to fill it. So more turnover of tenants, but smaller vacancy period. The mother benefit of that is. You get to diversify the asset because you get to have three different locations, three different types of tenants, three different leases ending at different times.

So you mitigate a lot of the risks there as well. And then you’ve also got three different bonds and guarantees and stuff like that. One of the other negatives is you’re most likely not going to get a freestanding one unless you go out on the outskirts of a capital city or regional town. So you’re going to be part of a body corporate, which takes away a lot of your value add opportunities.

So you’re not going to have like the subdivision separating tenancies and things like that. All you can really do is add a mezzanine for instance, or kind of buy something that’s under market rent and push the rent up. So you take away some of that stuff there. The big ones, Andrew. So if you went out and bought a big three mil or 3.

5 mil is you actually see more variety. So you start looking at to the big freestanding sites, the multi tenancy sites, the self storage sites, which we’ve got a question on later, even just the blue chip type tenants. So like we’re under contract on the moment on like a pet barn at that price point, you can start looking at the McDonald’s in regional towns.

So. You’ll see a lot more variety and because it is a bigger premise, potentially you can get longer leases. You can actually start getting the 5, 10, 15 year lease type one. So a bit more security there, way more value out, as I mentioned before, but then the other thing is the negative for them is if you lose a big tenant, a lot of the values in that tenant.

So you’re going to lose a bit of value until you find another big tenant. Finding another big tenant isn’t like a one month process, like it is a little 500k or a million dollar one, like I mentioned before, it’ll most likely be six months, 12 months, 18 months. So even though you’re going to have the tenant for longer, because they might be there for 15 years versus the million dollar ones where it’s only.

Kind of three, four, five years, for instance, before it turns over, you’ve then got a longer vacancy period. So just to summarize, I know I’ve rambled quite a lot on this question. It comes down to a case by case basis. There’s a prone and con of each one. A good deal is a good deal, no matter what the price point and just assess each by each deal on its own merits.

Yeah, it was a good answer. A good ramble. I told you I’ve answered that question a lot, Andrew. I actually just want to break down the calculations because it does depend on the person and what they want. So if you’re putting down a million dollar deposit and you say you’re getting a 60 percent LVR, The calculation would be a million divided by 40 times 100, which would leave you with a potential purchase price of 2.

5 million. And going on the other side, if you put down 330K deposits for three properties, that would be 330K divided by 40 times 100, which gives you 825, 000 budget. So there’s a big difference in those two types of properties as Steve said. So if you’re an active investor and you want to get your hands dirty and you want to find undervalued property that has a lot of opportunity, the larger property at 2.

5 million is going to be a much better option for you because you’re going to be able to find a property that you can work and you can add value to and it could possibly be multi tenanted which would reduce the risk. But if you are not an active investor, you’re a passive investor and you just literally want to have a set and forget, then the 825, 000 property is probably going to be a better solution for you because you have three tenants.

There won’t be much value add. I mean, that’s a case by case basis, but there won’t be too much value add that you can find on a property of that size. Because basically, everyone can afford that property and it’ll be more like a strata title warehouse or something like that which Steve just spoke about.

So as Steve said, it’d be like putting in a mezzanine would be a great value add. But other than that, unless you’re finding a very under rented property, those would be really the only couple of value add strategies. So it really depends if you’re passive or you’re an active investor. Personally, I would go for the larger property but each to their own.

Yeah, it’s funny you said Andrew. So I’m actually the opposite of you. I’m actually a very passive investor, as you know, like all my properties, I have complete set and forget because with my lifestyle of traveling around the world, like I’ve done 20 countries in the last two years, I don’t really have the mental capacity to run my business and do that on the side.

So it’s more of a nest egg for me. I want that set and forget passive income. So like you said, it depends on your personality, you know, And even you said 60 percent LVR, that’s you being quite conservative. Like at the moment you can actually get 80 percent LVRs with some lenders. There’s a few lenders like ANZ and BOQ, Liberty, Suncorp all doing 80 percent loans.

So you can leverage based on your risk profile and what you’re actually trying to achieve over what timeframe. Yeah, a hundred percent. I was being very, very conservative there. Learning about how commercial property really works has never been easier with so many great resources around like this podcast and Steve’s book and he’s giving it away for free if you use discount code podcast on his website, so go to www.

policeyproperty. com Use discount code podcast to get the book free. All you have to pay for is shipping. What a great deal. All right, let’s move on to the next question, which is a good one as well from Raul Malhotra. Why having cap rates increased to reflect the increase in interest rates? Yes, I actually know Rahul.

So, uh, really good question. So they actually have, so if you were to buy, like say a Brisbane warehouse over about a year ago, you were kind of buying at around a five, five and a half percent cap rate. Now that same property is around six percent to six and a half percent if you buy really well. They actually have increased over that time.

What people don’t talk about, and this is one of the problems with commercial is they always make this one statement in isolation, but what they’re not taking account is rents have been dramatically increased. Like we saw approximately 20 to 30 percent rental increases just last year. So even though we’ve had kind of 20 percent increases in the interest rates.

The rents have caught up as well. And that’s kind of what stabilized it moving forward. And even like CBRE reported, was it, I think the second half of last year, they had just 8 percent just in the quarter, the last quarter of the last year. So that cancels it out. Demand does what also happens when higher interest rates are there.

There’s also less stock on the market. So if there’s less stock in the same amount of buyers that can keep prices high as well. So. There’s a lot, a lot of moving parts with commercial, but I always tell my clients, don’t try to play the six month game. Like I’ve done this now for 12 plus years and 1500 plus deals.

I’m yet to meet anyone who can pick the market to six months, buy the property and look at it and go, is this going to be in more demand in 10 years time than it is now, and as long as you’ve got the funds there and your buffers in place, it’s probably a good investment. Yeah, I would agree with you a hundred percent and I have seen cap rates increase.

They definitely have. That’s with a caveat with on specific sectors. The really in demand properties like the properties that you’re buying for your clients, Steve, they are still in high demand. So there’s no reason for those cap rates to increase because people are still willing to take a lower return on great assets.

What I think has changed a little bit is the conversation that you have with the agent. The negotiation you have with the agent, it’s become a lot easier because there are less buyers that are have the ability to buy right now and you can craft a better deal. I’ve recently been able to put together a really creative deal that if I tried to do this 12, 18 months ago, there’s no way that the agent would have even thought of letting me or even bringing that to his vendor.

But it’s more about like. The environment that everyone is in at the moment is the same, so you have to take what you can get with the negotiating power that you now have. So just look at the difference in like retail and office. Office has been like decimated from, you know, COVID. When’s the last time you bought an office asset, Steve?

I didn’t even buy them prior to COVID anyway, for me, they’re kind of like an off the plan apartment. You don’t, you don’t own anything. And saying that, I have bought some previously when they’re like something kind of X factor about them. If they’ve got like a medical tenant on a 10 year lease or something like that.

But I take into account that the capital growth might not be there as well. One interesting point, Andrew, which I’ve actually been talking to a lot of like, uh, selling agents the last few months is, They’re actually getting a lot more interest from owner occupiers at the moment. So because interest rates going up, but inflation’s going up and then the landlords are passing on the rental increases to the tenants, they’re starting to look at it being like, well, why don’t I just buy?

It’s kind of like the rent vesting thing in residential. If they can just buy the property and it’s cheaper for them to buy than it is to rent, that’s why they’re buying now. So they’ve actually seen a lot more interest from owner occupiers. So that’s keeping the market afloat as well. Yeah, there, I mean, there are markets within markets within markets, specifically like a market like Geelong, it’s a really heavy market for owner occupiers, like you said, in industrial.

So, you know, that market is flourishing right now and cap rates have not increased at all, they’ve probably reduced. So yeah, you’re exactly right and I, I didn’t take that into account, but I do agree with you a hundred percent. It’s funny as well. You mentioned Geelong. So I actually am finding it’s most the fringe cities are the ones where the owner occupies.

So it’s the ones where they got lifestyle. So like Geelongs and Gold Coast and Sunshine Coast and areas like that, the owner occupied market there is huge because all these tradies in that move there and they want to live there and they want to have their business nearby and that their nest egg is buying the premise that they work out of.

Yeah, exactly. All right, mate. Next question from Nick Anton and he writes, Steve, what are the pros and cons of a multi tenanted commercial property? All right. So I love multi tenanted stuff. Main pro of that is obviously mitigating risk of vacancy. So if you buy like a retail strip and it’s got 10 different shops in it and they’re fully tenanted, if you lose one or two tenants, you’re still getting eight tenths of the rent.

So you get 80 percent of the rent come through, which mitigates a lot of the risk. So that’s one of the main pros. The other one is typically if you’re buying multi tenanted is it’s freestanding. You own the whole site. Like there’s no real point of buying like just half of a shopping center because then it’s body corporate.

You don’t get that kind of positive there. So you’ve got the freestanding, so you’ve actually got huge value ads because you can renovate the property and make it look nicer and charge more rent. You can do better like online campaigns to get people to the center and things like that. You can even manage the tenants.

So you can put different kinds of types of tenants in that bring the foot traffic. So don’t have three hairdressers in a row, diversify. You have like the physio, you have the pharmacy, you have the medical, you have the bakery, get it. So as many people come to that center as you can. So that’s there similarly applies to industrial, but less so with the types of tenants, that’s not as important unless you’ve got a specialized kind of industrial complex.

So what I mean by that is like. You’ll see a lot of like automotive industrial complex where they have the panel beta, they have the auto electrician, they have the mechanic. That’s because they can benefit from each other because they have the flow and effect from work. So the mechanic will send it to the spray painter, late order electrician, things like that.

So you have that there, but the biggest one obviously is just having the diversification of tenant and rent so you don’t lose it. The negatives is Sort of what I said in that first question, you’re not typically going to get a tenant on a really, really long lease unless you’re buying a huge, obviously, like a homewares kind of complex or something like that.

So you’re going to have shorter tenancies. Retail tenants, if you go down that route, is a little bit more volatile. Like you’ll have the tenant for longer. But if they leave the vacancy periods are longer, but yeah, multi tenancy is a great option. If you don’t want one of the negatives is obviously if you don’t diversify, if you buy in that one complex and put all your eggs in that location and that location population dies or the foot traffic to that complex slows down.

Whereas there’s a good argument as opposed to buying 10 retails or industrial in the same location, separate them like in the first question. Yeah, exactly. And Nick Ayton actually asked about self storage as well. And this flows on from that particular question we just answered was the reason that I like self storage is because it’s multi tenanted because you have hundreds of tenants on site and you’re not At any risk of having a single vacancy or a prolonged vacancy, and that’s really the power of self storage is the scale.

Um, I actually had a question. I was speaking to a client on the phone this week, and they were asking me about buying a single self storage unit at one of these places that Strata titles them and buying that type of unit or buying that type of property. All of the good parts of self storage are gone, you know, the scale, being able to move the rents, being able to have some vacancy and really push the rents as high as you can.

The multi tenancy piece is a really, really important piece of self storage and commercial property as well. Yeah, you know, if you buy a single one, Andrew, you’re not going to get someone signing a five year lease and it’s going to give you that stability as well, so you lose the whole benefit of buying.

One point to note, so, some industrial complexes will have, say, one or two of the warehouses dedicated to sell storage, so make sure you check your zonings. If you’re buying on and something doesn’t seem right and it seems cheap, check the permitted uses, because sometimes they’ll actually have it zoned as storage, which…

Can basically inhibit your future tenants because you’re not going to have the same pool as being able to do mechanics, wholesalers, fabricators, distributors, all that type of stuff. You’re just limited to someone who uses it as storage. But one of the traps most people go in Andrew is because they go by a single self storage because it’s cheap.

It’s the same trap that people go by a high density apartment because they can’t afford a house. But you’re just sacrificing too much. Buy in a different location, maybe a slightly more regional one where you do get that versatility. Yeah, that’s right. I mean, this particular client was talking about it was a business called Silo.

It’s in Wollongong and they actually, it’s just all self storage. And I said to him like exactly what I said before, but One of the disadvantages as well is that you’re buying an extremely small, like, little warehouse for someone potentially. So, you know, it might be 18 square meters or 24 square meters, so you could get something a little bit bigger.

But what happens when there is a prolonged vacancy of a lot of tenancies in there is everyone’s going to undercut each other to try and get someone in and you’re playing like a race at the bottom of the market. Everything about self storage and multi tenant commercial property. goes out the window when he’s trying buying something because that kind of tenancy is going to turn over a lot more if it’s a business in there because it’s just, they outgrow it so quickly.

It’s, it’s literally just a garage. So unless their whole business is just storing, uh, some stuff they’re selling on eBay for a hobby, you’re really not going to have a tenant for very long. Barely even 12 months, I reckon. Yeah. A lot of people fall into the trap of like the glossy magazine, buy off the plan from the selling agent.

I’ll get this self storage. It’s 160, 000 completes in six months. For instance, you’d be much better off just going to buy a 20 year old warehouse at the same price in the similar location where you’ve got that versatility, that more floor space, more value add opportunities. So yeah, just be mindful of that guys.

Yeah, a hundred percent. All right, next one’s from David Macklin. He goes, your views on rural motels and caravan parks in small but critical towns that are not mining dependent. Towns like Charlesville, Longreach, Coober Pedy, etc. So I guess the non mining towns, but they might have some reason why people are going there, like defense capabilities, something like that.

Yeah. So that question flows on really well from the last one, actually. And I’m going to quote you, Andrew, you actually said this to me, I think actually on an earlier podcast as well, you said motels and caravan parks is just self storage for people, which I actually think is brilliant because a caravan park is it’s these little metal boxes, whereas instead of having short term tenants for self storage, where you have like one year or two year, you actually just doing it over a week.

You’re getting people that come in for a week, but it’s the same concept. And there’s the same pros and cons in terms of like, you need to run the business well, make sure people are attending, keep the occupancy levels high and things like that. But what are your thoughts on caravan parks and motels, Andrew?

I do like caravan parks and motels, particularly because they have business returns. So high business returns in a real estate asset, which is always really cool because if you get better at the business or you’re really good at improving the business, then you increase the value of the asset. You just have to be careful where you’re buying these assets.

So, a lot of these towns that he’s mentioned, particularly Longreach. I know Longreach very well because I have a background working in the defense industry. Now, there’s a very, very large, uh, defense RAF site there. It will never be moved. It is part of Australia’s capability to defend Australia. I might be saying too much here.

They might not want me to talk about what’s at Longreach. But there is definitely… A presence of people coming in there and motels, but you’ve just got to be careful. I don’t know if I’d be buying anything at Longreach or, you know, Coober Pedy or anything like that. I tend to like things that have a minimum of 20, 000 in population and that’s absolute minimum, particularly for self storage.

But it can just get real dicey and also it’s difficult for banks to get lending on these things where they’re really far out. You have to be careful that it’s not a single economic dependency town. So it relies on one industry, like Wyella in um, South Australia. It’s all about metal and producing metal and that place particularly if that Industry falls over.

There’s one employer that runs the steel industry there. If they go bust or they change their strategy and they want to move somewhere else. The whole place is decimated a hundred percent. So it’s, you want something that has a really diverse economic industries that no one piece of that economic pie is too large where it could really kill the town.

Yeah. I think it’s also worth breaking up his question a little bit. So rural motels and caravan parks typically like service different demographics, like rural motels, you can be those, those like industrial towns and things like that because people come and go for work. Whereas a caravan park is typically tourism and lifestyle based.

So that’s where like you get the most like beach location or regional area where people visit, where there’s holiday parks and cafes and things like that. So there’s slightly two different demographics of tenant, but you need to check everything you check with the self storage you need to do with a caravan park or motel.

They are tough. It’s running a business as well. You’ll rarely be able to do it successfully if you buy a motel and just put a manager in place. Because, like all businesses, unless you’re involved in it, it can generally kind of fade away over time. Yeah, it is a business. You need to be there. And if it’s in a rural place, it’s very, very hard to get there and manage things.

I would stick with caravan parks, personally, on coastal areas. And motels even on coastal areas as well. You’ll pay a bit more to get them. But in terms of travel and people going there, there’s always a reason for someone to go there for holidaying. And it could be in a nice area that’s in between two major towns.

So there’s always a layover there. The good thing about motels and caravan parks. is there’s heaps of deals available. There’s great opportunity because there’s so many properties available. So if you’re good at finding an asset where you can add value, they’re a dime a dozen. It’s easy to find. If you turn that around to self storage, they’re so hard to find because no one wants to sell them because they’re such a great business and such an easy asset to run in compared to a motel or a caravan park.

Literally the other day, uh, one of my tenants moved out. And all I did was get a blower and I blew out the dirt and leaves that were in the mo in the unit. And I was done. And that was it. That’s me turning over the unit to get another tenant in there. With a motel, you have staff, you have all the sheetings, and the sheets can cost a real fortune.

Those beds there are really high quality beds too, because they need to be, because you’re selling sleep. that’s the product you’re selling to people. So all of these things really can stack up for cost and payroll. Whereas self storage is literally just a tin shed with a roller door. And if it’s just a room, you’re just selling a room.

So it’s a lot easier to do self storage in my mind. And that’s why I like self storage, but motels and caravan parks, I will potentially move into that. Later on down the line because the opportunity has got a very, very long lifespan for those assets, I believe, whereas self storage is a much shorter window to get in at the moment.

One of the benefits we didn’t actually talk about with caravan parks, Andrew, is you also land banking. And if you buy in the good location, it could actually pay quite good dividends over 20, 30 years. Can you imagine owning 10, 000 square meters next to a beach and a caravan park? Like as time goes on and population grows.

You will get that land banking side, which you don’t get the same level. If you buy and say like an industrial warehouse, like that might be on a 600 square meters versus 10, 000 square meters. So you do have that, but you are regional. So you have to play that game as well. Well, the caravan parks that I like actually have a permanent aspect to them, so a permanent stay aspect, so you might have a blend of some permanent, like a percentage of permanent people that live there all the time, like a residential park, and you might have a holiday park as well.

Now, there’s a big difference between the yields that you can get from these parks because a holiday park will attract higher returns because it’s more business like and you’re charging a higher rate for someone to come in for a shorter period of time, whereas a residential caravan park will have a lower return, but it’s more stable.

And these types of parks are really cool because it can have a development profit as well, so particularly the parks that are old and run down, and they can be turned into a manufactured home estate, which is basically just a piece of land that you’re dropping manufactured houses on. The person owns the house, or they buy the house from you, and they’re paying you a lot rent to have that house their house.

So if you buy the houses and put the houses on there, you can one, sell the house to the tenant so you can make a profit, a development profit from that, and then they will continue to pay you a lot rent, and then usually the people that do this are retiring or they’re elderly. Once they die, their heirs obviously need to get rid of the assets.

They sell it back to the park, and then for a cheap, reasonably cheap price, and then you can sell it again to make profit again. So it’s a really, really good snowball type of business where you can always making profits, no matter which way you’re going, either you’re just collecting rent, or you’re getting a development rent for selling the houses again.

Yeah, I remember back in my resi days, you’d always, all of a sudden find like a, a really cool little two or three bedroom cottage for 150 grand or something like that. And you’re like, Oh, what’s going on here? Then you’d realize it’s part of a holiday park and you just buying in that park. And then the rates, the rates are ridiculous as well.

Cause they obviously got to keep upkeep of the park. Yeah, or I think we should move on to the next question from Mark Jollum and it is, Is it still possible to get positive net cash flow with a budget of 600k particularly with high interest rates? Yep. So really good question. I get asked this all the time.

The, the budget doesn’t really matter as much because it doesn’t matter if you’re buying a 600k or a 2 million or a 10 million. It’s going to be the yield that you get versus the interest rate. How much that cash flow is will obviously change on the scale. But just to put in perspective, if you were to buy a 600k commercial property on a 6 percent net yield and you had a 6 percent interest rate, You would then be break even so as long as you’re if you’re that that’s with a hundred percent debt as well That’s not with a lot loan to value ratio lower than that so if you’re pulling out equity buying on and this is why I like commercial is because You do the same thing you buy a hundred percent debt on a residential It’s going to cost you twenty thirty grand a year to kind of hold that property.

But I mean, I’ll quickly crunch some numbers so let’s say we buy a 600, 000 property on a 6 percent net yield. So we’ll keep it fairly conservative. That’s 36 grand a year rent, 5 percent interest rate, you’re 13 and a half grand a year positive. You are neutral at 8. 94%. And this is on a 70 percent loan to value ratio.

It’ll change if we go to 60%, it’ll be more if we go to kind of a 80%, it’ll be less. But just to put in perspective, like interest rates would have to go close to 9 percent before you start dipping into your own pocket. So for me, that is really low risk assets. You’re making your cash flow on the debt that you have on it, so if you’re 100 percent leveraged, it is hard to find or to have it, uh, positively cash flow because the return has to outweigh the interest repayment when you’re 100 percent financed, so like when you’re borrowing equity.

from another property and you’re using equity to buy a property, that’s where you can get into trouble where you think you’ve get it, you’re, you’re buying or you think you’re setting up a positive cash flow but realistically, you’re just neutral or slightly negative. It’s the debt that you have on the um, the property and that’s why you have a 60, 70, 80 percent loan where the interest repayments are on 60 percent of the value and you’re making the cash flow on the extra 40.

It’s still a positive. If you’re going to get a neutral asset at a hundred percent leverage, like you’re not going to get that on residential. So on commercial, if you can get neutral, that’s a strong position because if the property price doubles in 10 years, you’ve made a lot of money. What’s going to hopefully happen is rents will keep going up and then that’ll shift into the, the really high cashflow positive.

So. You’re basically using someone else’s money in big dollars to make dollars as well. So you compare that to residential and do the same thing, a hundred percent debt at high interest rates, commercial looks way lower risk. Yeah. You get killed with residential. Yeah. I agree with you. Definitely. It just depends on what your strategy is.

Do you need the cashflow? Are you buying the property to pay for your lifestyle or are you. Working a high paying job and buying a neutral asset and adding value to it and then putting debt on it, that could be a good strategy too. It really depends what you’re using the cash flow for, if you need it or not, and how long a time horizon you can put on it.

If you’re putting a 30 year time horizon on it, then being neutral for five years… Might not be a bad thing. Considering if you’re going the other route with residential. Now, there are obviously different thoughts and the way that both of these assets appreciating value and capital growth. You really need to weigh up like for like and know your strategy before you go into it.

But you could, yes. I can confirm and I think Steve can confirm as well that you can get positive cash flow with a 600k budget and you don’t look realistically, technically, you don’t need any money to invest if you can set up some kind of a creative finance deal where you’re getting vendor finance and you know, there’s really a lot of ways that you can do no money down deals.

So with 600k, you could definitely do a lot. Yeah. I look, there’s probably two scenarios. I want to run past people. So if you’re buying say neutrally geared commercial asset, ideal situation is rents keep going up. As I mentioned before, we say five, 10, 15 percent rental increases per year, which pushes it into positive.

The other ideal situation is interest rates end up coming down. And then not all of a sudden is a little cash machine. So that’s the sugarcoated answer. The one you need to stress test for is if you buy that property that is neutral, interest rates keep going up and then we see some form of recession and the rents come down.

That’s where you need to work out your personal buffers based on your risk profile. Yeah, and you might be able to find a property that you’re buying for 600k and it’s neutral, but there could be some huge value add where you’re sectioning off a part of it and you’re putting another tenant in and that tenant is your actual cash flow.

So you might be able to get 30, 000. Of rent for this new section up area that was underutilized at the start. Um, so it really is, you know, you know, property by property. It’s case by case. You have to really look and weigh up at the deal, um, to see if it will work and it works for your strategy. Yeah, and that’s one of the reasons you absolutely love ValueAdd, Andrew, is because it’s a risk buffer for you.

If something goes wrong, you can do the ValueAdd strategy to recover those funds. The face value, the sticker value, the sticker return that I’m buying, I’m not staying with that. I’m not relying on that to be my total best return. There always has to be some extra added value to make it worthwhile. Yeah, nice.

Spot on that. All right, mate. The next one’s from Sergio Sahalem. And Sergio asks, If you’re investing in Melbourne and Sydney, the numbers don’t seem to stack up commercially. What are your thoughts there, Stephen, investing in Sydney or a Melbourne? Yep. So, Sergio, you are spot on. The yields in Melbourne and Sydney are typically pretty terrible.

Melbourne, they’re really bad at the moment. And by, by bad, I just mean low. So like you are talking like three to 4%, typically on a lot of good quality assets, Sydney, a little bit higher, like you can get kind of four to 5 percent on average, if you go out of the exact kind of CBD area. Recently we’ve bought in like, um, the Northern beaches and Penrith and areas like that and got like a five to five and a half percent net yield.

So there are some options there, but the yields aren’t and the numbers don’t make sense with interest rates where they are. You’re not going to be cashflow positive. It doesn’t mean it’s not a good asset. It could still grow. So same fundamentals as residential, the property could still double in value in 10 years and you can make a good return that way.

But if you are looking to build a passive income in the next five, 10 years, you do have to look at some high yielding locations. So Brisbane and Perth, some really good options at the moment, you can get five and a half to seven percent net yields in most asset classes and then regionally you can get even more as long as you take into account obviously the vacancy risk with it there.

Yeah, I mean Sydney and Melbourne haven’t really been investable for people that are probably listening to this podcast and you know your clients. For a while, like you’re looking at like, you know, 4 3 percent returns. If you’re buying all cash, could be a different story. But Melbourne, particularly, has some of the lowest cap rates, particularly for retail in Melbourne City.

The numbers just don’t make sense if you’re leveraging this property. And a lot of the time, the assets that are getting bought in these locations are by owner occupiers as well. And they push down the yields which pushes up the prices. Yeah. So I’m not, there’s nothing wrong with buying there, but you’re buying for a different reasons.

You’re not buying for cashflow. You’re buying with the hope of capital growth, which is the crystal ball stuff. But it doesn’t mean it’s not a bad market. They can, there’s still really short days on market there. It’s not like the yields are terrible and the properties are sitting there for years at a time.

There’s still some good, strong fundamentals, but for guys like us, Andrew, who are trying to build a passive income to retire early. Yeah. Buying a high yielding location makes more sense. And in terms of risk, the vacancy rates in Melbourne are not that much lower than anywhere else. So like most areas in Melbourne, we’re kind of 0.

2, 0. 3%, somewhere like a Brisbane where you get a 6 percent net yield, most areas are 0. 3, 0. 4%. So like they’re, they’re somewhat comparable. It’s not like it’s that much better of a location. Yeah, it’s just a perceived lower risk of buying in a capital city. Yeah, I mean, we’ve already done a couple of podcasts on this actual topic, so we don’t need to go too deep into it.

But yeah, just if it doesn’t make sense, it doesn’t make dollars, you know, so. All right, the next question is from Mark Lee and he writes, Is there a general rule of thumb on how much discounts that you can be negotiated or that can be negotiated off a vacant property or lease expiry? That’s actually a really good question.

And depending on when you’ve asked me that question, I probably would have gave a different answer five years ago. I would have said a vacant property, typically 10 to 15 percent off you can get. So that’s where you can make the money because you buy it vacant. You can put a new tenant in there and make that 10, 15%.

The negatives with buying a vacant property is you do have to have the extra 10 percent GST. So even though you can get that back on your first BAS statement, it’s a bit more cash in the game because you don’t have rent coming in. So your serviceability is probably less. So you need to be, have a high serviceability, got to have the extra cash to be able to pay for the GST.

And that’s where the value add came. But as I mentioned previously, own occupied markets are quite hot at the moment. So a lot of the areas I’m buying. There’s actually no, there’s no benefit by buying a vacant property or even a lease expiring like the lease expiring. That’s actually an opportunity for those own occupiers to come in as well.

So it’s not the same as where it was. If you ask me in 12 months time, it might be a different answer again as well. But yeah, generally not as much discount as you think in some of the hot markets. Yeah, I agree 100%. Um, you should try and get a discount. You should definitely try and negotiate anything you can.

10 to 15 percent would be a great result and you’ve also got to add in your lease up costs as well. So, make sure you know how much it’s going to cost you to put a tenant in and try and get that off the purchase price. This is buying vacant property is a lot more of A riskier strategy for a, an investor that has a lot of capital backing them because if you’ve got it wrong, you could have, you’re buying a problem, you’re buying prolonged vacancy.

So why is that property vacant in the first place? Is there a demand for it? So I’d say first, understand the demand for the property in the area. Try and get tee up a tenant before you go under contract and then you can buy 10 15 percent on a discount with also the lease up costs removed as well and then day one of owning that property, you can put a tenant in there.

That’d be the best way to do it, I think. And yeah, there’s no rule of thumb. Just try and negotiate as low a price as you can. Yeah, I’ve actually got a few clients at the moment that we do do this strategy for. However, we’re buying these properties cash. And that’s typically where we get the discount.

It’s because we go in with a cash unconditional offer. We’re not subject to finance and due diligence. And that’s where you can get the 5, 10, 15 percent. Because the seller knows if they go under, under a conditional offer. It could fall over in two months time from a short valuation or they find something they don’t like or the buyer doesn’t get finance, for instance.

So, going in cash is really strong in this market. Yeah, definitely. It always has been. Robert Chandra, how to find out the historical net rental growth, e. g. for industrial rate per square meter in Ballarat now is circa 120 per square meter. What was it 10 years ago? Okay, really cool question though. I’d want to ask probably Robert, what’s the premise of asking this question?

Are you trying to look back at historically and say, well, if it’s growing this much, I can then forecast the next 10 years for XYZ growth as well, because that’s typically not how it works. Sometimes a market’s been flat for 10 years. is about to take off if it’s getting tighter in the market. So I’d like you to know why are you actually asking that question?

Cause that might guide the answer a little bit, but to generally answer your question is go on CoreLogic because you can actually see the rental leasing campaigns. So on any property, You can go back and click the history and see 10 years ago. This is what the property manager started advertising the property for.

How long it was on the market for alternatively use awesome software like CP data that Andrew owns. And you can look at that there as well. It’s really difficult to be able to go back and find historical rate per square meter and historical cap rates. That’s why CP data exists. Um, and we only do a rolling 12 months.

And that’s purely because the amount of data that you have to have in there makes the platform a lot slower if we have years. And we’ve only been doing it for, I think, two and a half years now or something. It is very, very difficult to find out this information. So in Ballarat, for an industrial asset, you’re looking at a range of 90 to 120 per square meter for an industrial asset at the moment.

And that’s general range for like, it could be an A grade asset to a C grade asset, could be very, very different types of industrial property, but that’s what you’re looking at right now. So exactly, I don’t know why you need to know exactly what it was because just because it grew, In the last 10 years doesn’t mean the next 10 years are going to be the same.

So, I would just focus on trying to find and identify under rented property, knowing that 120 a square meter in Ballarat is on the high side. Try and find something that’s around 100 a square meter or 80 a square meter if you can, and figure out how you can add value to that asset by increasing the rates over time.

Yeah, you need to look at where you’re buying as well, because obviously something in the thick of Ballarat is different to one of the newer states on the outskirts as well, so 10 years is a long time ago. One point to note is when I mentioned on CoreLogic and look at the sales leasing campaigns, that doesn’t actually tell you what they actually leased for, it tells you what they advertised it for.

But not what at least might’ve been a soft market at the time. And they actually negotiated 20 per square meter off what they’ll advertise in it for. So that’s one of the positives and negatives of commercial. It’s a little bit like the wild west. Yeah, they just didn’t record the data like they did for residentialists.

No one took it upon themselves to do that. So yeah, that’s what CP Data is trying to change day by day. All right, the next question is from Luke Dimich. What is the worst aspect of commercial property and how do you manage it? Oh, okay. It’s probably the best and worst aspect is everything is negotiable.

So on a lease, you can negotiate everything, which works great if you’re the owner and you’re getting it to lean your way. But if the tenant’s trying to negotiate things their way, you can just have bits and pieces that are constantly changing about. Who owns this part of the fit out and things like that.

So there’s a few more kind of hoops you’ve got to jump through every deal. And as I mentioned previously, like we give an 80 to 120 page due diligence report on the property because that’s how much things can change on a deal by deal basis. So that’s probably for me, it’s probably the amount of work that you have to do, but then that’s also the best because once it’s locked in, if it’s a long lease, you never have to forget about it again.

It’s all documented and kind of that way. That changes depending on if it’s industrial, retail, office space, for instance. They’ve all got their own pros and cons, but what about you, Andrew? What’s the worst aspect for you with commercial property? The worst aspect for me would be the harder lending criteria.

You need a larger deposit for commercial property which is a barrier to entry for a lot of people and then the other aspect that is not good is the potential prolonged vacancy. Those are the two biggest risks in commercial property for me is just prolonged vacancy and also you need higher deposits to get Yeah, okay, good answer.

All right, Luke is back again for another question. At what outgoings as a percentage of gross rent would start raising red flags? For me, outgoings are somewhat uncontrollable and if they’re too high, they can be a major draw during vacancy and a hurdle finding new tenants. This is definitely a case by case one, because it depends what you’re buying, where you’re buying, and it depends what outgoings you’re looking at as well.

If you’re talking like body corporate, that is going to be different in different locations. Like if you’re buying like, I don’t know, in a cyclone or flood territory, and they’ve got to have flood insurance, their body corporate is going to be quite high. So it’s going to be a high percentage to buy in a much simpler one.

Same thing for like, if you’re buying a retail shop in a really nicely groomed, looked after complex, they’re going to have a much higher one than a very stock standard suburban distributor shops with no gardens and big car parks and stuff like that. Generally between kind of 5 and 15 percent is where it’s at, but For me, it’s not what the outgoings are.

It’s what they represent. So it’s like, what is it actually covering? If it’s slightly higher on our body corporate weights, but they’re adding value to the property because they’re constantly got a good schedule of like updating the facades and fixing the roofs and keeping the, the driveways paved really nicely, then that’s something I want to take on board.

And again, I’m assuming Luke’s talking about body corporate with residential. It’s the same argument, but if you have free standing. You have to look after that cost anyway. If you get some issues with the driveway, for instance, you’re most likely going to have to fix it down the track. If it’s outgoings in terms of council rates, water rates.

Land tax, insurances and things like that. It’s the same concept as residential. So, it’s very similar like for like. So, it shouldn’t stop you finding new tenants because you’ll be looking at net rent. You won’t just be looking at the gross rent and working it out. When you’re finding new tenants, look at, okay, what can tenants afford and what’s going in that rate and then work off those numbers.

Whether it’s gross or net, it’s going to be case by case. Except for in a self storage facility, I don’t think the percentage of outgoings is something that I would really calculate. It’s more of what are the outgoings, uh, they, does it still cashflow? If there’s so many outgoings and it makes it not cashflow, then it’s not a good deal.

So it’s really. How much percentage of those outgoings are making the deal not cash flow? And if it does cash flow and it’s within your accepted rate of return that you’re happy with. Then a higher percentage of outgoing, it doesn’t matter if you’re happy to take a 5 percent return on that actual property, then the outgoing’s percentage compared to the gross rent doesn’t matter because you’re getting that return.

Yeah, generally, most of the outgoings, if we’re not talking body corporate, The market is going to dictate that it’s a fair across the whole market. You’re not just going to be in one little zone that pays higher council rates, for instance. So it’s only really body corporate. That’s kind of a somewhat uncontrollable for me.

A big concern is special levies. When you research a property and you do your body corporate reports. Check if any special levies are coming up because even if the body corporate’s costs on a slightly lower and there’s a 30, 000 special levy coming up next year, that’s going to hurt a lot more than if it’s a slightly higher body corporate rate.

Yep. Stay up to date with all the hints, tips, and tricks in commercial property. By following PolicyProperty on Facebook. Go to PolicyProperty, hit that follow button and never miss a beat with PolicyProperty. All right. Next one’s from Davina Poletto. How easy or difficult is it to finance a commercial property purchase by cross collateralizing your PPR?

Okay, Davina. That’s a good question. Typically, I’m not going to answer for brokers. So speak to your lender or your broker for exact answers. But general rule of thumb, cross collateralizing is never a positive. That’s to benefit the banks. So if something goes wrong with the property, they’ve got another property to go after.

So I typically wouldn’t look to cross collateralize unless you absolutely have to, and that’s where you’ve assessed the risk and you want to keep progressing your portfolio, I would try to get independent loans. So I do an equity draw from your principal place of residence and then use that to get another property.

So similar to residential. Pulling out the equity, you just have to have the serviceability to be able to do it. So if you’ve got the serviceability, you can pull out that deposit. The benefit with commercial is you’ve got more lending options than residential. So where typical lenders might say no to you buying another residential with that equity, you’ve got things like lease stock loans and low dock loans and things like that.

So it’ll give you more options that way. It’s not easy or difficult. It’s the same process with residential. It’s the broker will probably argue with me and we’ll get a broker on in future episodes. However, it’s the same concept. Pull out equity, you recirculate it into another property and then go again.

Yeah, I think it would probably be a little bit easier with the bank though. If you’re talking to your existing bank, they might be more willing to give you a loan if they’re going to keep the loan. If you’re just drawing out equity, although that can be hard or difficult depending on your circumstance.

Tell you the truth, they would prefer to keep that loan within the bank. So they’re obviously going to make that a priority rather than just giving you a line of credit that you can do whatever you want with. Yeah, I remember back in my resi years, I actually did refinance, I think five or six properties with the one lender, which is normally a no, no, however, they gave me an extra million dollars serviceability.

So at the time I was just like, yep, sweet. I mean, and I actually did cross collateralize with the property. So even though I just said, don’t do it, if you are aggressive and it’s part of your strategy and you assess the risk, it can sometimes be worthwhile. Yeah, try not to do it, but if you have to, to get the deal, then it might be the only way you can get the deal done.

So you can always refinance and move the loan later on down the line. If it’s worth or if it’s the factor of getting the deal done or not getting the deal at all, then cross collateralizing your property, um, it’s a hard word to say, you know, if you have to, you have to. If you can get away with not doing it, that’d be preferred.

Yep. And just, just a disclaimer, Andrew, not financial advice. That’s just our opinion. Obviously go speak to financial advisors, brokers, SESC risk profile before making any decisions. Yep. Definitely not financial advice. All right. The next one is from Chris, uh, Santa. I’m at the beginning of my journey, so I’m wanting to see how I can transition into commercial property.

Fantastic. This is definitely the podcast for you then. I do have a soft spot for self storage. I like this guy a lot more already. I have done the normal thing of paying down my primary residence. But now, have heaps of equity. I’m sure that it could be put to better use. How do I go forward? Steve, I’ll start with this one.

I reckon you should ring Steve Polisi and, uh, get him to help you with this, you know, at Polisi Property. What do you reckon, Steve? Nah, I’m going to give the answer. I’m not going to self promote. I’ve got to do enough of that already. Self promote, come on. I’m all over Facebook and Instagram and socials anyway.

So I don’t know. All right. So I always answer this question with clients. When you make the transition commercial, it’s going to come down to three things. First one’s what you’re trying to achieve. Over what timeframe versus what you’ve got to work with. So what I mean by what you’ve got to work with is actually in terms of borrowing capacity, because as we’ve mentioned previously, you typically need a bigger deposit for a commercial.

So if you’re starting out in the beginning journey and you don’t have an immediate need to have a passive income. If you could go to the lender and get say three 90 percent loans versus one commercial on a 70%, you’re going to have three times the portfolio. So even though it might not have the same cashflow.

If you get capital growth, you’re going to have three times more equity to then transition into commercial later. So it really depends on what you’re trying to achieve. So if you were 18 years old and you know, you’re going to work the next 10 years, I would say go leverage up to the eyeballs while you’ve got the risk free age and you can make the money back and you can stay with your parents if need be.

However, Chris, if you’re 64 you’re about to retire and you’ve almost paid off your principal place of residence. Buying a negatively geared residential doesn’t help you. So you might go a lower LVR on a commercial to have that passive income. So the way you transition is really dependent on who you are.

The main benefit of commercial is you build a passive income and about a third the time residential. Andrew will hate me for this. I wouldn’t go self storage. I know it seems really good in theory. Andrew will attest though, it is a lot of work and it is a specialized asset. So if you do go down that route, make sure you’re well educated in the space because the returns are higher, but it’s also riskier as well.

Whereas for me, I’m much more of a boring investor. I buy standard warehouses in a good location with really tight vacancy rates on a long lease with a versatile premise. And I tick all the boring boxes. Cause I know in 10 years time, I don’t have to think about it. So it’s just going to depend if you’re active or a passive investor.

I would disagree that it’s riskier. It’s definitely a different type of asset and you need to have experience understanding how it works and know that it’s a business and you need to, you know, you need to be involved in that business. Risk wise, I would actually say it’s lower risk than a single tenancy commercial warehouse.

or any kind of single tenancy commercial property just because of the multiple tenancies you have and that self storage, it’s almost inconceivable for it to ever be completely vacant. But it’s just my opinion, you know, everyone’s got their own opinion on it. I actually agree with you in terms of the property itself where what I meant by risk is you really have to understand the specialized asset class.

Obviously, if you know what you’re doing, you can buy a much, much lower risk self storage because you’ve got lots of tenants as we mentioned before. But buying something simple, like a single warehouse, it’s less involved in the business and things like that. Whereas as you know, Andrew, like you run a business, like helping people self storage, that’s why they pay you.

It’s a specialized asset that you have to have a lot of knowledge in. Yeah, that’s right. I wanted to do a podcast about this, or even just talk about it, is that like people talk about risk, like it’s exactly the same for everyone. And Risk is really something that’s personal to you. So say, you have a lot of experience running a certain type of business and you go out and take and highly leverage to get that business or buy an existing business, it’s going to be a lot less riskier to you as opposed to someone who has no idea how to run that business.

So when people talk about risk, they seem to like have it on an even playing field for everyone. And risk is really. Only really dependent on your experience managing or working that investment and asset class. Nah, spot on. One of the things I always say to clients though is, it’s all, there’s all sorts of risks doing nothing.

Like if you leave your money in the bank, inflation’s at 7. 8%. So you’re actually losing money just leaving money in the bank. So it’s a lower risk strategy for me to actually do something with your money and it doesn’t have to be property. Like yes, go buy a commercial, go buy a residential. It’s one of the lower risk kind of asset classes, but go start a side business, put some money in shares.

You will not get wealthy by doing nothing. You’ll actually get poorer. So that’s the risk in itself. It is a big risk doing nothing. I heard something the other day, which I thought was really cool. Whereas if you have a person that’s making a hundred thousand dollars a year and they want to be earning a million dollars a year, the opportunity risk of not knowing how to make a million dollars a year is costing them nine hundred thousand dollars a year.

So, that’s the opportunity risk of not knowing or having the skills to earn a million dollars a year. It’s 900, 000 to you, which I thought was a cool way of looking at it. Just a way that you can kind of get your head around trying to upskill. Yeah, spot on, mate. So, one of the other things that I, I, I heard you touch on that last question, Steve, which I thought was really interesting, was you said about leveraging up at an early stage, like getting leverage up to the eyeballs at an earlier stage in your life, and this is something that actually caught me out where we bought a principal place of residence before we had children and then having children and having one of the incomes basically going down to zero because Your wife or your spouse is looking after that child for a good one and a half potential years before they go to daycare or sorry, probably about 12 months.

So what that does is it reduces your borrowing power significantly if you wait until you have children, until you have other expenses in your life. So. If you’re trying to do this from an early age where you really have no expenses and you have no commitments and you have a good job and you have a good deposit or you have some deposit, then would probably be the time to start getting some good debt behind you because it only gets harder.

To get loans and to get debt once you have children and then you’re, you’re borrowing power reduces and this isn’t financial advice. This is just from my own personal experience because I’ve had two children now. We’ve been having kids for the last over five years now and only now is my fiance really going back to work and starting to get that income back in, but it did catch me out.

So, you know, just wanted to help people, um, watch out for that pitfall in future. Yeah, and another point to note Andrew is a principal place of residence in the bank size is actually a liability as well So I’m not telling you not to buy a house to live in But it’s not going to help your investing like you might have some equity down the track, but in terms of serviceability It’s a liability.

You’ve got a big debt within zero income So that’s the whole rent vesting argument, which we’ve kind of discussed in the past But most people think and it’s a rich dad poor dad thing. Owning a house is a liability Doesn’t mean it’s not going to make you money, but it’s a liability in terms of the now.

Yeah, who’s paying for that mortgage? It’s you, so that’s the big problem. All right, Sergio is back. He’s got another question and it’s about Tassie. So Tassie was once a top performing state for residential. This state, however, also is the state that is declining the most for resi lately. What is the current state of the retail and industrial over there with the limited population growth?

Would you consider investing there, Steve? Yes, I have bought some in Tassie. Tassie is quite regional. So even though it’s a capital city, it’s not a major capital city. And like I’ve I did a camper van trip a couple of years ago around there for just post COVID effectively, where we drove around and even Hobart, like you drive for 15 minutes and you are out of the city.

It is quite a regional area, even though it’s dropped slightly in value, the net results still quite strong for Tassie. Funnily enough, if you actually go back 30 years in the residential space and you look at prices in Hobart to prices now, it’s actually still a front runner. It actually beats Sydney and Melbourne, surprisingly, because 30 years ago, where you could buy a house for 80, 000, that same house now is 450, 000 to 550, 000.

Whereas Sydney, for instance, you have to spend 280, 000 and the average house price is 1. 1 at the moment. So percentage wise, you can still do alright. To answer your question, industrial vacancy rates are really tight, but there’s, because there’s a lack of stock. However, there’s a lot of space for them to build new industrial.

So if you are going to buy there, you need to look at what’s coming up in the region that you’re buying. Retail is the same as everywhere. It’s got to do with foot traffic, road traffic, what you’re buying. Don’t look at the macro stats from the reports that like CBRE and like JLL and Savills and stuff released because They’re talking large scale Westfields on spending and stuff like that If you’re buying a local like everyday investor type one That’s got to do with the community that you’re buying in look at the population growth Look at the foot traffic, but there’s still some opportunities there So the reason I haven’t bought as much now in the last five years as like previously is basically the yields have come down quite a lot.

It’s actually quite hard to get anything with a 6 percent in front of it down there. You’re normally buying around that kind of four and a half to 5%. So I personally think at the moment some better opportunities, but again, case by case, I’m buying a lot in the regional areas of Tassie bought like a big warehouse in Devonport for a couple mil where we’ve got a huge site on a 10 year lease.

So you can get some x factor stuff like that at good value. Good answer. All right, the next one’s from Luke Hamilton. I want to know about strategies where I only use equity. Is it possible? Definitely possible, Luke. And this is what 90 percent of investors that own multiple properties do is, you buy a property, It has some capital growth.

You refinance that property to get the deposit for the next one. And you go again and you rinse and repeat where most residential people fall over as I hit their serviceability limit. So they do it two or three times and depending on your income and the outgoings and responsibilities and kids and stuff like that, that you mentioned before, Andrew, you’ll hit a glass ceiling.

Whereas with commercial, because you’ve got better serviceability from the property on full doc loans and the option of lease stock and low doc, you can keep moving forward, but. That’s the very simple strategy. Buy, pull out equity, refinance, rinse and repeat. Where you’ll do in terms of strategy, you can do the value add to accelerate that.

So if you can fabricate an extra 20 percent in the deal, that’s 20 percent you didn’t have previously that you can get into the next property sooner. And the hardest part is buying the first, after that, you rarely start using your own money because the capital growth outweighs the amount you can save at the time.

And it does get easy until you get to serviceability issues. Then that’s where you start doing more creative things to move forward. You may even do some form of sell down. So like me personally, I sold off some of our residential to transition it into commercial because. As I got wealthier, I actually stopped caring about net wealth as much.

And it was more about passive income for me because me having three mil net wealth or six mil or 10 mil net wealth doesn’t change my lifestyle now. Whereas I’d rather beef up the passive income from 100 to 200 to 300. Cause that’s what gives me the lifestyle that I want of traveling around the world and flying business class and staying in hotels and buying camper vans and doing all that type of stuff.

So the simple strategy. Rinse and repeat, get the good growth properties and cash flow and accelerate it. So, have capital growth plus cash flow plus your savings plus the value add opportunities. You get all four of them working at the same time, you can accelerate it faster. Perfect answer, mate. Nothing more for me to add on that one.

The next one’s from Kieran Ayerson. I have a question around finance LVRs. Oh, goody. With different commercial asset classes, there are different risk appetites from banks and other financiers. That’s true. What asset types have the best LVRs, e. g. industrial warehouse? Which asset types have the worst LVRs, e.

g. brothel? Can you please give me some examples in between those two and provide an overview of what deposits might be required for certain commercial asset types? Really cool question. That’s a good one. Yeah, so good question. The banks definitely do have different risk appetites in terms of types of properties and even locations.

Some lenders will be too highly leveraged in New South Wales and they’ll give better interest rates in Queensland, for instance. So, which is a lot of people don’t know. So like going to different lenders is actually definitely worthwhile. They kind of do what I do in a way they want to basically protect their money.

They want to kind of lend money out with as low risk as possible and as good of return as possible. So they like the low risk ones like industrial that you mentioned and some suburban retail they’re up with as well, but they will look at the location. They’ll look at like what the population of the area is, what the population growth is, what the vacancy rates are.

And based on that, you’ll generally get 80 percent or 70 percent LVRs for the lower risk ones. Where that kind of reduces on the special lives. So some of the ones I’ve seen recently actually spot on brothels, petrol stations. A lot of them don’t like banks at the moment. So because they know banks are on there because no one’s going into like physical branches anymore, carwash stations, cinemas, anything with a specialized use where if the tenant leaves, they can’t fill it easily without having to go the exact same type of tenant they’re obviously going to stay away from.

So that’s where you get down. You’ll normally have to put a 50 percent deposit. If it’s a medium risk one, then you can get away with 65 percent LVRs. That’s right. So an industrial warehouse that has multiple uses, you can definitely get a higher LVR, 70, 60, even 80 percent sometimes on those types of assets, whereas a self storage facility, it’s usually, you would be expecting 50 percent LVR.

But you would be shooting to hope to get 60 or 65 percent. Same with motels, same with caravan parks. Steve is exactly right, saying that when you have a specialized asset that really only has one particular type of use, the banks don’t seem to like lending on those. As much so they hedge their risk by having a higher deposit paid.

Petrol stations are a big one as well. And I think Steve, we, a couple of years ago, I was talking to you about an asset. Um, it was a really, really good property and I think it was in Melbourne too. And then we realized that the tenant was a brothel. And we’re like, Oh, that’s why it’s a really high return.

That’s why you can get a really, really, a really good price on that property. But yeah, um, you’ve really got to be careful. What you’re buying into because people do like a lot of the times I hear from agents who are selling self storage facilities, we had a buyer, they didn’t really know anything about self storage and they said they were good for the money and then when they’ve gone to the bank, they tried to get a 90 percent loan like it was a residential house.

And the banks laughed about it out of the actual building because there’s no way. I mean, in America, you can get leverage on a self storage facility up to 90%, um, in some cases that Australia’s got a really tight lending policies compared to America. Those are really the assets all in between. So if you’re looking for a high LVR, obviously residential is going to be the highest, but their next in line, I would say, would be a traditional, you know, Warehouse that has multiple uses and also good tenants and good leases in place already.

Yeah, one of the tips and tricks you can do is if you do know you’re going to buy a certain type of asset class. You can get a sample contract from another property that’s similar and then give that to your broker or lender to run the numbers. And then they’ll definitely come back with what LVR they’d be willing to give to you.

And it’s not foolproof, but it’ll at least give you an indication of, Oh, if I do buy the self storage, this lender is offering 65 percent LVR. So when you do find one and you’re doing your negotiations, at least you’re doing it well informed. Yep, a hundred percent. All right, last question. And this is the burning question that’s really been on my mind for a long time.

It’s from Jeff Miles. How does Steve maintain his beard game? Thanks for that, Jeff. How long do we have? I can probably go on for a little while. First step with the beard game is obviously get a good barber. So you want to go at least once a month to get a beard trim. And then you’ve got to look after it as well.

So me personally, and I’m going down the rabbit hole here is at nighttime, I put beard oil in it just to keep my skin soft and supple and the hair follicles nice and moist. And then when I wake up in the morning, I give it a beard wash. So I’ve got a specific shampoo for my beard. So I’ll wash that. Then after I get out, I’ve actually bought a prop from home.

This is the game changer for me, Andrew. It’s a electric beard brush. That’s got a heater in it. So you can actually straighten your beard. And then after I’ve straightened the beard, then I’ll use a beard balm. So for moisturizing and nice smelling, and then you can kind of groom it to how you want and you are done for the rest of the day.

So. Yep, I waste way too much time on my beard. Dude, it’s like a part time job keeping care of that thing. Oh my gosh. That’s just like next level. The worst part is I can’t even shave my beard anymore because I’m known as like the bearded buyers agent. Like everyone’s like I have the beard. So I’m stuck with it now.

Yeah, dude. I mean, I wanted to do though, you know, you see the Instagram where the dads scare their child, they shave the beard and then release like the towel from their face and the kids just lose it. Yeah. I mean, even when I, I never, ever wet shave with a razor, I always just use clippers on like number one or number two.

Um, but I just look so weird without a beard. Um, but my God, like. I just, I could not stand having that thing on my face. I get sweaty and itchy. Oh, mate, I’ve tried my best and I’ve had a beard probably about half the size of yours. I only grew it in the winter. It was my winter beard, but I’m a reasonably hairy guy myself.

So I’ve always tried to get rid of the hair, not incentivize it or try and make it grow more on my face. Especially so, I’m glad I, um, I’m glad we’ve, uh, got down to that, the root of that question because it was burning on my mind, but geez, the maintenance, it’s just the maintenance on that thing. What an episode.

We’ve started on Poonamis and ended on beard care. Can it get any worse, Andrew? What will we do next? That’s the question. All right. Well, that was the last. Question. Uh, there’s one more question to Steve. Where can the listeners go to find out more about you, mate, and your services? All right. So to check out the Bearded Buyers Agent, just go on any of the socials, so Facebook, Instagram, TikTok, LinkedIn, websites, www.

policeyproperty. com or email me directly at steveatpoliceyproperty. com. But yeah, just type in Policey Property or Steve Policey on Google and I’ll pop up somewhere. You better go grab that URL or handle the Bearded Buyers Agent. I’m sure that people are going to go snatch that now. And don’t forget to go and grab a free copy of both of Steve’s books best book out there on commercial property.

No doubt Yep. Sounds good guys. Just go to the website, Polisiproperty. com. Use the code word podcast at checkout and you get it for free. Sounds like a really good deal. All right. This has been Andrew Bean and Steve Polisi on the Commercial Property Investing Explained Series. Thanks guys. Thanks guys.

Thanks for listening to the Commercial Property Investing Explained Series. This show has been produced by the Commercial Property Show Network.

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