EPISODE 17: Why It Might Be The Wrong Fit For You - Property Inc

[ 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 Investing Explained series with Steve Polisi. I’m your host, Andrew Bean, and I’m here with author, founder, and buyer’s agency, Steve Polisi. How are you, mate? I’m really good, man. Just being fatherhood, traveling the world, working, coming back to Australia in a month. So yeah, just it’s all happening at the moment.

So this might be the last one for a couple of weeks, I think. Well, we have a big announcement today, don’t we, mate? We do. Probably, I don’t know, it’s bigger for me, I’d say, than you.

Well, that announcement is that I’m actually going to be joining Steve at Polisi Property as head of client strategy next month. So super excited about that. I can finally now offer a buyer’s agency service to all the listeners instead of just consulting for them on their deals. So I’m super pumped about it.

No, everyone is, I’m, I’m ecstatic to have you as part of the team mate and even social media when we did the post the other day, I think we had like 18, 000 likes. Like it was a very, it was a very well performing post. So obviously the listeners and our clients obviously happy to have you on board, but if anyone wants to have a strategy chat with me or Andrew, uh, give us out andrewatpoliceyproperty.

com shoot him an email. Awesome guys. So ironically, we’re actually doing an episode today on reasons why you shouldn’t buy a commercial property and now I can finally help you buy a commercial property. So go figure. Today we’re, we’re talking about the reasons why you shouldn’t buy a commercial property.

It is, but I think the reason this podcast resonates with, as opposed to the people are like other buyers agents and other podcasts and things like that is we are measured. We’re not, I’m not selling that commercial is the best thing in the world. There are heaps of advantages with it, but there’s also negatives and then commercial is not right for everyone.

And we’ve mentioned it on like the first 10 podcast episodes, especially. So let’s, we’ll break it down to when it’s not right for you. I love property in general because you get to leverage. It’s a fun game to play to make big dollars, but there are risks with commercial and there’s, there’s times where commercial is not right for you.

Yeah, and I think at the end of the day, Steve and I are just interested in helping you create wealth. It doesn’t really matter if you’re in commercial, resi, or even development. Now Steve’s got his own little company there as well, a development company. Yeah, and like I said to you before this podcast is, a lot of the times I actually recommend clients go to residential over commercial.

They’ll come to me as a first time investor thinking, Oh, I’ve heard everything you’ve said on the podcast, Steve, I want commercial. There are reasons why residential makes more sense, which we’ll break down today in the podcast. Yeah, 100%. So mate, do you want to just jump into number one? What are some of the reasons why commercial property is the wrong choice for you?

Reason number one is you are early on in your portfolio. What I mean by that is the whole advantage of property investing is leverage. You get to play with someone else’s funds. And by 8 to 10 times kind of thing and make big dollars, not sugarcoated, Andrew, you can lose big dollars in commercial and residential investing because you’re playing with big dollars so you can also lose.

So there’s a risk in itself. But when you’re starting out, especially if you’ve got time on your side and you don’t have a short term passive income goal. Residential can make more sense and that the main reason for that is you get more leverage. Like let’s just say I had a young 21 year old client come to me and they say, I want to grow a commercial portfolio and have a passive income.

They’ve probably got a bigger borrowing capacity with residential because they could go out and buy three times residential properties on 90 percent loans. They will pay lenders mortgage insurance, but three times residential properties on 90 percent loans. Versus only one or two commercial on like a 70 percent or 80 percent loan to value ratio.

So they’ve got more leverage. So if they’ve got three times the portfolio and we get the exact same capital growth, we make three times as much. So we’re going to have three times more equity, which we can then transfer into commercial for a bigger asset or a better asset. So. Maximizing leveraging, especially in the accumulation phase, is paramount.

That’s the advantage of property, and that’s when it might not be right for you, because you’re starting out, use leverage to get those funds and that kind of wealth, and then you can go into commercial afterwards. Yeah, and I do like the idea of taking bigger risks when you have less responsibilities, like, e.

g. like kids, mortgages already on other properties. So, if you’re younger, you realistically could lose some money, like, you realistically could lose it, but it won’t kill your life. I do like the idea of, while you have less responsibilities, You know, getting as much leveraging as you can. So commercial property might not be the best for you.

And let’s face it, commercial property has a big barrier to entry because of the higher deposits you need. No one can sugarcoat that. It’s just how it is. Yeah, you can buy some lower price commercials, so you can go out and buy like 150 grand warehouse, but that generally isn’t going to kind of scale your portfolio.

As opposed to doing like a 30 percent deposit on 150 grand warehouse, I would rather use that 50k deposit and go buy a 450, 000 residential property on like a 90, 95 percent loan. So it gives you the option there, but you raised a good point. Your risk profile, which is actually one of the points. I think that’s number 0.

4 we go through for reasons not to buy. So we’ll, we’ll touch on that a little bit later. All right, mate. So what’s the next reason that you’ve, uh, thought of and why you shouldn’t buy commercial property? Okay, so it’s a flowing on further early in your portfolio. The second reason is you do not have the required capital to suit your borrowing capacities.

So that’s exactly kind of what you said, like you generally going to need about 100, 000 as an absolute minimum to get into commercial. Like that’s a 280 grand kind of warehouse, for instance, on a 70 percent loan. So you need quite a lot of funds. So you want to maximizing that leveraging. And that’s the thing.

Like a lot of people, you might have the serviceability, but you don’t have the capital to get into it. So that’s what holds people up a lot of times. It’s they’re going to have a different borrowing capacity for the capital that they have and the serviceability. So if you don’t have the capital, it might not make sense, even if commercial is the right answer for your passive income goals to get into it.

And I reckon also when you’re younger or when you’re just starting out, it’s a lot easier to understand and comprehend how residential investing works. Instead of going like from the start, you’re just starting out and you go right into commercial. Unless you’ve been studying it for a very, very long time or you’ve had a really good educator behind you, you know, if you make those mistakes, like, you know how people like you always hear, Oh, we bought like this terrible residential house, but then the market corrects those wrongs.

In commercial property, The market doesn’t always correct wrongs. Sometimes they’re just wrongs forever. So I do like the idea of more people being able to jump into Resi as well. And I probably interviewed more, uh, commercial property investors than the most people. And a very, very common way that they’ve got into commercial property is they started with Resi.

They’ve built up a base. And then they’ve turned around and gone to commercial. Well, they used equity to go to commercial, not really at the end, but not very far into their journey either. So say like 10 years into their journey, cause they wanted now to retire and have a better passive income. Yeah, spot on.

So one of the points I want to actually talk about though is I sort of touched on it there, but like serviceability can sometimes dictate your strategy. So, so what I mean by that is if you’ve got 1. 5 mil worth of borrowing capacity for residential and only 700k for commercial because of the deposits, that might be the direction you go, even if it’s not best thing quotation marks your strategy.

However, it also works the other way with commercial. I’ve had a client that we bought a 3 million commercial for who had zero capacity for residential. And it was because he just didn’t have the full doc capacity, but he had the money sitting there. He had a spare 1. 5 mil and an offset account. So we could get a lease stock loan, even if he wanted to buy residential, he was kind of pushed into commercial if he wanted to keep pushing his portfolio.

And that’s also the advantage of commercial is you can actually push your portfolio further when times are tough with serviceability, but we’re talking about the times it doesn’t make sense. It’s normally when it’s the other way around, you’ve got the server serviceability. You don’t have the capital to be able to get into the properties though.

Yeah, I remember when I was first learning about, um, commercial property and I was reading or I was finding out that you could get a property on a lease stock loan and I was like, what, so I could like, go and like, put an offer on like a 5 million property and there’s no way I could service it, but they’ll just like, they’ll just service it on the actual lease.

That’s crazy. Obviously, that’s not literally how it just works, but. In theory, it is, but you do need to have financial backing behind you and have other assets and be a good and secure person to lend to, but that idea is like, wow, I could almost just get a 5 million property without any kind of financial backing.

So similar to what I was actually saying, I personally had the same thing. So when I left engineering and became a buyer’s agent, I obviously didn’t go into a high paid buyer’s agency straight away. Like I think it was on about 50 grand a year with the commission. And in the first three months is when I wanted to buy another property, but residential wouldn’t touch me.

They want to see kind of 12 months of, cause it’s a new industry and they obviously want to be 12 months worth of pay. And then all of a sudden, I could actually buy, I think it was about 600K commercial with the leased stock. And I was just like, why am I exploring this? And that, that’s when I, I kind of got forced to buy my first commercial because I wanted to keep progressing my portfolio.

Yeah. And I think leased stocks have tightened up a bit more now as well. It’s not as easy as it used to be. What do you reckon about that? The main reason for that is basically because interest rates are higher. The whole premise of a lease stock is because the rent will service the loan. So back when I bought my first one, I think it was like four and a half or 5 percent interest rate.

Me buying a 7. 2 percent net yielding commercial. It looked after itself. It washed its own face. So that’s the whole premise of the lease stock loan is you get it based on the strength of the lease because it washes its own face. Now, the main issue is interest rates are quite high for lease stock, like we’re talking six to seven and a half percent on average.

So unless you’re buying a six to seven and a half percent average plus net yield, you can’t get the lease stock because it’s not servicing itself. That’s why we’re seeing less and less of them at the moment. Yeah, I mean, but this is even before interest rates started going up, I reckon, like, it’s just not as, it’s not as easy, I mean, it’s never easy to get finance on a commercial property, but it was, you know, it’s not as easy to get lease stocks as it once was, and I’m talking like seven years ago or something like that.

I haven’t really felt that, but I’m only seeing the people that come to me with finance that can kind of go, we haven’t really struggled. And I know like when we do our due diligence, the properties are stacking up. We’ll get a broker, probably the next podcast episode. And we’ll actually break it down a little bit.

And maybe there are a few lenders less that are doing it at the moment. Yeah, okay. 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. Awesome. So mate, what’s the next point? All right. So the next reason why you shouldn’t buy commercial is it does not suit your goals. What I mean by that is what you’re trying to achieve in investing is paramount.

Like that’s why you’re investing. You’re investing because you want to reach a certain goal. Everyone’s going to have is obviously a different kind of like goal. So like if you, you come to me as a young client, a 20 year old client, and you say you want a hundred K passive income. The goal to get there is to build a portfolio first.

So commercial is holding that back because of the reasons we mentioned before, number one and number two. However, you might actually have really good capacity, but if it doesn’t reach your goals, there’s no point in doing it. So the example I normally use is say you’re a 60 year old client and you’re looking to retire in five years time.

You might have 3 million worth of capacity for residential, but only a million dollars capacity for commercial. But does buying a negatively geared residential property get you to a passive income in five years time so you can retire? No, like it’s not going to help at all. It’s actually going to be the opposite.

It’s going to be a bit of a hindrance. So commercial is the right answer then because it gives you that instant passive income that we can retire on. So that’s what I mean by it’s got to suit your goal, like what you’re trying to achieve. Over what time frame and then the other piece of the puzzle is what you’ve got to work with in finance, which we touched on on point one and two.

So marrying up that with what you’re actually trying to achieve is really important. Yeah, and I also thought that buying a commercial property usually so you want a passive income. So I reckon that some people that may be looking at potentially buying a property Especially like a motel caravan park even self storage facility.

They have to realize that if they want a passive income then they’re actually just buying a job because those types of assets require work. So I guess, obviously, does not suit your goals. That’s part of do not suit your goals. But I was just thinking like, there are a lot of commercial assets that actually are hard work.

They’re higher returns, higher business returns in a real estate asset. But, and this happens in business all the time as well. You know, you see those mobile coffee shop Guys and stuff, they buy this little franchise, but they’ve really just bought themselves a job that’s probably returning to them about 40 or 60K a year because they thought they were getting a bit more flexibility and lifestyle, but it’s really just a job.

Yeah, especially some types of commercials. And I’m, I’m weary about mentioning this because I know you’re going to rub it on for about 20 minutes, but like self, self storage, you will make a much better return, but there’s a time investment into it as well. So it’s that kind of return on investment there, whereas there are the lower risk kind of lower input commercials you can buy.

Yeah, that was one I didn’t mention. I didn’t leave it out. It’s definitely, definitely a job. I was doing it today. But, you know, the way that you can run the business, and I was fully aware of that. I mean, I’m happy with that. I like doing it. So, yeah. You’re, you’re doing it because, like the point we mentioned about it suiting your goals.

It gets you to your goal quicker, and that’s why you’re doing it. You might not have to do it if you extended your time frame by two. You could actually take on some lower intensive, more passive investments, but you don’t, you’ve got your eyes on a prize over a certain timeframe and that’s how you were going to get there.

Yeah, that’s right. So like, say in 10 years, I have 100 million of self storage assets under management, and then I do not want to be managing the managers that are managing the self storage facilities. Then it would be a good idea to transition those assets into like a more larger industrial asset where it’s literally just a passive income, five year leases, monthly income coming in day dot all the time.

But I guess, yeah, it’s exactly right. It’s the, I want to create value in the asset. For me, that type of asset, like self storage is the best type of asset to create huge wealth quickly. And you, you actually touched on a really good point is your goal is you actually want to have a huge kind of portfolio like that a hundred million dollar ones.

Me for instance, and we’ve had this discussion many times privately, I’m a bit different. Like I’m a bit simpler. Like I just want to keep traveling the world. So I don’t need a huge portfolio in that. Even for me, I’ve actually got a bigger capacity for commercial than I do residential at the moment.

However, my next purchase, I’m actually going to buy a family home. And pay that off in five years time, because just for my mental wellbeing, I like the idea that I’ve got my passive income from commercial. I’ve got a house I’ve paid off. I can never be stressed financially after that. And then I probably won’t keep buying lots of commercials.

I might buy one or two here and there, and I’m going to do some developments just to keep interest going. But I don’t necessarily have the goal of having a hundred million, 200 million portfolio. I don’t get my enjoyment from that. I’m not, not criticizing you because like most of my clients are actually the same as you, Andrew, which is why you resonate really well with them.

That’s where you match up your goal. You don’t necessarily have to use your borrowing capacity and you don’t necessarily have to buy a property because you can. A hundred percent. I mean, each to their own. I mean, mate, no one’s ever going to, uh, say, Oh, you shouldn’t buy this. You shouldn’t buy that. Or you should do this or should do that.

It’s your own personal preferences. It’s just that for me, my goal of why I was learning about commercial property and why I started this podcast so I could learn about commercial property and talk to industry professionals and things like that was to build a monster ginormous portfolio. Cause I always thought when I was a young kid, I was like being a landlord, you just like.

Do nothing and collect rent. That’d be awesome. I was like, probably like 15. I was like, that’d be cool. But I never even thought or did anything else with it. Cause I was, I was actually supposed to be a professional baseball player. So that was always my goal. And I think I really liked, or I wanted to be a professional baseball player.

Because of the money in it as well. So the money was actually driving me. And then when my baseball career was over, because I didn’t get selected and get signed where I wanted to go, unfortunately, cause purely because of not being able to throw fast enough by a couple of miles. I didn’t find I loved the sport as much as I thought I did.

I loved where it could actually take me. And I think that’s why I love commercial property and investing is because it’s something that you can really dig your teeth into and you can be extremely wealthy and successful from it. And you can take it where you want as well. You can be as aggressive or non aggressive as you want with it.

Anecdotally, like for me as well, like I was very similar to every other buyer’s agent, a young investor who wanted the fancy cars and be stupidly wealthy for me personally, I started caring less about money, the more I earned, and I know that’s very easy to say from a successful position, but. When I made my first, like my first residential, I made my first like 80, 000.

You’re like, Oh wow, this is awesome. Let’s try to get a hundred thousand dollars. And then the next goal is 200, 000. Then the next goal is 500, 000. Then it’s a mil, then it’s two mil, then it’s 5 mil. And you keep going up exponentially. I still have not been as excited as I was with that first bit of money that I earned.

Like the enjoyment level went down. So. I stopped caring as much about the actual money and more looked for the enjoyment of actually doing it, which is kind of what you’re saying about sinking your teeth into and actually having some ownership of something. Yeah, it’s awesome. Alright mate, so what’s the next point on the list?

So you, you touched on it kind of earlier on in the podcast and the point is it does not suit your risk profile. One of the ones we’ve mentioned so many times on every single episode is the risks of commercial. So like, you’d have to know what you’re doing, you have to be well researched, you’ve got bigger deposits in the game, they’re susceptible if you don’t know what you’re doing to longer vacancy periods and things like that.

So it has to make sense with you personally, even if you’ve got the capacity. And what I mean by that is… I’ll touch on, like I was mentioning before about how I got enjoyment when I was making money when I was younger. I grafted and took on way more risk than I do now because I knew I had bank of mum and dad to fall back on.

And by that I mean like my parents weren’t wealthy, but like a couple of times I had to borrow 1, 500, 2, 000 off them because like an air conditioner blew up or something like that and I didn’t have the funds. Like I was living paycheck to paycheck, but worst case scenario in my life. Was groveling back to mom and dad going to my old bedroom that I grew up in and sleeping there and I’ll be fed and looked after.

So that was a very, very like high risk kind of point in my life. Now that I’ve got a daughter and I’ve got like liabilities and mortgages and stuff, like I’m not doing that. I am making sure I’ve got adequate buffers in place of six to 12 months worth of vacancies and things like that. So depending on who you are and what your risk profile is.

You might be a single parent with three kids. You should not be buying commercial and spending all your money if you don’t have a buffer in place. So they will have a bigger buffer than say a young, aggressive investor. And that’s kind of what I mean about it does not suit your risk profile. That’s interesting that you say that now, because if you remember correctly, before you entered the UK, we were supposed to do this, the Buyers Agency, together.

You know, you asked me to come and join you in the Buyers Agency, and I was really wanting to do it then, but I had kids then, and it wasn’t what it was today. So, it was like… My risk profile to jump into a, a relatively new venture as almost like a startup, but you obviously, you had a lot of skin in the game already, you know, working for other buyers agency and knowing what, you know, but obviously it wasn’t the buyer’s agency and the deal machine that it is today.

So it’s like, it’s interesting, like now that you’ve got the perspective as well as being a parent, it’s like, Oh, should I, I really got to make sure that I can pay my mortgages. I can feed my kids. And I think I had one on the way as well, back then as well. I had, yeah, Sadie, Sadie was about to be born, I think in a couple of months.

So I was like, I don’t know if it’s the best timing for that, but now definitely, uh, ready to jump. Well, you’re right though, it would have been irresponsible for you to join a company that had zero income. Like you would have went from your salary, paying the mortgage, not having to stress in a very stable job.

And that’s actually a point worth noting as well. Your type of employment affects your risk profile. If you’ve got a government job, you’re basically, unless you do something illegal, you’re never going to be fired. Like that is a very stable kind of one. Whereas someone who might be, I don’t know, their commission based roles and it’s up and down, that’s a higher risk.

Or if you’re in the industry, like. Um, I’ve got a lot of professional athletes on my books, they’re completely different. They can blow out a knee and their income can go to zero very quickly. So everyone’s got a different risk profile, but like you said, you said at the time, you just like, look, I can’t leave my salary job.

But the good thing now, good thing for me and good thing for our clients is now that we’ve got an established business and you’re getting paid a salary and you can kind of basically risk mitigate that for yourself, it’s going to really benefit us. Oh, a hundred percent. What’s the next one on the list?

Alright, so the next one is, you do not understand commercial property well. It seems obvious, but with residential, you can get away with not knowing that much. As long as you buy to some fundamentals, like there’s good population growth, the vacancy rates are tight, the properties are short days on market, it’s a good owner occupier appealed market, not in a flood zone or housing commission or something like that.

As long as you tick those little simple boxes. Long term, you’re going to be okay. Like in the last 30 years, residential is quadrupled in value in every capital city. You can weather storms with that commercial. There are so many moving parts, which we’ve touched on, like in the due diligence episodes, there’s lease review, contract review, tenant interviews, foot and road traffic analysis.

Vacancy studies, occupancy studies, credit history checks on the tenants. You check rental ledgers, cross check all the outgoings, check leases are registered, check unapproved structures. Like there is so many moving parts. So if you don’t know what you’re doing, don’t touch it. You might get lucky, but you might burn yourself massively.

And it’s, it’s not the same risk as residential where cool. You’ll get a tenant. You just got to pay the difference in mortgage, not having a tenant with an asset that might be worth less. So you go out and buy a million dollar property. Lose a tenant and without a tenant, it’s only worth 900, 000. You’ve lost 100, 000 and you have to be able to handle a million dollar properties mortgage with zero income.

That’s where you need to understand it inside and out. It’s funny, like you can rattle off all the things that you need to be checking and then you’ll talk to someone who owns a commercial property and they bought it years ago and like, I didn’t do any of that. I’m like, Oh, okay. So like, have you had any vacancy?

Like, yeah, I’ve had super long vacancies. I’m like, okay, well, maybe that would have changed the asset that you chose or like, it’s just like, you don’t know what you don’t know. So you didn’t know you should be checking these things to mitigate risk for buying a property that had prolonged vacancy or wasn’t a type of property that that tenant or your potential tenants wanted to be in.

It’s like, you just, you just don’t know what you don’t know. So education is the best things you can ever invest in because you can lose your house. You can lose your car, you can even lose your wife, but no one can take the knowledge that you have from you from that education course that you’ve learned, like, you know how they say, like, say Jeff Bezos or Elon Musk, if they lost everything today, then in six months, they probably have it all back and some, because all the lessons they’ve learned from being able to build billion dollar companies, it’s so valuable education and understanding how things work.

And the more you know about something, it mitigates your risk. So the more, you know, the less riskier it is for you. Yeah. I like, I’ll give, I’ll give people 10 years ago, a bit of a path because there was stuff, all information out there on commercial, like there was nothing like that’s the whole reason why I wrote my book was one was like, how is there not one book on the market, which breaks down all the ins and outs of commercial.

Now, there’s no excuse. There is multiple books on the market, multiple buyers agents, multiple people doing podcasts on commercial. Like there is enough articles and data on the web that you can start going through and crossing the T’s, dotting the I’s and learning commercial. I think the market saved a lot of people, especially in the industrial class, whereas vacancy rates in the last, last seven years have come down from like five, 7 percent down to like 0.

2%. So they got saved. But then a lot of people get burnt in retail and office space, because that one’s all about foot traffic, road traffic, understand the economy, how work’s going COVID obviously affected those asset classes dramatically as well. So. Yeah, I know. And it’s like, right now it’s the information age.

So you actually have no like reason to not understand any kind of topic because the information is so readily available. Side note, when I was younger, a lot younger in high school, I thought breakdancing was cool, right? So there wasn’t YouTube. There wasn’t any way that sounds ridiculous, but I wanted to be a break dancer, um, which is so stupid.

But my best friend, he was into breakdancing, so we used to do it together, but you couldn’t find like information how to actually do any kind of moves. So I’d go to the video store and I’d find VHSs that had some kind of breakdancing movement in it. And I’d put it on slow mo on your tape player to try and figure out how to do the move, like the windmill or like something like that.

But it’s like… Ridiculous, like, to think, like, now if you wanted to do, say, a windmill or a headspin, you just go, how to do a windmill or a headspin, and you do it on YouTube, and YouTube’s actually a search engine, it’s the second largest search engine, apart from Google, and there’d be so many videos now, it’s just like, information is so readily available, it’s so awesome.

But people also probably don’t know if you haven’t been doing or thinking about or learning about commercial property for a very, very long time, industrial used to be the worst asset. It used to be a 10 cap, an eight cap, a nine cap. Like it used to be the bottom of the totem pole as in like office was the best and then retail was also up there as well, like industrial and also self storage was like junkyard.

It was not asset that it is today. And it’s just funny how things change. So just, that was just all more on the point of giving people a pass who bought 10 years ago, probably more like 15, 20 years ago, realistically. But if, if you bought that like that long ago, gee, you would have done well. God, it would have changed like the, the, the value.

Yeah, but even like when I started, like probably what, seven, eight years ago, I remember most people that had knowledge were telling me to buy office space. They’re like office space. Steve is where we are struggling to find an office space yet. And I was just like, why am I buying that? Like, I don’t like apartments.

Why am I buying the commercial equivalent of that? So I was not lucky because I made an educated guess, but I, I’ve pretty much never bought office space unless it’s got a bit of X factor about it, like a medical specialist suite or something like that, because you don’t have scarcity. You don’t own any land.

You own a bit of concrete in the sky. Whereas industrial, you get the fundamentals of investing, which is land. They’re not building any more of it. There’s been wars for thousands of years over it. If you’ve got that demand there. Because it was inconceivable back then that people wouldn’t want to be going to an office to make money, like that’s how business is operated.

And it was just not in anyone’s mind that, oh, we want to work from home, we want to have a lifestyle, you know. These millennials, they want to live in the beach and have their, their cake and eat it too, you know, and get the big salaries of the big cities and live on the best places to live that have the cheapest real estate and have the best lifestyle.

It’s just inconceivable, but it’s so cool how Things change and I think that’s why I really like property is that it has so many ebbs and flows depending on all these other circumstances, like we’ve gone through really low interest rates, really high interest rates. We’ve had the credit squeeze, we’ve had COVID, all of these things make all of these different storylines and like ways to make money and ways to figure out how to take advantage of something and it’s always changing.

And technology is the main drive found that’s why I like office space was needed 20 years ago because you have to turn up and sit there with the colleagues, even prior to that, you were literally going there, typing with typewriters and handwriting notes and stuff like that. But now that we kind of know.

Technology means you can work from anywhere. And the only time you have to be in person is for physical, actual products. That’s going to change it as well. But that’s also why I dislike buying versatile assets where you can chop and change the use of it. An office space is not a versatile asset. A retail, a little bit versatile.

You can kind of make that into multiple different things. Industrial it can actually be an office space like, and most of them have a percentage of office space. Even you can turn it into shop front. So I’ve seen industrial properties where you open the roller door and it’s a shop. It’s an industrial retail shop and you can go in there.

So that has a level of versatility as well. Mate, I, you know what we’ve inadvertently done, we’ve turned back to why commercial property and investing in real estate is awesome. This is supposed to be a show about why you shouldn’t buy it. And unknowing to us, we’ve just gone back to why it’s the best asset out there.

No, but we’re also in turn pointing out the risks where at the time of knowledge, buying office space was a really low risk asset. It was tighter vacancy rates than most industrial. So with the data you would have collected at the time, you would have been like, this is foolproof. Look at the vacancy rates at two, 3 percent getting this good quality asset on a 8, 9 percent net yield.

However, that has not turned out as you expected. And that’s why all those other points we just discussed about risk profile and things like that are still important because you need to be able to weather the bad times as well. Also, why some people like we don’t have an aggressive strategy where we’re going to keep accumulating and keep refinancing a lot of my like, especially older investors, there is a definite pay down strategy.

It’s a, let’s reduce this LVR as much as we can in case there are some bad times ahead coming, which there might be. I’m not going to pretend I’m an economist. There could be a recession coming in the next 10 years in Australia. I don’t know. It’s not my forte. I understand property. I don’t understand the economy as much, but you need to be prepared for the worst case scenarios.

Yeah, well, no one knows that. They say they can, you know, pick it, but no one can really pick what’s going to be happening five or ten years from now. You just don’t. Like, anyone that says they do, you know, maybe you should run a mile from. But yeah, it’s really interesting. The funny one you’ll see when you do some strategy calls with people, Andrew, is they’ll dictate, they’ll say what interest rates are going to do.

They’re like, well, they’re obviously going to go up one point and then they’re going to come down next year. And I’m just like, how do you know that you’re a mechanic? The guys at the bank with actuarial degrees, they can’t even pick it. So why do you think you’re smarter than all of them? Yeah, I get the same with clients that I have for my, um, consultancy business.

It’s now, it’s going to be merging into the buyer’s agency piece. But yeah, it’s interesting how people, like, think they have a handle on things, but realistically they just don’t know. I mean, it’d be really interesting if we could just go forward in time 10, 20 years and see the asset that is the most popular asset at that time, where the cycle has gone.

Will industrial ever fall from grace? Who knows, it doesn’t look like it would, but you could say the same thing about office as you said. Like, it just didn’t look like it could ever fall from grace to being the darling asset. Interesting times ahead. Mark, market shift as well, it might make more logistical sense to not have any warehouses in city because we get some form of transport or method of getting there which is really efficient and then all of a sudden the regional areas will actually skyrocket where at the moment they’re higher risk.

The vacancy periods in a lot of regional areas are more than the capital cities that might completely shift. The capital cities might be high risk because businesses will go, why am I paying a premium when it’s much cheaper to be out in a regional area and I can get the same product to the same time.

So that might shift as well. But like I’ve said many times, like industrial, you still own land. You’ve got something you can do. So as long as there’s population growth and there’s a need to be in that area, you’ve got some use. You could knock it down. If that does become the case, council might change the zoning and might make it residential.

And then you build some cool industrial retail flats, which you’ve seen a lot of areas. There’s some cool areas of like Melbourne and Adelaide where like you can buy a flat that’s in an industrial shed, which is really cool. My mom lives in a warehouse. That is not a joke. Oh, cool. My mom lives in a warehouse.

Yeah. So they sold their house in the Northern beaches, her partner and, and her, and then they bought up in Wollongong and they converted, uh, off the plan warehouse. Into a, a residential style warehouse because her partner is really interested in cars. He’s always tinkering and working. He’s been a mechanic on airplanes and stuff like that.

So he uses the warehouse to store his cars and has big pallet racking in the warehouse, but then they also have an upstairs loft where the residential piece is there. And I believe that where they are, like 70 percent of the residents there are actually doing the same thing. And I don’t know if it’s supposed to be like that.

Oh, okay. I actually stayed in an Airbnb in Adelaide, which was a converted warehouse and it was really cool. Like I just loved, like it was clean, but I had that cool, like rustic kind of like feel like, you know, in the American movies when they have the penthouse and they’ve got like the big beams and stuff.

And it’s called that kind of, it was kind of like that. So like. I thought it was really cool. It’s big open space. Yeah. I think there’s some good opportunities as well. Same thing for value add. Like you can always might make more sense to turn a commercial property into a residential and vice versa, buying residential and developing commercial, which is the development part of the business is doing now, but this is versatility.

And that’s what I, the word I always use by something that’s versatile. So you can weather the storms in 10, 20, 30 years. Yeah, I think it’s really popular in Northern Beaches actually, where people live in a warehouse or an industrial type unit and that’s purely also because the property around it is so expensive, the residential property, but they could buy this warehouse for half of the price and then also live in it, but they’re doing it illegally, you know, they’re not supposed to be doing that.

Yeah. There are some kind of like, even the Northern, I’ll use Northern Beaches as an example. So like, even like Brookvale, which is on the Northern Beaches, warehouses aren’t the same necessarily. It’s not dirty industrial like it was, there’s some really cool cafes and like a brewery that’s really cool there as well.

Like it’s really gentrifying. It’s not the same like fabricators and panel beaters. There’s some cool, clean, upper class type tenants going in, which will further bring kind of like population growth to the area. Alright mate, we better get back to the topic, what is the last and final topic that we have on why commercial property might not be the right idea for you?

All right. So like I actually was done at five, I had five reasons why you shouldn’t buy a commercial and you actually brought up before the call, you said, what about this, Steve? You don’t understand the sector you’re about to invest in. IE you might’ve invested in like an industrial, but you’re going to buy retail next.

And I was just like, that’s actually a really good point. We need to discuss that because even though 0. 5 was, you don’t understand commercial well, you need to understand the actual asset class type as well. They’re all got idiosyncrasies as well. Retail is completely different to industrial. Industrial, you can just look at the numbers and make a very informed, educated guess.

Retail has to do with like foot traffic and road traffic and the buzz in their complex and what future developments are going on. If they’re building apartment blocks, are they building competing retails? There’s a lot more kind of moving parts per time that and a lot more risk as well, really sticky tenants.

If you get the right tenant in retail, they are locked into that location for the life of the business, but way more moving parts. So that was actually your point entry, which I actually thought we had to add to the list. Yeah. A hundred percent. I mean, people actually gravitate is say you’re a residential investor.

Usually the first thing people gravitate to is retail because they’ve had the most experience with it. They’ve been into a shop. They know what it should look like. They know these kind of things. Obviously, they don’t know all the tricks and things and reports and things you should be finding and doing before you buy the property, but taking those retail skill sets and overlaying that on an industrial asset.

It won’t work if there’s just different things, different reasons why that business is there. And that’s just a really simple example of like retail to industrial. But what if you’re going retail to a caravan park or retail to a self storage facility? That’s the thing is like residential is residential.

So if you understand how I had to invest in a house, that’s pretty much it. Whereas you can understand really well how to invest in an industrial asset, but it’s just. Sector by sector by sector, they’re different things, different drivers, different ways to add value, different things those businesses are looking for as well.

You touched on a good point. People understand residential because unless you’re homeless, you’ve lived in a house or a property. So you get how like the rent works or how mortgages work and how it all kind of works. And you mentioned retail. People get a preconceived notion with retail as well because they’ll, they’ll go, well, my corner shop went vacant and it’s been vacant for two years.

Cool. Now you’re applying, you’re tarnishing the brush of commercial for all of Australia because your corner shop went vacant. And I even found that like most of my clients, especially the business owners, if they’ve got a business that operates out of a warehouse, they see the value in that and they want to buy another industrial property.

My clients that have like a retail business, they want to buy a retail because they feel they understand that. They don’t know the other sectors. But most clients will generally kind of understand, well, they’ll think they understand retail more because they’ve walked into a retail shop. They’re like, I know how this works.

It’s an exchange of goods and services. I pay money and I get a goods and service, but they don’t really understand industrial as much. However, education is starting to change. People are looking now and going, I understand that industrial is the lowest risk. So understanding the idiosyncrasies with the types of assets is really important.

You touched on specialized assets as well. Caravan parks, petrol stations, car wash stations, banks, stuff like that. They’re all, you need to understand inside and out how they operate and why they work, what the risks are with them. Like a petrol station, for instance. You need to understand, okay, how is that shifting to electric cars?

What’s the land contamination issues? How did the planning permissions from council give grants for where petrol stations can be? Can another one open up around the corner and completely drain your business? And all of a sudden you’re going to have a very expensive petrol station with no people coming through it and it closes down.

So. You’ve got to understand the asset type really, really well before you jump into your next property. Yeah. I mean, I know a guy that solely consults people on how to invest in petrol stations. That’s how specific it is. So like you mentioned most of the stuff, but it’s not just that it’s like the branding.

How does, is the, the oil that you’re actually going to be pumping, what percentage of that, what contract, there’s a contract between say like Shell or whoever it is that’s the branding on the petrol station because the petrol station brand probably doesn’t own the actual asset. It could be someone else and then they’re leasing it to them and there’s like a branding deal.

It is very, very complicated and especially it’s complicated if you ever want to change that site back to something else other than a petrol station, the contamination can be ridiculous. I mean, sometimes they just bury the tanks under the ground or leave them there and don’t ever touch them again because it’s just such a big job getting it out.

You did a petrol station recently, didn’t you? Yeah, the only reason I touched that was because we actually had retail attached to it. We had a, I think it was a Woolworths, a BWS, uh, had a medical center and a dog salon. And where that was in the region, we knew because there was no competition, even if we transform that into like an electric charge station.

It made sense because it had the cafe and the, like the shops and the, the people could get their dog groomed or go do it when they seen the medical center, I think it was a dentist and a GP. So we bought that because collectively it made sense. Weirdly enough that that client doesn’t believe petrol cars aren’t going anywhere.

He’s like, nah, they’ll be around for 50 years. Would you like, I’m not going to argue with him. Like I can actually say, look, I disagree, but he might be right as well. Like there might be all these things and then they find that it’s not useful to have electric cars in that location that stays there, but yeah, collectively that made sense.

We also got a much high yield to mitigate that risk. And we also stress tested it and spoke with council about what would need to be done if we got rid of the petrol station. And it ended up being about 350, 360 grand. So that was part of the plan. Cool. If we have to do something with this site in 10 years time, do we have those funds?

Do the numbers still make sense? Does that extra yield mitigate that risk? So we did take into account all that type of stuff. Yeah, it’s really interesting. Petrol stations are pretty cool because there’s so many ways you can add value to them, like, as in, like, putting in different retail shops. And I do actually like the car wash.

Maybe not the big one where you drive through, but the ones where you’re doing your self service car wash. They can be really, really good assets because it’s very, very low staffing. And people always want to have a nice clean car, regardless whether it’s petrol or electric, people will always clean their car.

There’s, I think there’s one down the road for me. It was up for sale. This is a couple years back. Obviously, it’s in Sydney, so it was expensive, but I think the revenue on it was over a million dollars. Just from like a four, five dollar self service car wash. There’s probably about six bays or something like that.

But the revenue, it would be gross revenue, but it’s just a million dollars from a car wash or more than that. That’s pretty impressive considering all your job is to keep the car wash working. There’s no extra things. So, but that, that resonates to my point as well as you need to understand car wash and how it works inside and out.

Because like. Buying in regional suburbia where everyone’s got a front lawn and a hose probably doesn’t make sense to have that there. You want to be in somewhat of a medium to high density where people don’t have, where there’s a lot of flats because people don’t want to go down to the underground car park and wash their car.

They want to drive in and do it out in the open. So you’ve got to understand competition in the area, what types of demographics are there and how dense the population is there. And then that’s all part of it. But again, that’s a specialized one. There’s less work if you just buy them like an industrial.

The one I get sent all the time from client is hotels. They’re like, Oh, this is great. Like, look, they’ve made profit the last two, three years. They’re doing really well. It works well when it’s working well, but I’ve also seen, cause I’ve analyzed a lot of them, they fall from grace very quickly as well.

And having a few negative reviews on a hotel or poor management, that asset class can be wiped out as well. Yeah, and there’s such a high expenses because you need so many staff to run a hotel very very high expenses But I find that all of these specialty like assets or industries They always have a governing body or a group where you can actually talk about them So like there’s a car one is obviously the self storage association There’s petrol station ones and funnily enough there’s even a laundromat one a coin laundromat like governing like body where you can get all the different like Machines and stuff.

Cause the coin laundry is almost exactly the same as a, a carwash asset, but obviously a coin laundry is usually just in a retail shop and it’s not really an asset specifically for that, but it’s passive and sort of the passive the same way. Yeah. I’ve actually had a client call with someone who’s made a lot of money from laundromats.

And their whole niche was they’re not just doing the stock standard laundromats, they do it in affluent areas where there’s like high rise apartments, but they attach a really cool cafe to it. So in the laundromat, there’s a cool cafe. So people go there and actually sit there with their laptops and work or have a coffee and meet up with friends while they wait that hour for their laundry to be done.

Because that’s been my biggest pet peeve whenever I’m living in apartments and they don’t have a good laundry mat, is you go there, you drop it off, you do it, you walk back and then you’ve got to set like a reminder on your phone, go back and get my laundry an hour and a half later. Whereas if they had a really cool setup where I could just pull my laptop, sit there and work for an hour and a half.

Beautiful. So that’s, that’s their nation, why they’ve made so much money, but that resonates to our point, they’ve understand the specialty of that asset class and then kind of made it. So you really have to know what you’re doing. It’s not as simple as, Oh yeah, laundromats are good. They’re very profitable, low staff costs.

Let’s buy one. No, you have to understand why people actually going there in the first place. Funnily enough. I’ve noticed that there are a lot of laundromats, particularly for sale, like businesses in Melbourne. Like, I’m not sure why that there’s so many there, but you, if you literally go onto like buyanybusiness.

com. au and you type in buy a laundromat, there are coin laundry and there’s like 20, 30, 40 coin laundries in Melbourne and there’s none anywhere else. I was curious why. Maybe it’s a culture that more people live in apartments in Melbourne or something and they don’t have the washing machine because when I’ve ever lived in an apartment when I was younger, we always had a washing machine in the apartment.

I’ve never ever used a laundry bat, never. Yeah, it just depends on the types of apartments as well. I think some of the older ones don’t necessarily have it, so they, they have to go there, but it could be anything. It could be, it’s actually one or two owners that are offloading all their stock and they actually own 10 of them each.

So it seems like there’s actually a lot of them coming on or it could just be the flavor of the year. And they’re like, Oh, I can get a good price for this because people think it’s a very passive business, which it is if you get it right. I’m not sure. don’t, not looking into buying the business at the point in time.

I try to analyze the area that I’m buying in. But they are super cheap. Like they’re not expensive. They’re like literally 300k. That’s like you get a coin laundry that does like 40, 50, 000 a year. But anyway. Stay up to date with all the hints, tips, and tricks in commercial property.

I think we’ve covered quite a lot today on why you shouldn’t buy commercial property or it’s not right for you at time of your investing journey. But what are some of the red flags that say like an individual property that you’ve seen or you can share with us? Okay. So like the main reasons I walk away from individual properties, the first one, if you’re looking at deals and you find that there’s really high vacancy rates in the area for that type of asset class constantly, it’s not worth my time.

Now, I don’t want to buy an asset that’s not in demand because you’re foregoing capital growth and you might have long periods of vacancy. Even if your tenant looks great, even if it’s fresh five year lease. If the area is not going to perform, this is what we mentioned before. I want it to perform in 20 years time.

So I just walk away from there. Same thing for maybe potential long days on market. I’m buying an area where every property is going on. It’s sitting there for six to 12 months before it sells. Unless you’re trying to pick up an absolute bargain. Again, not worth the risk. So high vacancy rates, long days on market.

So the big walkaway ones, the other one, when I’m actually looking at actual property, like a bit more in the micro phase is special levies. So if you’re looking at, say you do your body corporate reporting, you find there’s a 80, 000 special levy coming up in a few years time. I’ll walk away from that because that’s just going to erode your net yield that you’re receiving.

It’s also a negotiation point. So you might find, Oh, look, there’s a 30, 000 special levy coming up in few years time. Try to get money off the price to offset that kind of risk. And it doesn’t necessarily mean like for like, like you don’t find there’s a 30 grand special levy and you try to get 30 grand off the price because.

Yeah. 30 grand off the price is not equivalent to 30 grand cash out of your pocket because cash in your pocket, you can leverage at 70, 80%. So it’s actually worth more. So I would generally try to make like 60, 70, 80 grand from that 30 grand off the purchase price. So when I go back and refinance that property, I get that money back in the pocket.

That’s also a good negotiation. One other ones are like overlays. So if you say any like big zoning issue or noise corridor or big easements going through the property, or just something that might detrimentally affect your property, just walk away. There’s lots of deals out there. You can, you can find a good one there, a new infrastructure.

So that’s also a positive and a negative new infrastructure is great for helping population growth. However, if the infrastructure is competing commercial property. That can be an issue. So if you’re buying on like an industrial on the fringe of a city and they’re potentially building another 200 warehouses that might keep your rents low for some time or increase the vacancy rates.

Similarly, like if you’re buying a cafe or retail shop and there’s plans to build a Westfields, 500 meters away. That might destroy your foot traffic. That’s another one you need to look at lack of growth in the area. Long term similar to residential we’ve touched on like the service type. So like petrol stations and banks and things like that, where they might be dying long term.

You want to kind of forecast the next 10, 20, 30 years. The big one I find is an undisclosed lease back. So where they’ve tried to hide that the person selling it is also the, the tenant, that’s a big red flag for me, not necessarily a deal breaker, but the chances are no matter what they’ve got on the lease, they’re not sticking to, if they didn’t disclose it, they’re just going to give you like, Oh, there’s no solid rent guarantee or bank guarantee.

Oh, there’s only a one month bond on this property. They’re going to leave. So be mindful of that. The other one is, and the final one I’ll touch on is, it’s too good to be true. So the ones where I get clients, they come and they say, Oh, look, Steve, I found this property. It’s a 10 percent yield. The area is only 5.

5%. I’m just like, don’t waste your time. They’re like, Oh no, but I couldn’t get a bargain. I’m like, People aren’t idiots, the agent’s not an idiot, like, why would they sell it to you at half the price everything else is going at? There will be something wrong with it, there’ll be a huge asbestos issue, it’s in a flood zone, there’s something wrong with the property or it’s unapproved or something like that.

It’s not worth the, the time and the money of going under contract to due diligence, spending five grand on valuation, building pest inspections, searches, soliciting fees to find the red flag, like, If it seems like an absolute unicorn walk away. However, and saying that though, you might find a unicorn that no one actually knows is a unicorn.

And that’s what we’ve spoken about on previous episodes where you list like, well, the agents missed the mark here. He doesn’t realize the rents 30 percent under rented, or they don’t realize there’s this value add opportunity where we can build another dwelling and things like that. Those ones obviously keep to yourself and progress, but the ones where it’s just advertised and it’s 10 percent net yield in an area that’s got a five cap, don’t waste your time.

You’re better off looking at a quality asset. Yeah, that was one I was going to touch on is the, this long days on market, but only because people haven’t identified the huge value add or there’s some, you have the skill and knowledge and the understanding that you can see something that other people can’t.

And that does happen quite a lot. There are a lot of great ways to add value to property. And I think the other one that I just wanted to explain a little bit further is the sale and leaseback is because the owner does the old pump and dump. So he might boost up the rent to make it more profitable, to more, look more valuable.

But realistically, in that market, there’s no way you could ever rent that out to anyone at that rate per square meter, but he’s happy to take that. For a year, two years, however long the sale and lease back is to get a lot higher sale value for that property. So those were the two ones that I really wanted to touch on.

Yeah. Sometimes there is a valid reason for a lease back. A hundred percent. Like they’re expanding the business and they no longer want to be a property owner. They want to be a business owner. The common one I come up against is normally when a business partner is selling out of the business and the only way the other partner can actually buy them out is by selling the property.

So they’ll actually sell it because they don’t have the spare half a million dollars to buy their business partner out. So sometimes there is a valid reason. The good agents will disclose it, but yeah, there’s got to be a valid reason, which is it all ties in with why commercial can potentially not be right for you is because of these added layers of risks and understanding.

But yeah, the days on market one, sometimes a property that’s been long days on market, as long as it’s just an individual property, it could just be because they were advertising too high. So I’m not saying don’t put an offer on that property. Like you might have to wait for it to come back to realistic expectations.

But what I meant by that point was if all the properties have been on the market for long periods of time, that’s a very soft market. Mate, I think we’ve done this justice. I mean, I think we’ve really given the cons and why someone shouldn’t be buying commercial property. I think that’s all we really wanted to do was lay it all on the table.

We’re not spruiking commercial property. For me and for you and I, it’s the asset of choice for reasons that we want to have a passive income. We like it because of that, but some reasons don’t work for everyone. Any closing remarks, mate, for this one? The main thing is like, it is not for everyone, but there’s cons to everything as well.

Like there is a thousand cons I can say for residential and shares and other asset classes as well. But that’s part of the education piece. So before you put your hard earned money into an asset, make sure you understand it. You can make money from anything, business, shares, property, doing like trades, all that type of stuff.

You need to understand it though. You’ll rarely meet someone who’s just like, yep, got lucky, bought a couple assets. I did really well. The ones who go next level are the ones who understand it inside and out. Yeah, definitely. All right, mate. Well, last question. Where can they go to find out more about us?

I’m part of the team. Yeah. So if you want to chat with Andrew, don’t chat with me. I’m way too busy guys. Go past Andrew now. In all seriousness, just go to, if you want to chat to any of us, go to policyproperty. com. There’s an inquiry form on the main page. Just shoot us a message on there and then reach out.

Obviously all the usual stuff, go on the website. There’s free resources, downloads. Get a free copy of the book. If you want to get the book on the website, just use the code word podcast. Me and Andrew are more than happy to chat with you about strategy, commercial, even residential. We still purchase lots of residentials each month because they make sense for some people.

So reach out and have a chat. Yeah. If you want to, um, send me an email. Uh, my new email address is andrewatpolicyproperty. com. Yeah. Just send me an email, even if you just want to say hi, you know, you like the podcast. I always like reading about how people love the show. So, uh, All our comments and even bad, you know, you hate the show.

If you hate the show, email me as well. I just want to talk to you. You don’t have to reach out if you’re ready to buy a property. All the time I get people just come to me and go, Oh, Steve, I’ve actually got an asset in Brisbane’s North. Do you know a good property manager there? So recommendations is should it’s an email.

Even stuff like, Oh, who, Steve, who do you find gives the best, like tax depreciation for a commercial investment and things like that. Just happy to make recommendations. So any questions like that, just shoot us an email. Awesome, man. All right. This has been Andrew Bean and Steve Polisi on the Commercial Property Investing Explained series.

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