EPISODE 6: Buying or Selling a Commercial Property - Property Inc

[ Podcast Transcription ]

This is the Commercial Property Investing Explained Series. A free 10 part course 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 of Commercial Property Investing Explained Simply and founder of buyers agency, Polisi Property. Steve Polisi, how you doing, mate? Awesome, mate. How about you? I’m fantastic, buddy.

How’s the weather where you are? It’s actually really nice. So currently in UK, it’s bright and sunny, and I just spent a week in Greece and Ireland. So definitely can’t complain. First world problems for me. Living the high life, mate. Well done. Good on you. Commercial property, mate. Get that passive income.

That’s it. That’s it. All right, mate. So in this episode, we’re actually up to episode six, and we are going to be discussing preparing to purchase a commercial property, which involves buying structures and syndicates, searching for properties, conveyancing the acquisition process, and then also selling properties with.

An exit strategy. Sound good? Sounds good. Disclaimer, obviously, guys, not financial advice, just a bearded man giving personal experience about what I’ve learned along the way. A well bearded man too. A very well bearded man. 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 Discount Code podcast on his website. So go to www.policeproperty.com. Use discount code podcast to get the book free. All you have to pay for is shipping. What a great deal. So mate, what are the necessary steps you need to take when you’re preparing yourself to actually buy a property?

So I’ve, I’ve kind of labeled a doubt as six steps along the way. The first is assess your current financial position. The next is work out a purchase price range. The following one is decide whether you’re a passive or active investor. The number four is set some goals. Five, develop a plan. And six, build your team around you.

All right. So with the first one, Assessing your current financial position. So generally to do this, you look at a few things. One is the cash you have on hand. So how much spare money or equity do you have in an account or in available in a property that you can invest into the next property. Then the next one is assess your income.

So not just the quantity of your income, it’s like how stable your employment is, what’s the longevity of your job and what’s the risk profile of it. Then the next one is you need to analyze your cash flow. So that’s looking at your present cash flow from all your assets. So that’s like your property, your cash, your shares, business funds, superannuation, all that type of stuff.

Then compare that to what liabilities you have. So you can kind of work out a net cash flow return of what you kind of look like. And then basically what are your financial family commitments as well. So like you obviously got a plan for that in terms of buying new houses and looking after children and things like that.

The next one is actually looking at your borrowing capacity. So that’s speaking with a broker or lender and just finding out how much you can borrow. And then one of the other ones is actually looking at your credit rating. And this one’s not really spoken about and it’s not as critical, but I recommend doing it anyway for an exercise.

Look at your credit rating. There’s a few websites you can do that. So one’s Equifax, one’s Illion, and one’s Experian. That’ll give you your credit rating. And then the last one is actually assessing your risk profile. So, really looking deep of kind of like how risky your situation is in regards to work, financial, how much savings and buffers you have.

If you need help with any of those though, have a chat with a financial advisor. That is literally their job. Yeah, that’s awesome, man. So, like the credit rating thing, is that a free website, is it? Yeah. So you can go on there and find out what credit ratings and have a look. Also have a chat with your broker as well.

They can obviously run that stuff for you. I’m guessing when those free ones, it doesn’t put like a hit on your credit rating or anything or a credit score for checking it. You know, obviously I’d imagine it’d be pretty fun. Yeah. It’s one of those ones. I actually have never even done it for myself because I don’t have credit cards.

I don’t have that kind of time, but I’m very frugal with my money. Um, but I’m a very simple person. I don’t have complicated structures. I haven’t been bankrupt or anything like that. Yeah, fair enough. And I think also a one that’s actually quite interesting for a lot of investors is decide whether you’re a passive investor or active investor because that’s a hugely like widely different thing, isn’t it, Steve?

Yeah, exactly right. Like most people, we buy commercial because they want to be passive. They want the passive income, the tenant to look at all that. But then there’s some aggressive investors like probably you and me, Andrew, where we look for a little bit of value add along the way, but you just need to assess where your time is better spent.

Like if you’re a high income earner or a new business owner and you’re slogging yourself at work or you’re earning better money than you’d actually get from doing like a value add project, probably not worth your time. If you do want to value add, then that’s when you can actually have a look at like a buyer’s agent to do the work for you.

But just assess how much actual time you have. I get so many people that say they want to be an active investor. They get home from work 7pm every night and then they just don’t have the mental capacity to spend four hours every night for six months looking at a property. They would have been better just buying a really good quality property.

Having the capital growth, having the cashflow, and they’d be in a better net position by the end of it. Yeah, I mean, I’m the type of person I think you are too, as I’m looking for problems in a property because I want to find problems that I can solve because that’s how you can make the most money in property.

And at the end of the day, when I come home, I’m actually looking at property for fun, not because I have to. You and I probably enjoy flicking through, uh, the commercial, you know, listing websites to see what actually we can find. Yeah, but we’re a slightly different breed, like we chose to do this. for fun, like as a job.

So like I was an engineer in the past and I actually got sick of just kind of working for the man and I was like finding myself every lunchtime and after work looking at property and that was the kick up the bum to be like, okay, no, just go work in property. You obviously enjoy it. Yeah. Fair enough. So mate, what about the purchase price range?

How do we actually calculate what we can actually purchase? All right. So the back of the envelope way is just looking at how much cash you have and then basically turning that into your deposit. So most commercial lines are at a 70 percent LVR. So allow for about 5 percent purchasing costs. So that’s effectively going to be a 35 percent deposit on that property and then just divide whatever cash you have by 0.

35 and that’ll give you an approximate kind of purchasing cost. Have a chat with the broker though anyway because there are some options doing 80 percent loans at the moment and then you effectively don’t need that 25 percent deposit total and you can work out that there. It just gives you a starting point of, okay, what’s actually achievable?

Where can I start looking and go from there? Good. Bye. I always recommend have a chat with your bank manager or your broker and find out what’s actually possible for you because people have a different borrowing capacity versus serviceability sometimes as well. And you need to look at that because what I mean by that is you might have a really good serviceability to buy property with like a full documentation loan where you could buy a 2 million commercial.

You just don’t have the deposit yet, but you might come back and go, Oh, I can only buy a million dollars now. Is it worth waiting and to save up a bigger deposit to get the 2 million one or is it better to get something now, get the capital growth, get the cashflow, then move into the next one and then you can assess by there.

Or alternatively, you might have a really big borrowing capacity and you need to work out, cool, am I going to stage this over multiple purchases or just go for the one big multi tenancy or development side or active site and do it that way. So just get your head around exactly where you’re borrowing is.

Borrowing is always the biggest bottleneck for commercial investors. Otherwise, people just keep buying properties for the rest of their lives. It’s always the glass ceiling is lending. So get your head around that. Speak with a broker. Work out what borrowing pack kind of range you’re working in and then go from there.

All right, mate. So for new investors, when you’re actually deciding to be an active or passive investor, how do they do that? What do they do? What does this actually mean? I would just assess like… in yourself how much time you have and how much you actually enjoy doing it. You can subcontract out being an active investor to a buyers agent if you really want.

You’ll just end up looking at your goals. So, so maybe we have a bit of a chat back because your goals will determine it. If you can get to where you need to be by having a nice steady easy low risk plan, there’s no point being an active investor because sometimes being an active investor takes on risk.

Because you’re obviously doing something, there’s an unknown that you’re going to flip into a positive. So I’d actually just assess that how much time you have versus who you are versus what your risk profile is and how much you enjoy it. You have to enjoy investing like it’s, it’s a long term game.

You’re not doing this for one year and moving on. If you’re not enjoying it, you’re going to have a terrible time for the next 20, 30 years and you’ll probably crack it and you’ll move into shares or something else because you’ll, you’ll look at the negatives too much. Yeah, we don’t want them to do that.

That’s a fool’s game right there. So mate, what are some of the goals that your clients actually set? We were trying to get an idea of like, we want to set goals, but we can’t think of any. What are some of the common goals that your clients set? All right. So everyone’s different. The most common one I hear is like, I want to have a hundred K passive income.

Like that’s normally one or match your salary at work. So you can step away because I find. Most people in the right ways don’t love what they do. They’re doing it for their family or just to earn a buck and they want to kind of get out. So that’s normally the one. I’ve actually got a hundred K passive income, like what that portfolio size looks like on my website.

So if you want to go there and have a look, you can kind of see how long that would take for one property. Then we can kind of change it from there. But just work out exactly what you need and what’s going to make you happy. And most of the time you actually don’t need to match your income. People have this weird thing where they go, I’ve got to match my income so I can step away from it.

If you’re not working, you don’t actually need to match your income. If you’re on 150k and you say, Oh, I want to match my income so I can travel the world. You don’t need 150k a year to travel the world. So what’s a better option? traveling the world in five years time because you’ve got a 70 grand passive income goal or spending 15 years working doing the job you don’t like.

So then you can have a travel the world. So just be realistic with what you’re actually trying to achieve and what makes you happy. Like everyone would love if they just got dumped a big chunk of cash and they could get on with their lives, but it’s not the case. Like me personally, I, everything I enjoy doesn’t cost a lot of money, like rock climbing, climbing mountains.

campervaning around Australia and other countries and even my travel like I don’t need to stay in five star hotels and fly business class here and there. I don’t get that much more enjoyment from that. So my passive income doesn’t have to be huge like I’ve got a decent one but I’m never going to be that guy that has the 50 foot yacht or anything like that because I don’t have to, I’d much rather spend my time doing travel and things like that.

But just assess what makes you happy. Some people also love making money and that’s fine as well. Like just be honest with yourself. If you get a real kick out of like every time you buy a property and you see it’s going up 300k, cool. You can keep doing that. Just do what actually makes you happy. And I know, I know this sounds a bit wishy washy.

But it actually is. I’ve, I’ve had this chat with a thousand plus people and most of my wealthy clients aren’t happy. And some of my ones that have a 20 K passive income are really happy. So just work out what actually makes you happy. Yeah. Well said. So developing a plan, how do we actually do that? Can you explain what a good plan looks like for reaching your goals?

Yeah. So we just spoke generally about kind of what makes you happy. Now you just need to turn that into something you can actually write down. So it needs to have a timeframe on it. So little realistic short term and medium term goals. The long one, you can still write that down, but get the short ones because they’re the ones that are going to affect your next purchase and how much you spend and what you buy, whether you go resi or commercial or don’t invest at all.

So just write down what you actually need to do to get that kind of plan started. And then it’s got to be in numbers as well. It can’t just be, I want a 50k passive income. Cool. What size portfolio do you need for that 50k passive income? And then work backwards from there. You can have a chat with a financial advisor or a buyer’s agent and they’ll give you some kind of experience there of kind of what’s actually achievable.

Yeah, I really like putting a plan in motion as well. Because if you think of it like You’re traveling in your car and you’re putting a destination in your GPS and then the GPS will work backwards to get you there. It’s exactly the same thing. You need to know where you want to go and what your passive income or your property goals are to actually lay out that roadmap to get there.

So very, very important. It’ll affect your decisions and what types of properties you buy as well. So like the common one I get is especially like a young investor. They tell me they want a passive income, but then they can only get a 70 percent loan for a commercial and they go, I want a passive income in five years.

A lot of the times I’ll actually recommend them go residential instead of commercial because they may be able to go buy three loans on 90%. So they’ll pay lenders mortgage insurance, but they’re effectively going to have a portfolio that’s three times as large by doing that. And then if we do get capital growth, they’re going to make three times as much.

Then the commercial portfolio, then they can leverage that and get into kind of commercial. So that’s what you’re saying, Andrew, about the plan. You need to kind of have that short and medium term kind of plan because I could have just gone out and bought him a commercial property that have a nice little 20, 30, 50 grand passive income, but then that kind of be stuck for a while because the time it takes for the cashflow then it gets more savings.

The whole power of property is leveraging. So you just got to balance that about like what you’re actually trying to achieve or what time frame. Someone who’s like 63 years old and is going to retire in two years time, there’s no point going out and buying them a like mutually geared residential property.

That’s not going to help them with retirement. They’re going to be looking at cool, get a commercial, get a passive income there, probably a lower LVR to mitigate risk. So just about setting all those things we’ve just spoken about and then putting pen to paper and a plan in place for it. And so mate, after you’ve got this plan in place, or even actually before you’ve got this plan in place, realistically, who do you need on your team to actually do this?

Like, how do you build a property team? Who are the players we need? Yeah, okay. So this for me was actually the, the biggest thing when I was an engineer. It was actually trying to trust other people. Like, being an arrogant young guy, I was just like, nah, I can be an expert at everything. You just cannot.

Like, I know, Andrew, you know, some things in self storage that I don’t and vice versa in other fields. You need to trust someone at some point, definitely can’t do it alone. So there’s a few ways to find your team. So one’s obviously online searches. That’s the most common one. However, one of the better methods I kind of recommend to your listeners is find some successful investors who are at the point where you want to kind of be and ask them who they use, like it’s going to be very unlikely that a successful investor has a weak team around them.

So have a chat with them, get the reference there. And then basically you need to vet whether they’re right for you. So first one is when you, when you have a chat with them, do you like them and do they like you? And I know that sounds a bit funny, but it’s actually one of the most important ones for me because I even find this with like clients and everyone in your life.

If you like someone and get along with them, you work much better with for them and you actually want to work with them as well. So that changes it there. Obviously make sure they’re competent and confident. And then obviously go with that kind of, do you trust them? So assess what they’re actually trying to get out of you and what the benefit is.

Like, obviously it’s going to be some form of monetary benefit. And then the other one is, do they have good communication skills? I find some of the best conveyances and lawyers and. Brokers, they’re actually terrible at communication. So they might not be right for you. Having someone who kind of gets back to you two weeks later is not going to benefit you.

So that’s the general process when you’re kind of vetting them. And then the, basically who you actually needing your team now is what I think the question was, is your finance broker or your bank manager, if you’ve got a good relationship, but I do recommend finance brokers, your accountant, buyer’s agent, if you’re going to use one solicitor or conveyancer, property manager, town planner.

and valuer. They’re the ones you need on every single property purchase. You can also try to find a mentor as well and it doesn’t actually have to be a person. It can be listening to podcasts, reading books, but having someone you can bounce ideas off if you do find a property is invaluable as well. So should we go through some of those kind of in depth, Andrew, the people on the team?

Sure, mate. Let’s do it. All right. So the first one I mentioned was a finance broker. We did touch on this a fair bit in the lending. podcast episode, but you need to have a finance broker who’s experiencing commercial lending. I find like you get so many residential brokers who say they can do commercial and they’ve might’ve done five or 10 of them.

But as we discussed previously, it’s a different game. Like there’s leased doc loans, full doc loans, no doc loans, lease, uh, commercial only lenders for instance. So you need someone who’s got some runs on the board. It can help you kind of put a plan in place there and work at your borrowing capacity.

Just be weary of some brokers. I’ve seen this a lot recently. There’s some brokers trying to upsell people into other products like car loans and life insurance and things like that. A good broker should be chatting with you about your goals, not trying to just get you covered for life insurance and things like that.

So get a good finance broker. As I mentioned, always the bottleneck. So that is going to be the key to kind of getting started. The next one is obviously accountant. So always recommend using an accountant. Same thing when I was an engineer, I tried to do it myself at the start and then as soon as I went to a good accountant, it kind of changed it for me.

Make sure they’re used to dealing with large property portfolios. So like anyone can do a simple kind of tax return, but they need to be there and setting up the right structures for you for that kind of 5, 10, 15 year plan and they need to be on board with that strategy as well. And basically, so find an accountant that’s typically got a good portfolio themselves.

That’s going to be the first step. And then you can kind of go after that. Mentor, as I discussed before, that’s just someone you can bounce ideas off just to make sure you’re not making this mistake. So that can be online forums, podcasts, buyer’s agent. A point to know is make sure they’ve bought properties outside their state.

I get a lot of people that they think they’re experts because they bought 10 properties in Sydney 20 years ago and it’s done really well. That doesn’t mean they’re a good investor or a good mentor. Find someone who’s got a bit of versatility and kind of openness to other types and locations and things like that.

This is a self promotion part. So buyers agents, I still have people that go, Oh, what’s a buyer’s agent? What do you actually do? And can’t I just do that myself online? Yes, you can. You do not need a buyer’s agent. You can do it yourself. But if you are going to do it, make sure you research like. I spent two or three years researching before I bought my first property and even now after like a thousand plus transactions, I still learn stuff every single day.

So there is something to experience. So have a chat with a buyer’s agent, find out what they do. But generally, what a buyer’s agent does, they source properties, they do the research for you, they do the due diligence. They hold your hand through the settlement process, so they’ll recommend like conveyances, building pest inspectors, property managers, and they’ll just support you through the whole thing, and they will sometimes get access to off market deals and get you a better price and things like that, but commercial, as we know, it’s a complicated game, so having someone that knows what they’re doing is kind of invaluable, just to basically make sure you don’t make a mistake.

The next one is solicitor or conveyancer. I got asked this yesterday is like, why do I go a solicitor versus a conveyancer? I’ve met good ones at both. I’ve met really, really good conveyancers and horrible solicitors and vice versa. The main difference is solicitors like legally trained at university and conveyancers just like non trained at university.

They can still have the same experience and skill. They’re the ones that are going to hold your hand through the settlement process in terms of contractually and making sure you’re not going to do anything wrong and protect you. I like conveyancers and solicitors and I’m going to say something kind of outlandish here They’re the only person in your side in the whole transaction.

So like everyone else has an incentive. The, the real estate agent, the property management, even the buyer’s agent, because they’re obviously getting paid by you. They’ve all got an incentive to get you into a deal. The solicitor or conveyancer, they will get paid whether or not they tell you it’s a good or terrible property.

So they’re generally the only honest ones and it’s, it’s actually why I actually avoid some companies where, you know, those companies usually that do everything in house. They got the brokers, they got the conveyances, they’re the buyers agents, things like that. I’m always a little bit weary of those ones because they’re obviously going to try to get you into a property so they all can get paid.

So I always dislike separate financial advice from different people. So there’s a point there, but. Yeah. Conveyance and solicitors, very, very important and you’ll need it on the property. Stick to one that’s in the state that you’re buying because there’s obviously state based like laws that you need to follow.

So them having experience in that’s going to be fine. All right. The next one, I know I’m rambling a little bit. Property managers. I always get asked, do I go property manager or self managed because commercial is easy? No, get a property manager. That’s my recommendation. Have a chat with local property managers of where you’re looking to buy properties as well.

So it’s not just once you’ve got a property. Have a chat with the local ones where you’re looking to buy because they’ll give you little tips and tricks of like what’s going on in the area, what’s coming up, what infrastructure is going in, what the demand’s like. So they’re an invaluable source of information as well.

And then another one is town planners. Go with a town planner because they’re going to tell you that what’s going on in the area that might actually cause an oversupply or increase the value of your property. I normally choose a, like an independent town planner, not the council one. I just find they’re a little bit, they’re a little bit more upbeat and like keen because they, they might get some work out of you later down the track.

And then the last one is actual valuer. For me, they’re invaluable, pun intended, for getting clients some information on the ground because literally their job all day, every day is to value properties. So they’re going to be better than anyone and they’re going to be conservative as well. So have a chat with a value up before you buy a property as well.

And then you’re basically done. So that’s, they’re the key team members before you even get started, Andrew. Good description of each of those, mate. Well done. But, um, quick tip for a town planner, if you’re just checking a property that it has, you know, potentially do what you want, you can ring the council town planner and talk to them because they’re free.

And you can get the idea of, yeah, it’s probably like, it’s probably okay to have that change of use. And then when you’re actually on contract, then you can use the town planner that you’re actually an independent town planner that you’re paying for, because you’re going to get better advice from them.

That was a little quick tip I thought. I also appreciate the solicitor tip as well, not using one that’s in house because you do have to remember what’s the incentive of that person. Is it to actually give you good sound legal advice or is it to actually get you into a property to get paid? So I thought that was a great tip as well.

Yeah. I want my conventor to tell me it’s an absolute shocker of a property. Walk away from it. You’re going to get stitched up because like you literally, if you buy a bad property, you can lose hundreds of thousands of dollars. So I’d much rather have someone tell me to walk away. They can sometimes try to help like salvage a deal.

If there’s something that you find in building a pest or due diligence, they can obviously work with you there. But they need to be the ones kind of telling you everything and giving you guidance there legally. Because like I said, they’re the only ones in your corner. Solicitors are those, the type of professional that can blow up a deal as well.

You know, when they come in a little bit too strong and they’re mucking around too much, they’re taking too much, they’re being too cautious. I know from a deal that we’re doing for a self storage facility, the solicitor on their side has been an absolute nightmare and they’ve, you know, held up this deal at least, you know, six weeks to eight weeks just on, you know, little minor.

You know, things just really ridiculous things that are not even worth talking about, or even, you know, questioning. And I’m not saying don’t get a good solicitor cause you should, but just, I just thought it was also interesting that, you know, solicitors, they can just sometimes come in too strong too. And they just, they don’t really care about.

What the deal, as the deal stacks up, they just really care about protecting their own client. Yeah, but that’s their job as well. Their job is to cross the T’s and dot the I’s. You as an experienced investor need to work out what you’re happy with and what you’re not happy with. And your conveyance or solicitor needs to know how to operate with those different types of personalities as well.

But I a hundred percent agree, Andrew, so many times we’ve like I’ve actually walked away from deals, not because of our solicitor, because of their solicitor. Yeah, I’m sure as a buyer’s agent, you would see it every single day where the solicitor on the other side, it’s just being difficult for no reason.

And it’s not really helping the client out that much. And then the actual deal ends up getting run by the opposing party’s solicitor, not the actual vendor, like the vendor actually selling it. All right, mate. So when we’re actually buying a property, what are the structures and entities we need to have set up already to be basically market ready?

Yeah. All right. So this is probably the most confusing part for investors. And one of the common questions I get on like my sales calls is, Oh, what structure should I be buying under? And normally my first response is just go have a chat with your accountant. Because there’s no one size fits all like everyone’s situation is different.

They’re going to have different risk profiles, different goals, and things like that. So get your advice from your accountant and work out what’s actually best for you and your family. What are some of the popular ways to buy a property entity wise? The most popular ones I see every day are individual ownership.

So that’s just under your name. The other one’s joint ownership. So that’s with like a partner or a spouse. Another one’s joint ventures. Then the other ones are family discretionary trusts. unit trusts, self managed super funds or SMSF, company structures or property syndicates. So I can go through them quickly if you want, Andrew.

Yeah, mate. No worries. Let’s do it. All right, cool. So the first one, individual ownership. That’s the simplest and most common kind of one for inexperienced investors, I’d say. It’s just where effectively it’s your full name on a contract or your partner’s name and you go from there. Because commercial property is positively geared though, it’s not necessarily most beneficial for you.

Because you’re going to be in a higher tax bracket effectively. So you’re going to lose there. You’re also up for the risk of if you ever do get sued or go bankrupt, the property will then be then used to kind of sold off. So you are at risk of losing the property there. So that’s a lot of the time just for like low risk people with careers who are just buying one property for the next five years and they’re not going to be too aggressive.

And then it’s kind of a little set and forget type one. And then following on from that, that’s where you can have like joint ownership. So that’s where you obviously buy it with your spouse. There’s a couple of ways to do this. So there’s ones where it’s called joint tenants and the other ones tenants in common.

Basically, what a joint tenant is, that’s where you hold the property equally between both parties. So it’s 50 50. If one owner dies, The property is automatically passed to the surviving joint tenant. And then the other method is that tenants in common. So that one, you can actually split up a different percentage between each tenant.

And by tenant, I mean owner, by the way. Basically, if one of the parties dies, though, the person’s it gets passed onto whoever says in their will. So it doesn’t automatically go to the other party like joint tenants. These are quite good if you’re trying to basically reduce tax because you can give the larger share to the spouse with the low income who’s in the lower tax bracket or for whatever reason, if you’re buying a commercial property that was negatively geared, which I doubt it, you could give the bigger share to the partner who has a higher income to kind of maximize the tax benefit there.

So flowing on from that, then you’ve got joint ventures. So, so those two are generally just for partners and spouses. Joint ventures is when you do like friends or family members or business partners and things like that. Just a word of warning with joint ventures, I might have a bit of a clouded view here, but I hear horror stories all the time with it.

Everyone who does like a joint venture, they’ll come back. And the main reason is everyone’s Circumstances change, like people get divorced, have kids, they need to travel for work or upgrade their PPOR or something like that. It’s very hard to get right. So if you are going to do a joint venture with someone, make sure that kind of outcomes and the plan is clearly understood and make it legal as well.

Make it a contract between you that this is what happens in three years time, five years time. These are the buyout strategies. What’s the short and long term kind of plan from there and then you can have a successful kind of way to buy property. The benefit is you’re generally kind of um, can have a larger borrowing capacity because you’re going to have two people’s kind of incomes and serviceability.

You can buy something better. So, it might be worthwhile if you think buying a high priced asset is going to get you a better quality asset, but most of the time I find it’s actually not the case. So, another thing to be mindful of Andrew, make sure if you can have separate loans between the parties as well because that way if your partner say defaults, On making repayments, you’re then responsible for it, but at least with separate loans, your debt and serviceability won’t be affected.

So again, have a chat with your broker, have a chat with your accountant and make sure that it’s all set up correctly because it’s, it’s very hard to untangle down the track and inexpensive. You can potentially be up for paying stamp duty again. With this joint venture, Steven, as well, you still need a purchasing entity as well.

This is just. the structure of your partnership, but you’ll still need to be getting some kind of entity to purchase the actual property in. Yeah, exactly right. You’ll be setting up some form of a legal structure with the accounting. Next ones are family discretionary trust. This is basically like a tax structure that’s set up to, in quotation marks, kind of benefit like a family group.

So it’s everyone in the same family. This is probably the most common one I see mainly because there’s tax benefits and then it also provides asset protection as well as there’s some most trusts are actually eligible for 50 percent discount on capital gains tax as well. So it’s very common this one and this is what most people do it.

The negative with it. is it does cost money to set up. You can be up for a few thousand dollars setting up and then compliance at tax return time is quite expensive as well. So it’s worth doing there. You can’t generally distribute losses though but that’s not really a kind of an issue for commercial property but family trusts most common and where I see most people getting guided by their accountant.

Obviously, the accountant gets paid to set up the family trust, so they’re going to do it and it protects you. So, it’s normally a win win for both. Yeah, I mean, so the discretionary trust, it actually is a very, very common one. What I actually like about it, and I’ll try and explain it again, just so everyone’s 100 percent clear.

So, it basically means that you can disperse funds to anyone in your family. So, if you are the highest income earner, And say your wife is potentially a stay at home mom, then you can disperse income or revenue to her. It doesn’t change anything about your taxable income, then she will still have the taxable income as well.

So you can kind of manipulate where the money is going legally and it just makes more sense. It’s tax wise and it gives you flexibility in future. So and I think the next one we’re going to talk about is the unit trustee, which is not so flexible. Yeah, exactly. But it’s the same concept. You’re still setting up a trust.

The main difference is you basically it’s divided up into like fixed and quantifiable parts like they’re called units. So it’s a nice way to split it up between people that aren’t in a family. So it’s generally the same kind of rules but it’s just you kind of percentage out to who owns what and it’s normally for like when you got friends and business partners and things like that.

The other benefits of a unit trust is asset protection obviously and succession planning and again being eligible for that 50 percent discount on capital gains tax. The next one is self managed super funds. I find these have been a very common way of kind of buying commercial property the last couple of years.

One of the main reasons is because interest rates in lending for them are a little bit higher. Like in at the current time, you’re talking 3. 5 to 5. 5%. So even with that interest rate on commercial property, The cash flow is quite attractive and people like them for a self managed superfund because they act similar to like having shares, for instance.

So with the cash flow, you know what your return is. The benefit is you get good leverage and you can also have capital growth on top of it as well. So there’s a few benefits there. One’s when you retire, you actually don’t pay any capital gains tax on it. The other one is loan repayments. So they’re effectively tax deductible because if you salary sacrifice and pay down the debt, you’re not actually paying tax on it.

So there’s a bit there. The income that you get is actually only taxed at 15 percent as opposed to like 46. 5 percent if you’re a top income earner. And then employer super contributions can be used to help repay the loan. So again, tax advantages there. Just one point to note though that any tenants that you have in the self managed super fund property, they have to be third party.

They can’t be like related to you or a business or anything like that. Sorry. Just be mindful of that. The next one is company structure. So get asked about this all the time as well. It’s basically setting up a company for a property. So you need to have all the directors, all the structures in place for the same as a company would, but then it operates under lower tax rate because it’s, it’s normally the company tax rate of 30 percent and you can pay tax through dividends or the tax can be paid to the company through can be franked.

It also offers a high level of protection for you personally because if the company gets suited, the company is the one that kind of shuts down and you don’t have to be necessarily legally liable to it. Again, not legal advice, just, just pointing that out. Some of the drawbacks though, uh, they are very expensive to set up and they’re not eligible for the 50 percent discount on capital gains that are available to trusts.

And self managed super funds. And then the last one, Andrew, syndicates. And I know we’ve spoken about this many times off air before syndicates are basically where you have to buy expensive commercial effectively. So they’re, they’re for what’s called sophisticated investors in quotation marks.

Sophisticated investors are basically anyone it’s defined by the corporations act. So it’s anyone 5 million worth of assets earns more than 250 grand a year for the last two financial years. Or if you’re investing more than 500, 000 in the syndicate offering, they’re, they’re basically like a financial fund.

So it’s got to have all the same legalities, follow all the same rules that a financial fund would. The benefit is you just can get into a larger quality property because like you might be buying, say a 20 million property. So you can have a look at a way, way lower risk properties in some instances, because you can get like the multi tenancies or blue chip, long tenants and things like that.

The benefit is obviously you don’t have to put as much money in. You. You can buy a high priced property with less capital. The other ones get to diversify because the fund might actually have multiple properties in it. You get stable returns most likely. The negatives though is you’re generally going to have less control because you’re not doing it, the fund’s controlling it.

You’ve got less of a say in kind of what goes on. And then there’s always going to be other vested interests. So like the financial interests are going to be dependent on other people and that needs to be taken into account. The other one is you’re not going to have management control. So they’re going to basically run the property for you.

So there are some positives. There are some negatives. I was actually involved in a 20 million shopping center that we bought in for a syndicate in Bundaberg. That was basically had like 25 tenants and about 50 percent of them were medical. I can tell you they are so much work to set up and actually do and get buyers to all agree and get it all running smoothly.

And it’s also very expensive as well. You, you generally need to be buying more than 20 million for the fees to make sense, to make the return on investment worthwhile. You know, it’s definitely a very, very expensive, difficult time setting up a syndicate because I’m doing that myself for a syndication business specifically targeting self storage.

And it is definitely a whole shirtload of work, but it will be hugely rewarding, you know, being able to get great returns for the investors and also the company as well. So looking forward to that. Yeah. And as, as you know, and exactly what you’re doing, Andrew, is you, you get to see some really cool deals and bargains and versatile properties, because you get to look in a, in a different that every mom and dad investor can’t look at themselves.

It’s obviously, it’s good to have really high value properties, but it doesn’t necessarily have to be. If you’re not going to be getting the AFSL license in house yourself, you can actually pay for someone’s that has AFSL license. So actually do the work for you and you’re using their license. Usually when you have an AFSL license holder, that’s in within your company and you brought that in house, you’d be at a really high scale of assets on the management, like a hundred million, 150 million of us on the management.

To make that worthwhile, but when you’re starting out a syndication business, you do have some options to using that professional, like you’re using their expertise and their licensing to look over all the documentation and making sure everything is regulated. Cause it’s a very, very stringent, serious thing to be doing this a hundred percent to the letter of the law, because there is serious jail time involved if you’re not, and it’s something that I’m not interested in going to jail ever in my life.

So we’re definitely taking all the precautions. and everything we need to do to have exactly the right structures, the right people looking at it with the right licenses. But just to give you an idea, the property that we’re purchasing at the moment is 4. 6 million. It will be a very, very high value property in five years.

But just to kind of give the listeners an idea, it can be a lower value property if need be. One of the things you need to consider though is also maximize your leveraging now. I get a lot of people that think it’s, Oh, it might be lower risk. I’ll go into this syndicate. You might have a way better borrowing capacity buying yourself.

Like you might be able to get a 70 to 80 percent LVR. The syndicates are a little bit harder. It is possible, but most of the time it’s like a 50 percent deposit. The other point to note is just because you’re in a syndicate with other people doesn’t mean the actual investments are better property. The fundamentals still need to stack up.

I’ve seen lots of people buy into syndicates where they’re like office towers and obviously that after COVID. Is not going to be the best investment. So you still want to make sure you’re taking all the fundamental boxes we’ve spoken about previously. A hundred percent. You definitely need to be checking the business plan and everything for that property.

Steve, a lot of people actually invest in syndicates to actually diversify their current portfolio. So they might actually have. Properties that I already own outright themselves. They were an active investor or they’re now don’t want to be an active investor. And I want to take more of a passive income without having to worry about running a self storage business, for instance.

So people will, um, you know, put in money to a syndication to basically diversify what they’ve already got as well. Yeah, it’s basically buying shares, but you get in the property realm and you get to be a little bit more picky with it. You’re not necessarily just kind of diversifying into all the. The Westfield shopping centers and those two are metros and all that type of stuff.

You can actually sort of have a little bit more tangible choice of what you actually want to choose. A hundred percent. I hope you’re enjoying the show. We’ll be right back after this short break. Stay up to date with all the hints, tips, and tricks in commercial property by following Policy Property on Facebook.

Go to Policy Property, hit that follow button and never miss a beat with Policy Property. All right, let’s move on. On to the best ways to actually search for property. How do we do that? Ah, so basically after you’ve done your research originally and you’ve actually found an area that you’re interested in, you can start having a look in your price point.

So, point to note, it’s going to be very unlikely that you’re going to find a property that 100 percent perfect. I get people that think they’re going to find a unicorn. They don’t exist. And no commercial property is perfect. There’s always going to be a negative about it. You can sometimes turn a negative into a positive by getting a price reduction or whatever it may be, but…

Buy something that’s just a very, very good property because in two years time, it’ll actually be better than not buying a property there as opposed to sitting there for two years looking for that unicorn. If you’d bought something two years ago, Andrew, you were buying seven, 9 percent net yields quite comfortably in capital cities.

Now it’s actually a struggle to buy five to five and a half percent in capital cities. So just buying a good performing kind of commercial property a couple of years ago, you’re in a much better position now in terms of capital growth and cashflow. So just tick all the fundamental boxes first and then look at the property and go, will this property be a good performer in 10, 20 years time?

And if the answer is yes, probably worth going down the rabbit hole a bit more. So there’s three basic ways I used to obviously find properties. One’s obviously going on the real estate websites. The other ones through actually talking with real estate agents on the ground or alternatively, the third one is actually using a buyer’s agent.

If you just don’t have the time or skill or experience, you can have a chat with the buyer’s agent. So, we all generally understand going on the websites, the real commercials and all those websites and searching. I generally recommend though like use the filters. So search by like a location, budget, the types of commercial property, and then go to like the map view because that’ll give you a good idea of kind of what’s for sale, where the main roads are, where the arterial roads are, and you can kind of use that as a kind of a starting point.

As I mentioned as well, get some good relationships with agents on the ground because Once you’ve got a good relationship, they’ll actually start sending you properties. So you don’t actually every day have to go on real commercial and have a bit of a look about what’s coming up. They’ll tell you what’s coming up.

So choose a region. That’ll be the easiest way. Trying to do Australia wide as a one man show is going to be very hard and due diligence on a commercial property takes a hell of a lot of time. So you’re going to need to make a short list. It’s not like residential where you’re like, once you’ve kind of chosen your suburb, you look at the houses, then it’s more of a negotiation piece where you just check a few things like our flood zones and housing commission, things like that.

So many moving parts with commercial. So you need to going to make a short list. And then after that, you can start negotiating from there. All right, mate. So once we find a property, what are we going to need to request? All right. So reach out to the agent and request an information memorandum. And you’ll sometimes see that in the, in the text as IM.

So information memorandum, basically like a sales document that They used to advertise the property. So it gives all the critical information about it. So it gives some photos, description of the property, tenant information, investment highlights, location highlights, all that type of stuff. Also probably going to have container disclaimer, waiving responsibility for any of the information that’s incorrect.

So make sure that you cross check all the figures in that. And that’s part of the due diligence for me as well. I’d say probably about 50 percent of the time, Andrew, I find the figures aren’t right in that document. They might not be far off, but they’re normally not right. And then you can use that as a bit of a negotiation piece down the track.

Just remember, like the selling agent, he’s always going to point out the positives and hide the negatives. That’s actually his job. And there’s a saying called in, um, in Latin, the caveat emptor, which means let the buyer beware. So just cross check every single information that they give you. Yeah, perfect.

As having due diligence, basically that means that we believe everything you’re saying but we reserve the right to check it and make sure it’s correct until we’ve moved forward with the purchase. Yep, exactly right. So mate, what else might they send us? All right, so here’s one that’s not as commonly called but a pro forma.

That’s basically a projection of the property’s financials. So it’s not actual financials. They’ll use these sometimes in the memorandum just to demonstrate like potential future value or things like that. And it’s, it’ll be used for things like if there’s a multi tenancy and only two out of the three are tenanted, they’ll put in the expected rent from that one, basically trying to get you to pay the fully tenanted price.

But I wouldn’t work off that. I’d work off what the current one is, basically come up with your own pro forma. So work out like, cool, is there any values I can do in this? Once I do get it tenanted, what’s the rent going to be? What renovations can I kind of do to increase the value? Can I split tenancies, et cetera, et cetera.

Generally keep that to yourself. Don’t tell the agent you’re doing that. That’s for you to work out. Cool. Can I get a bargain here? And that’s one of our great value add strategies too, Steve, is you’re buying. Are the actual property on the current net income and so if it has a vacancy, as soon as you actually get that tenanted up, you’ve increased the property value just by getting a tenant in there, which has boosted the value.

So it’s a really, really nice way to pretty much just guarantee you’re going to be able to create some. growth in that property. It is getting harder in this hot market though, like you no longer can have something 50 percent tentative and get it 50 percent of the price. What I generally try to do in that instance is just get something that’s like, use the examples with the really low like rate square meter rate, knowing that you can kind of clean it up a little bit and maybe squeeze out an extra 20, 30, 40 percent rent out of it.

And then that’s how you kind of buy well as well. Buying well is the main thing, isn’t it? If you buy well, that’s when you’ve made your money. But one other thing you can also do is you can add in your tenanting and letting up costs in the actual purchase price. So you’re taking it off the value. So you’re not dipping into your pocket to get someone in there as well.

Yeah. One of the other ones I actually see when they’ve do got like a vacant properties, for instance, is they’ll offer rental guarantees. Be mindful of this, like you’re paying a premium and they’re always going to choose a high rent to make it more attractive as well. So always try to get effectively like a realistic rental guarantee if you are looking at something like that.

You definitely need to be checking the rates per square meter for a comparable property in that location. So mate, what are the different methods of sale that we might be looking at? So methods of sales is basically just how you’re going to put offers on properties and like what are the terms of the contracts in there, what order in which you kind of do your due diligence and finance before going or after going under contract.

The usual ways are the agent will give you like an expression of interest. So that’ll just be you filling out a form, fixed price listings. Off market sales and auctions are the other ones. So expressions of interest, that’s not legally binding most of the time. It’s just a document where you show what interest you have in the property in terms of like what terms and conditions you’re going to do.

So like what finance periods, building and pest clause, due diligence clause, deposits you’re going to be paying. Just be mindful though, sometimes they will have a little clause on them saying, if you do go under contract on this property and then pull out, you’re responsible for our seller’s solicitor’s fees.

So I did see a client stung with that a few years ago. So just make sure you read it. But most of the time, not legally binding, they’re just used to kind of start the negotiation process effectively. Some agents will use them to gauge interest before auctions. And just basically just lazy man or woman’s job of just kind of getting all together.

They’re more common in a hot market, in a cold market. They’ll talk to you directly when they’re getting hundreds of kind of interest that they’re going to send out expressions of interest. So that’s one way of kind of negotiating with the agent. And then the other one is where you’ll see on like websites, fixed price listings, So that’s just where they do like price on application offers above 1.

2 mil contact agent or high yielding 6 percent net yielding property. That’s just the standard kind of way of doing it. The reason they do this is they basically don’t have to pay like expensive auction costs or anything like that. They can try to get a sale prior to auction. That’s the most common one you’ll see.

So in general, like the lower price stuff, so that the sub 2 million properties and then flying onto that similar idea, but like off market sales, that’s just where the owners are happy to sell privately. I always actually get asked, like, why would someone actually sell like an off market property in a hot market?

There’s actually a number of reasons like the tenants kind of too weary about the property or buy the property because sometimes they actually don’t have rights to buy it. They don’t want friends or family or neighbors. Alternatively, sometimes buying off market doesn’t actually mean better value. It just means you get first look.

So like quite often, I actually get stuff that’s off market where we actually pay a fair price. And I know as a buyer’s agent, I’m supposed to be like, Oh, I’ll get you below market value. No, sometimes in a hot market, buying a really good property at a fair price is actually a good outcome. And like one of the examples, so the other week I had an agent call me up at about a property and he’s like, I’ve just posted this property online.

And I had 18 inquiries in the first two hours. He’s like, if you can get me this price for it, I’ll just give it to you. And then we were done and dusted under contract subject to due diligence about two hours later. And that actually showed because he was getting a lot of offers, like slightly above and slightly below where we’re at.

I knew there was demand for that property. And it was a good property. It was, you know, like it was a lower price property. So basically at the moment, like a bit of a feeding frenzy for sub million dollar properties. That was just because it was off market and no offense to the agent. He was just doing it because there was no way he was going to get back to like 80 people and kind of send them information memorandums and have a phone conversation.

He just wanted it done and dusted at a fair price. So off market doesn’t mean good value. It just means off market. So that’s fine there. And then the last one’s auctions. They’re generally just held for the really attractive properties. So like the CBD locations, the national brand ones like the Bunnings and the McDonald’s and things like that.

I’m less common on the cheaper ones just because there is enough kind of demand to kind of get them sorted without it. Be aware if you’re buying at auction though, you have to do everything prior to bidding. So all you do diligence or inspections, speaking with your lender, getting your finance approvals and the evaluation sorted.

If you bid on it and you can’t go through with the purchase, you’re effectively going to lose your deposit and Theoretically, you’re liable for any further losses and damages sustained to the seller. So auctions are legally binding. So make sure if you’re going to auction that you’re well prepared. I personally don’t like going to auctions.

I’d rather get a deal done or watch a potential property like go get called in at auction and then I’ll make an offer afterwards. And then normally that way you can at least kind of gauge what fair market price is. All right, mate. So how does the actual acquisition process work? Can you walk us through it?

All right. So three main stages. One is negotiations. The second is the under contract period and then third settlement day. So we’ll go through it one by one. So negotiations is at the start of the property where you’re talking with the agent and you’re actually like trying to negotiate on the price and the terms and the conditions and all things like that.

This can actually take like It can literally be in an hour and it’d be done or it can be months. For your self story, Jandre, I believe you’ve spent quite a bit of time negotiating. How long did you spend on that? Actually, I found this property at the start of February and we’re under contract, but we haven’t activated the contract yet because we’re still waiting for their accountant to pass us the profit and loss statements.

for the self storage business. So it’s been a good five months that we’re working this deal. The longest one I’ve had is about eight months. And a lot of the time, sometimes you’ll actually lose it to another buyer, for instance, and then they’ll fall off the scene and then they’ll come back and things like that.

But those bigger ones, yeah, they’re much more complicated to be long. It’s worth pointing out though, like making an offer on a property is not a legal commitment. Unless it’s an auction, it’s just an indication to the agent that you’re interested in buying the property. So before you start negotiations though, just make sure you know the area well, the property well, have some comparable sales and rentals, know how long the property’s been on the market, etc.

This will kind of put you in a good stead with the agent. Like don’t be the person who just goes online and emails every agent with low ball offers. Like you’re just going to annoy them. And I say this too much, and they’re just not going to want to work with you. You’re not going to find that unicorn where it’s just going to, one’s going to pop up and you’re going to be all right.

Talk to agents and show them a bit of respect. And you’ll actually find you’ll get a better outcome long term. So they do represent the seller, but they still want to get a deal done. So they want to work with people that they’re going to kind of work well with them and get kind of basically a good outcome for both like normally negotiations and somewhere between the seller’s expectations and what you’re willing to pay for it.

And that’s normally where you get a fair outcome. But just go through the whole process and be confident with what you’re doing. Like your greatest strength in negotiation though is being able to walk away from the deal. And I actually find walking away from a lot of deals is where you actually find the true value because then if the agent starts chasing you, you know you might be in a good position just to kind of have another counter offer and have another crack at it.

So just be confident with anything. But know the property before you start negotiating. There’s, there’s no point in negotiating unless you understand the area, what’s going on, what the cap rates are, who the tenant is, like how long it’s been on the market. And it’ll make you a much stronger negotiator.

So what are the main negotiation points that you see come up in your transactions? When you negotiate on a property, these are the normal ones you kind of talk about with the agents. One’s obviously the price, like you need to agree on a price. Then the other ones are normally things like conditions. So finance periods, building and pest inspection access, due diligence periods, how much of the deposit it is, and then whether the property is subject to like the office subject to like development applications or rental guarantees or early access or something like that.

But the main ones when I put in my offer is you put in your price, your finance period, your due diligence period, and what deposit and settlement period you want on that property. And that’s normally the starting point. The good thing with commercial is everything is negotiable. So you can talk about that.

But part of the negotiation process is actually making your offer sometimes more attractive than other people. So a lot of times at the moment with the hot market, I’m shortening my due diligence period. So I’m doing a lot more work over a shorter period of time just to make my offer more attractive than other people’s, whereas other people might be offering a 30 day due diligence period.

I’m offering 14 and seven day ones and trying to get it done there just so that I can actually have the same offer on price, but they accept mine because there’s something more attractive about it. Same thing with finance. A little bit harder to obviously get the finance one. It is, does take kind of weeks to months at the moment getting stuff done.

But if you can have a shorter finance period or be a cash buyer, for instance, you’re in a very strong negotiating position. So what about the deposit? What’s your stance on negotiating how much we’re actually going to be putting into this deal at start? Like I said, you can negotiate anything, but usually it’s five to 10 percent of the purchase price.

Be weary though. Like if you pull out on a contract, your condition like due diligence or finance, you get that back. So it’s not cash you’re going to lose. Be mindful though, they still have cooling off periods on contracts. So don’t pull out on a cooling off period if you’ve got one of those conditions because you’ll lose 0.

25 percent of the purchase price that way. So just be very mindful of that. Always make sure your contract is subject to due diligence or finance. Just so you can get out of the contract should you find something you’re not happy with. While we’re on the acquisition process, we might as well also talk about GST and when it’s applicable on commercial property.

If you’re buying a tenanted commercial, no, you don’t have to pay GST on the purchase price. It’s considered what’s called a going concern. So you will sometimes have to pay GST if you’re buying a vacant property. However, you will get that back generally on your first BAS statement, like your business activity statement.

But again, speak with your accountant before purchasing a property. I always call my broker and my accountant before I do anything with a contract. Hey mate, that’s actually what I love about commercial property is that every single thing and part of it is actually negotiable. So basically whatever you can get them to agree to.

So that’s why I absolutely love this game. You can even get like an agreement to lease for the property. So the tenant will sign their next lease term as part of settlement. Like you can guarantee and reduce the risk as much as you want with commercial. So mate, once we’ve agreed to a price and conditions, what happens here?

Ah, so you’re going to be generally under contract on property if you sign a contract, but Before you sign the contract, get your solicitor to do a quick review just to make sure you do have some of those exit conditions where you’re not going to lose money. Then basically, you need to start the conveyancing or solicitor process, organize building pest inspections, get your finance moving along, perform the due diligence on a property if there’s a due diligence clause, and then engage a property manager.

We’ve spoken about finance already on a previous podcast, Andrew, and we’re going to discuss due diligence and property management on one of the future ones, but for this one, we’ll just stick through that under contract period without those. It’s best to try to minimize the legal finance and due diligence costs though by doing the things first that don’t cost money.

So like things like area research and tenant research. Do that like in the first instance before you pay for building and pest reports valuations. Never stay in the deal just because you’ve invested some funds though. Like I get a lot of people they feel like the committee because they’re four or five grand down the rabbit hole with fees.

That’s very minimal compared to the financial hit you’re going to take if you buy a bad property. So never stay in a deal if you find a red flag. Walk away, reassess, and then move on from there. Yeah, well, I actually had to walk away from a deal earlier this year. It was a self storage facility up the coast and basically I’d created entities for it.

I obviously had engaged a solicitor. We were working the deal and then I had my terms and conditions. Agreed by the vendor and the agent and then when their solicitor came to the party, he wouldn’t allow me to have any kind of a due diligence period at all. So, weeks and months of going back and forth for this particular deal, they just wanted an unconditional contract straight up and we had to walk away.

So, on that particular deal, I walked away from about 4, 000, like 3, 000. Uh, for setting up entities, at least 1, 000 for the solicitor fees. So you just have to do it sometimes. It’s part of doing business. It’s part of the commercial property game. Yeah. And the next deal you get into anyway, with the cashflow that commercial generates, it’s going to pay up that very quickly anyway.

So it’s just part of a bit prepared for it. I even find with clients, when I tell them to crush a deal, because I find a red flag, you can walk from a deal if you’re not feeling it. So mate, can you explain the conveyancing part to the listeners? So, the main purpose of the conveyancing process is to transfer the legal title of ownership of the property from one party to the other.

So, this process usually starts just before you enter the contract and then it’s going to continue the whole way up until settlement. So, conveyancing is normally done by a solicitor or conveyancer as we mentioned before. The solicitor or conveyancer you choose though, they need to be well versed in the laws in the state that you’re working.

So, there’s many differences among the states about deposits and cooling off periods. and conditions and things like that. So just make sure you’re using someone who’s highly experienced in commercial. Don’t go for the cheapest person. Find someone who’s good at what they do. Pay an extra 300, 500 for someone who’s looking out for you as we mentioned before and to be honest, the only person kind of looking out for your best interests.

is crucial. So look for a really good one and pay what you need to pay to do it. And again, if you have to walk away from the deal, it’s funds that you might lose, but it’s well worth it in the long run. From walking away from that deal, like I lost 4, 000, but it could have cost me a couple of hundred thousand dollars.

If you know there was something wrong with that deal that they were trying to hide that I didn’t know about, I only would have uncovered during due diligence. So you just got to take that hit for one little time to basically protect yourself for your financial future. Yeah. So the settlement process, it’s always going to be messy.

With commercial, you’re rarely going to have a smooth sailing settlement process. So you need to be confident in the person’s best interest at heart. Yeah, definitely. So mate, what actually happens once you sign the contract in regards to the conveyancing and legal side? Once you and the seller have agreed on all the terms of the contract and have both signed it, the contract’s then going to be dated.

Once the last person signs, which is effectively the seller. So that’s known in quotation marks is exchanging contracts, which you might hear in some states of Australia or under contract in some other parts. The contract is a legally binding document. This is where it gets quite serious and you need to have your conveyance and solicitor involved the whole time.

The deposit’s usually paid before the buyer signs or seller signs, but it depends what state you’re in. So just make sure when you’re negotiating part of that, you’ve paid the deposit on time. The contract that’s going to stipulate the conditions that the buyer needs to satisfy. So that’s the due diligence, the finance approval, pest inspections, or any other kind of extra ones you have there.

And then the period between you signing the contract and the property going unconditional is known as the conditional part. So that’s where you can pull out based on these conditions that you’ve stipulated. In the conditional period, This is most likely where you’ll do your due diligence because as due diligence takes quite a lot of time, as you know, Andrew, like you do need time for that.

So you’ll do that in the bulk of it in that once you’re under contract, our next episode, we’re going to a deep dive into due diligence. So we’ll kind of cover all the things you need to tick off there. But during that period, your solicitor and conveyance is going to undertake like some pre purchase searches and inquiries.

Just be aware though, they’re going to send you a big list. of searches that they can do. So it’s best to have a, like an open, honest chat with them about what one’s actually more appropriate for your transaction because otherwise the cost of them will just add up too much. So what are some of the searches that a conveyancer will actually do for you?

So you’re going to have things like title searches, registered plan. They’re going to check government and non government authorities to ensure there’s no like outstanding interests or problems with the property. They’re going to do like local authority rates search. Special water meter searches, land tax search, transport and main road search, priority notices, they’ll give you pages and pages.

They’re the critical ones that most people get. If there’s something special about your property, have a chat with the conveyance as well because there are extra ones you can get just that is add another layer of protection for you. Just as FYI, your solicitor can also arrange to do your body corporate inspection or record search.

However, there are some companies you can obviously just go and organize that yourself. Yeah, fair enough. What actually happens after these searches? All right. So after the searches are done and you’re fully satisfied with your due diligence and you’ve got unconditional finance, and I stress that word unconditional, that’s not conditional finance because that’ll happen in two stages.

The broker or lender will come back saying, yep, you should be right. And it might be subject to valuation or something like that. You need to wait for the unconditional finance. then you can make the contract unconditional as well. So you’re conditional up until this point and then once you’ve satisfied all these conditions, the contract becomes unconditional after that.

And what are the boxes that need to be ticked once under contract before settlement? All right. So some of the things you need to be looking at before you go to settlement, sometimes even just as you kind of go under contract is that you’ve got adequate insurance and peace of mind. Most states of Australia, the risk of the property passes to the buyer one day after the contract date.

So start looking at that quite soon. The other ones where I normally see people get caught up on is just simple things like collecting keys, passes, and codes for the actual property. It’s always something like a few days after settlement, you try to chase it up and trying to get that stuff out of like a seller who’s already got their money is sometimes near impossible.

So get all that sorted prior to settlement. The other one is just arranging a pre settlement inspection. So that’s just to ensure that the property is in the same condition. for when you perform your early inspections. For vacant commercial properties though, this is pretty critical because you just want to make sure that there’s no damage when they’re leaving or they’ve left rubbish behind and things like that.

Even if the property is tenanted though and responsible property, I still recommend an inspection. It doesn’t hurt. It’s normally a good excuse for your property manager to go in and introduce himself to the tenants and get that ball rolling and making sure that they have a nice easy handover as well.

Yeah, the arranging their pre settlement inspection, I think that’s one that sometimes people forget about because it is important to make sure, especially like You know, in situation where the settlement has actually taken a very, very long time, who knows what’s been happening at that property for the two, three, four, five months, if this is really dragging on.

So you need to be checking that what you’re expecting to buy is exactly what you are buying. And there’s one more, um, that you didn’t actually mention, Steve, is particularly in self storage, you might have some kind of business handover. a four week business handover before settlement to make sure when you do take over that property, you hit the ground running and you’re not losing any business or there’s no operational drag there.

Yeah. The biggest thing as well is, yeah, like just talking to the business owners prior to settlement as well, because with commercial, a lot of the times, like even though it might not be in a lease, there might be like an under the table agreement. One of the ones I always find is you’ll actually buy a property and then two weeks after.

The tenant will go, Oh no, the previous owner said, I’m not having rental increases this year. And then you’re stuck between a rock and a hard place because you can’t actually prove it. And the previous seller is not going to tell you anyway. So get all that organized prior. So that way on settlement day, the property manager, and you’ve got all this stuff stipulated, everyone knows what their expectations are.

So what happens after unconditional and up to settlement day? We’re just stepping one step back here. Yep. Okay. So before settlement day, Like Any special conditions such as like repairs or removal of items left of the property, they must be satisfied as well. So that’s why the pre settlement inspection is quite important.

In this period though, this is where the banks are going to do their thing to ensure that like finance is ready for settlement. And then for settlement to occur, like all parties including the banks, And they must be ready to settle. So settlement day is the day where you transfer the title. So basically on that day, all the solicitors and conveyances and their bank representatives will represent the buyer.

And then they’ll organize the pay of the balance between the purchase price and the exchange. And then they’ll do the title transfer. This is actually surprisingly done with like paper and in person. However, like recently there’s this new digital PECSA. Well, I say recently, it was introduced in 2010.

Yeah, so PEXA is actually an interesting development in property. Can you explain what it is? PEXA is basically like an e convancing platform. It stands for the Property Exchange Australia for Digital Settlements. Yeah, it got introduced in 2010 to get rid of the old paper trial method. It’s just an easy way to do it.

It saves time and money. There’s also some pretty high levels of security for it and protocols in place like Every conveyancer and lawyer who signs in PXR has to have like dual factor authentication and a digital certificate and things like that. It did change a lot in 2010, the way all property was transacted, not just commercial property.

But there’s also potentially another change coming, which is smart contracts. When in future, I believe, and a lot of other people are saying this as well, is that There will be properties that are actually transacted through the blockchain, like how cryptocurrency is actually transacted, and this is going to really speed up the way things are actually done because this is a 24 7 service that’s double checked by the blockchain essentially.

So you know when transacting property, Steve. As you definitely know, if your transaction isn’t completed by like Friday afternoon at 4 PM or 5 PM, you’re not getting it done for that weekend. But when you’re actually doing it in future on the, as a smart contract on the blockchain, this is a 24 seven process.

And I think property will become more liquid. So it’ll be transacted a lot quicker. And it’s a really, really interesting time because I think there are going to be some huge businesses that are created out of this new technology that we’re going to be using and property is going to be a lot different in five, 10 years in the way it’s transacted than it is today.

So yeah, I agree. And like the blockchain, like this adds another level of security as well, because you have obviously all the other users authenticating the transfer. Yeah, there’ll even be some that we kind of have not expecting, like breaking properties up into NFTs and like little units. That they can transfer and then that can be managed because everything can be done digitally and online.

Yeah, I think the game is going to change quite a lot. Yeah, we’re actually looking at potentially doing exactly that. Creating an NFT for the actual property that we’re syndicating. And I definitely think that it’s going to be something that a lot of big syndication firms will do in future because it makes the whole transaction way more.

Fluid and easier to get in and out of property. So it’s definitely going to be something to watch. I think from what we know now to what we’ll know in, in two, three, four, five years, it’s going to be night and day when this technology starts coming into place. But it is a very, very interesting time in property and the blockchain.

So yeah, exactly. It’s going to make it very fluid where this stuff can actually change hands quite regularly. You can have smart contracts, you can have levels of security, it should be interesting. And anyone can work on these from anywhere around the world, which is interesting as well. Yeah, definitely.

So mate, let’s talk about actually selling a property. In what situation would you actually sell? So selling the property is always going to be a tough decision. Like ideally you want to hold your properties long term because they give you capital growth, they give you a nice good income. Before you consider selling the property though, just make sure you kind of look at the numbers carefully on a property.

Like selling a property costs a lot more than you think. Because you’ve paid your stamp duty on the property there originally. Then when you sell it, you’re going to pay agent costs of a couple percent. Then the property that you replace that property with, you’re going to pay stamp duty again. So you’re generally going to be adding up to about 10 percent losses just from transferring one property to another.

So just be very mindful of when you’re selling a property that it is the right thing to do. Some of the reasons why you might sell a property though is if it’s a seller’s market, So like if there’s lots of buyers yet that you believe you’re at the top of the price point, having to sell to transfer the funds into another purchase that you think might have some better value long term, that’s one way to do it.

Same thing as if the market for the things heading into a downturn. So if you think that the market might turn, cause say interest rates are rising, even though I disagree with that, that’s going to change it. Just look at where you are in the cycle. And we spoke about that on a previous episode about the market phases.

So. Go back and have a list of that podcast if you want another ones. If you don’t think you’re going to get like rental increases in the near medium future, and there’s better opportunities than available to you. And then the other one is actually, if you think it’s good part of your exit strategy, and we’ll have a bit of a chat about that later, you also might just choose to sell if you get a great offer on a property.

So for example, like if a developer gives you an absolute awesome price, you might jump on it there. And then the other one is if it’s part of your exit strategy. So we’ll have a bit of a chat about that later, but. Some of the reasons not to sell, obviously, if it’s a buyer’s market, or if you think the area that you bought in is gentrifying or has some growth kind of prospects, or if the market’s just generally still growing, like there’s no point in losing out on there unless you have to kind of fit the funds into something else.

Let’s say, however, like the value of the premises has grown significantly and you want the funds to invest in a better project. So just ask yourself, like, does selling this property fit into my actual plan? Where am I going to put the profits? How leveraged is my portfolio currently already? What’s my risk profile?

And what’s my exit strategy? Don’t just sell a property because you don’t like it. I find a lot of people end up selling properties because they don’t get along with their tenant and there is a bit of friction between them. But if they’re good, stable business and they’ve been there long term and they’re paying their rent.

Having a bit of friction is not a reason to sell it. It still means it’s an attractive property for you longterm. Yeah. And I guess another reason that why you would actually sell a property is that you’ve completely maxed it out. Maybe it was a value add strategy or a value add project that you are working on and you’ve got it to where your projections were and you could dispose of that asset to buy another property.

That is a better property factually for making it grow in value. So what do you actually do? To prepare a property to be sold. Ah, so if you do decide that selling is the way to go, there’s a few things you can actually look at and they’re normally just to do with getting the best price for the property.

So, one of them is increase the rents to market value more as high as possible as you can if you haven’t already done so because that’s going to mean it’s attractive to an investor. The other thing you can do is obviously try to get them on a fresh lease. Having a fresh lease with the tenant is going to be very valuable in an investor’s market.

Be mindful though, there are some markets in Australia where like owner occupiers are paying a premium, like they’re trying to get in. So not having a tenant or a short lease can actually be beneficial as well. So just assess the market that you’re in. Same as residential property, you can make some cosmetic improvements to the property.

So like fresh paint, upgrade the flooring, revamp the landscaping around the area, things like that. Then the other ones just try to reduce the operating expenses. So just make the net return more attractive to an investor. So just like look for if you are paying for insurances or maintenance on the property or property management, try to get that down to a reasonable level just so the net return increases.

Let’s talk about exit strategies. What are some of the exit strategies we could use if we’re going into retirement or, you know, instead of selling a property? So this is quite important because it’s specifically what’s going to meet your goals that we spoke about previously. And like your exit strategy actually can be your goal because it might actually get you to your passive income goal or your portfolio size goal, whatever it may be.

So each investor’s exit strategy is going to be different though. Like their goals, their portfolio size, their personal circumstances. That’s all going to change. So sometimes having a chat with a financial planner, accountant, buyer’s agent is going to be helpful here because they can put pen to paper and say, look, this is actually going to be the most tax effective and financially beneficial strategy for you.

There’s seven strategies that I kind of summarized here as the most common ones. So I’ll go through them now and we’ll go in depth in them afterwards. So one’s keeping all your properties and not paying down the debt. The next one’s keeping all your properties, but paying down the debt. The next one is keeping your properties and increasing your debt.

The next is selling part of your portfolio to pay down the debt. And then the other ones are selling part of your portfolio and living off the profit, selling your whole portfolio, and then selling some of your properties by vendor finance. So, I know I rambled a little bit there, but we’ll break it down a little bit.

So first one, keeping your properties and not paying down the debt. So that’s generally with commercial property because you’re going to live off the passive income. You can just keep it on interest only for as long as you can, basically before the banks say no. The benefit of this is you’re keeping all the properties, you’re getting the capital growth and you’re still living off the passive income.

So you’re kind of winning on both fronts. This is generally lists like the way to kind of generate a passive income for financial freedom and what rather than paying down the debt. Some people might pay it down slowly, but this strategy, the main focus is to generate the passive income to provide the financial freedom.

The next one, which is kind of flows on from that is keeping the properties, but paying down the debt. So that’s effectively having like principal plus interest repayments or using the cashflow to pay it down over time, over the timeframe that you have. This is a lower risk strategy, obviously, because If once you get to the end or your retirement age, you’re not going to have a debt.

So it just mitigates the risk that if you do have vacant properties in your portfolio, that it’s not financially going to harm you. So you can keep moving forward. The next one’s keeping all properties, but increasing debt. So this one actually just means like, Generally, like, keep refinancing the properties and living off the extracted equity.

You can’t do this forever though. Banks are obviously going to say no, but as a younger kind of person, you can theoretically use these funds to move in. This is going to be the highest risk strategy though, because it’s going to be susceptible to like, market cycles, the vacancy levels. Lending fluctuations.

The benefit of this though is you still get to hold all the properties though and get the future capital growth out of them. The next one is selling part of your portfolio and paying down the debt. So this is again just to mitigate the risk of holding debt on properties if they do go vacant. The negative though is going to be Andrew.

Your portfolio is not going to be as big. So if you do get capital growth, you’re going to miss out on the next 10 years of capital growth plus the cashflow that those extra properties would have got. But one of the most common ones is just kind of paying down some. Alternatively, you might actually sell say some of your residential properties.

And then use them to pay down the commercial debt. So you increase your passive income that way. The next one, selling part of your portfolio, and then living off the profit of actually selling those properties. So you sell the property, you get your few hundred thousand dollars, whatever it may be, and then you use that money to live off.

Generally, I’d look at kind of paying down the debt on the other properties to, to increase. But again, it’s going to depend on what time frame you kind of work around what you’re actually trying to achieve. The second last one is selling the whole portfolio. This is obviously just a really conservative strategy where you’ve made your money, you set up for retirement, you want to put your money into other investments.

It might just be like a lower risk investments or savings fund. You might just want to give some profits to family members. The quite common one I see is Some of the older generation will then give their kids and grandkids deposits to buy residential properties, for instance. So, quite common there. And then the last one is actually selling properties due to vendor finance.

So, we’ve mentioned this on the lending episode. Basically, it’s where you only sell part of the property and then the new owner will effectively be paying you. for that portion that you’ve sold to them. This is less common nowadays as we’ve spoken about in the past. But the main thing is just think carefully about your exit strategy, consult a financial advisor and accountant, and just make sure you consider all the relevant items.

Yeah, very, very interesting. Some really good points there. Another point to actually think about is when you actually are selling a property that It’s not your principal place of residence as it’s not going to be because it’s a commercial property that’s going to incur a capital gains tax as well. And there’s also a really cool little interesting way of doing it as well.

Steve is your principal place of residence doesn’t incur capital gains tax. So if you sell that, cause you move somewhere else. And you use that money to pay down your commercial property and then live off the cash flow of those. It’s a nice way of actually doing it. So make sure when you’re doing this, you need to be speaking and talking to someone, maybe a financial advisor or someone like that and your accountant to make sure you’re putting yourself in the best financial position for the rest of your life.

Because you might stage your selling as well. Like you’re not going to all do it in one year. And like you said, incur big capital gains tax bills and things like that. So you might decide over a period of five, 10 years. To sell down slowly or whatever the strategy may be, but like you said, have a chat with your accountant, financial advisor, because that is literally their job is to kind of work out the best outcome for you.

Yeah. Very specific to your situation. So mate, I think we are actually done. That has been a big episode. You know, you might have to listen to this in pieces because it’s well over an hour, but that wraps up episode six. So Steve, where can the listeners go to contact you and get the free giveaways? Go to my website, www.policeproperty.com.

If you want a free copy of my book, just go to checkout and use the code word podcast and I’ll, I’ll send you a free copy of my book. There’s also some cool resources out on there. I have like free cashflow calculators and property plans and stuff like that, which we mentioned on this. So feel free to browse there and if you wanna reach out and have a chat, just let know.

All right. So stay tuned for episode seven, where we explain the entire due diligence process. This is an extremely important part. And I feel like every time we go through this, I’m saying, this is an extremely important part. This is the most important part because it’s just, everything is really important with a commercial property.

So this is where we’re actually going to uncover and find anything that hasn’t been disclosed to us during the actual selling process. And basically being able to renegotiate the price depending on what you’ve actually found. So, this has been author Steve Polisi and Andrew Bean on the Commercial Property Investing Explained series.

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