[ 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 buyer’s agency, Polisi Property, Steve Polisi, how are you, mate? I’m really good, mate. How about you? Yeah, good, buddy.
Much better. All right. So today we’re going to be having a chat about the three main things that can happen after and post a purchase of a commercial property, and they are organizing the property management, and how to do that. Surviving a potential downturn, we all know that can happen, and then also formulating a value add strategy plan.
Yeah, that’s right, Andrew. Just when you thought the hard work was over, you have to still work at commercial property, so, like, most people think that the cash flow is just going to simply roll in, but these topics are the things you need to mind, like, once it is post purchase. Because you need to manage it well, make any upgrades, additions, and also protect your investment.
So we’ll go over all those topics, I suppose. Learning about how commercial property really works has never been easier with so many great resources around like this podcast and Steve’s book. And he’s giving it away for free if you use discount code podcast on his website. So go to www. policeyproperty.
com. All right, well, let’s start with property management. Why is a good property manager worth their weight in gold? All right, so like normally most people with commercial think it’s going to be easy and the money is just going to kind of roll in but there are a few things you need to worry about like even though the tenant’s responsible for the outgoings and you only have to check that the rent comes in time, there’s actually a lot more to it than that.
So like that’s why people get a property manager, even though it appears there’s not much to do, a property manager will save you a lot of money in the long run. Yeah, that’s right. The types of property managers that you kind of want to look for, the types of property management that they feel like or they manage the property like it’s their own.
So no one’s going to manage that property better than the owner, like take care of it wise, like picking up trash, seeing damage, like getting stuff fixed. And you really want your property manager to try to take onus of that property like it’s actually his investment. Typically, it’s not always just the big companies that do the best job as well, because a lot of the time you just get someone who’s doing it as a job.
So sometimes the smaller companies are actually better because they’re more hands on. Yeah, 100%. I mean, in a big company, it could be 100, 200 clients that they’re servicing. But if you’re in a smaller company, you tend to sometimes get a better service, which is more preferable for someone who’s probably listening to this podcast with 1, 2, 3, maybe even hopefully a large portfolio of commercial property.
But realistically, most people listening to this will have 1, 2, or 3. So, yeah. And we’ll have a bit of a chat about that later about how to vet the kind of a good property manager versus a bad one. Definitely. So what are the things that a good property manager will keep track of? Ah, so the first and foremost thing you need to keep track of is obviously the tenants.
So their rental payments, the outgoing payments, any rental increases, all lease renewals, or any breaches of lease. And then the next one is obviously record keeping. This is the one I’m personally, I’ll put my hand up. I’m not the best at it. I’m pretty lazy with it. Sorry. That just means keeping track of receipts, outgoing receipts, rates notices, regulation notices, such as fire checks, council permits, more even like updates to the Retail Leasing Act is quite important.
And then the next one is repairs and maintenance. So even though the tenant is responsible for repairs and maintenance, they often will call the owner or the property manager to organize these things. So you’ll be looking at looking at organizing repairs, liaising with the tenant in regards to those repairs.
Engaging local maintenance contractors, understanding the maintenance costs and quotes with the building, and just becoming familiar with the building in general, especially if it’s a body corporate one or if you own it yourself. And then the next one is rent. So you’re obviously going to have to know the Retail Leasing Act, if it’s a retail property, know what the current market’s doing, manage the rent reviews and the lease options and keep track of rental arrears and do bank reconciliations and things like that.
The next one is where we obviously want to avoid is tenancy disputes. Every tenant always has a dispute at some point. It’s very rare you have a perfect relationship with your tenant. So you’re going to make sure you need to have like a good communication skills and negotiation ability. So just know yourself with that.
I get a lot of commercial property owners who They’re great at finding properties and buying properties, but they’re actually not the best at conflict and actually dealing with emotions, which business is an emotional process for some people, especially the owners of the business. So just be aware of your personality if you can kind of handle those disputes.
Then the next one, if your tenant actually leaves, finding new tenants. So marketing, advertising for new tenants. Reviewing any new tenants that come in. And then the last one is just understanding legislation changes. So like what incentives are required during pandemics, such as COVID for instance, but with all that, having a really strong detailed lease that stipulates exactly what’s required of the tenant, as well as making sure the tenant understands that lease.
is really, really important. So there are a lot of moving parts. So due to all these moving parts and the relatively low cost, I always recommend using the property manager. Like your time Andrew is better spent like just looking for another property or focusing on a job where you could earn more money rather than trying to save a couple grand a year and do it yourself.
So most of the time I find the property manager covers its cost anyway, because they get like Cheaper right on tradesmen or they kind of stay up a little bit more up to date on rental increases or something like that. So I highly recommend using property managers and do commercial investment. Oh yeah, definitely.
I mean, we’re going to touch on this a little bit later, I think, but just the headspace that you need to be in, you basically have to learn a whole new job, a whole new industry, have systems set up. Like if you want to do this properly, like you could do it half assed. You could, you could do it half assed for a single tenant, make it very, very easy and, you know, not have Any kind of record, like recording of records and things like that, but to do it well, and I hope most people would like to do it well, it’s a full time job, you know, taking care of commercial tenants and keeping up with legislation.
So highly recommended use a property manager. Yeah, it’s all fine when it’s working well. It’s when it doesn’t go well, which is the really good, really good property manager. Imagine owning a commercial property during COVID and trying to stay up to date with like the COVID incentives and having what when the tenant’s asking you can they not pay rent what to do and things like that.
So having some of the disunderstanded inside and out like my commercial property managers just it was so much easier during COVID with things like that. It, as you said, it’s all good when everything’s going good, but as soon as there’s some kind of a dispute where there has to be some kind of backtracking to if you gave them notice or something like that, where they have to go to court or some kind of litigation, it’s just not worth it.
And it’s not that expensive, really. It’s like between what, 3 percent and 7 percent or maybe 8%, you know, mostly. Yeah. All right, mate. So when’s the right time to actually engage a property manager? So I actually engage a property manager as soon as I go under contract on a property. So it’s just the early you can get them involved the better.
They just add another layer to ensure a smooth settlement transition and basically just ensure you’ve got all the correct documents because there’s 10 to 20 documents sometimes you need for a handover so they can manage that. In addition, they’ll actually perform the pre settlement inspection free of charge most of the time.
So, just getting them included early on. They’ll actually know the area well and sometimes even know like the tenant and the building and things like that. So, they might actually give you some inside information and potentially tell you to walk away from the deal. They might actually show a red flag that you weren’t actually going to find during your due diligence.
So, I just get them involved as soon as you can because finding, vetting, and buying the right commercial, it’s just, it’s just critical to making a profitable investment. Yeah. Well, he’s just another, uh, a great opinion. Is he a boots on the ground opinion that you can take advantage of and not have to basically pay any extra money to get that opinion straight away?
It’s great. Yeah. And if you go to the right property manager, who’s like you said, boots on the ground, they’ve been there for a long time. They’ll know the area way better than you. Like you can do all that due diligence. We spoke about in the last episode about kind of analyzing the air and things like that.
You won’t have the same knowledge, like they’ll know like the business owners in the area, what’s exactly going on, who’s moving where and things like that. They will give you some insider information. Yeah, definitely. So, we touched on before. So, what are the differences between self managing and hiring a property manager?
As we spoke about, like there’s quite a lot of management involved. So, even though we were kind of saying in the early episodes, oh yeah, it’s easy, just get the money in, there actually is quite a lot you have to do. So, You just got to make sure that you’ve got the right personality for it and have the time.
Like it is time consuming. So even though it might only be a few hours each month, just focus your attention because even though it’s only a few hours, you do have to be able to dedicate like someone like you, Andrew, like home life can get pretty busy and you always put like just me. I put my banking stuff always at the end of the month and I just hate doing it.
And most of the time you end up not doing it because of it. So just be aware of your personality. And like you said before, you’ve got to have the correct software and methods to manage a property. If it’s an interstate property, then you’re obviously not going to have the boots on the ground. So you’re not going to be able to talk to the tenant directly regularly as well.
It’s a really kind of tedious task. And if you do manage it poorly, it’s just going to give you a huge amount of time, stress, money that you’re going to lose. Like I said, I’m always going to recommend a property manager because if you get a good one, they are going to do it better than you. You also don’t have to be available 24 seven.
So if there is a, an urgent kind of maintenance issue or something like that, I don’t want the phone calling at 10 PM saying there’s a flood or there’s a leak in the, in the kitchen or something like that. So it just takes the full stress out of it. You’ll also need to make time to like assess the tenant applications, conduct tenant interviews.
And like this part’s a lot more difficult if you’re a borderless investor. So like chances are you’re going to need to get a property manager for that part of it anyway. So why not keep them on for the management? The other thing I recommend is it’s not too wise to become friendly with the tenant because like it’s all good when the business is going well for them.
But when it is goes bad, like I like having another layer of separation between you and your property manager. They can even play you off as the evil landlord. So they can say, Oh, let me see if I can kind of get a rent reduction. They can say no. When the tenant’s actually calling you on the phone, you do need to have that kind of dispute resolution kind of arsenal in the back of your mind to be able to do it.
Yeah. There’s a reason why they say that property management is the hardest part about investing because it just literally is. But in comparison to its counterpart residential property, Managing a commercial property is a lot easier. There’s a lot less headaches because most of the outgoings and the repairs and things like that are on the tenant, not on you as the landlord.
So there’s a lot less headaches in commercial than residential. Still not worth the time. It’s well worth it. Yeah, exactly. It is a lot less work than residential. And once you’ve got it going right and it’s kind of, you’ve got the long lease and the tenant’s good and they’re paying on time, it is a lot easier.
Um, it still takes time. As we said, there’s a lot of bookkeeping and things like that, but it’s just kind of a nice thing to get back. It’s when things go wrong that you really kind of need a good property manager. Yeah. So what’s the process for selecting the right property manager, mate? All right. So like the right property manager, it’s basically the difference between having a good tenanted long term one or a vacant property.
Your relationship with the property manager is basically a partnership. You want them to understand your objectives with the property and basically this work in kind of in relation to how you want the property to operate because it is still your property so. You need to basically maximize your profits as much as you can, but also take their advice like they are the experts.
So, so look to listen to some of their advice because they do know what they’re talking about sometimes. So, look for a property manager who sees his or her job as about relationship building, not just completing the transaction. Their focus should be on increasing the value of the asset. While maintaining and increasing the cash flow as much as possible each year.
So finding a manager who’s experiencing your property type, size and location will give you a much better outcome. Local knowledge is just extremely important. Like they obviously need them to be like close to handle the tenant issues and have a good reputation in the community as well. One point to be aware of Andrew is like the selling agent for a property that you’ve purchased will always try to push the management of their company on the sale.
However, just because they sold the property doesn’t necessarily mean they’re the best person to manage it. So make sure you shop around for a good property manager. One of the best ways I find a good manager is just referrals from another commercial property investor. There’s also a lot of like online commercial investor groups on social media or you can ask your buyers agent if you’re using one.
So, but referrals are definitely the easiest way to kind of find out if you’ve got a good property manager or not. Although it’s not always possible, but if it is, always try to visit the property manager at the office. So, that way you can get a bit of a feel for their staff, their organization skills.
Like if everything’s untidy and there’s mountains of files on every surface, it can be a little bit of a sign that they’re overwhelmed. I cannot believe that I’ve walked into some management offices and they still have like huge piles of papers on desks. Like this is generally more like common in like regional areas where you might get a bit of a older manager who’s been doing it that way for 30 years.
But now with technology, they need to have updated systems. Everything needs to be uploaded digital based electronic resources. So that way they can email you things. They’re not scanning things through. So yeah, just try to get a really good feel for their office that they’re working out of. Yeah, one of the added bonuses of finding a really good property manager as well is if they’re very well connected, like they know a lot of people in the community and you’ve already bought a property in that location and you potentially want to buy another property in that location, they might have connections or just have whispers when things are getting sold and they might be able to give you the inside scoop to get some deals that haven’t gone on the listing portals yet.
So it’s always nice To have a very well connected property manager in your corner, it’s beneficial for them to find more deals for you as well, because they get more management from you. Yeah. But if they know the area really well, like I had a recent one in like property in Toowoomba, it’s a big industrial warehouse.
The next door tenant wanted to expand. So instead of actually finding them a bigger space, he actually came to my client and said, Hey, look, they’re willing to pay your current tenant quite a lump sum to get them out and find their own place. So we actually moved our tenant into another building and then that way they could expand into the warehouse next door.
So just things like that will happen. And then, yeah, we got a fresh 10 year lease out of it. So yeah, just that was all the property manager. You would not been able to do that yourself. That’s right. It’s just those little things that they come to you with those little ideas that there’s no way you would have had been able to get that idea or get that tenant or get that lease without them, you know, intervening and coming to you with that great idea.
So that’s awesome. So mate, what are some questions you can ask them to find out if they’re a good property manager? So I’ll riff a few of the questions out that I typically kind of go through. So questions are, how long has the company been in business? How long has your dedicated property manager been at the business?
And what’s their previous management experience? How many residential and commercial properties does the business manage? How many residential and commercial properties does your dedicated property manager manage? Is there a dedicated property management or do you have personal assistance? Is there a separate team for residential and commercial because this one’s important to our different types of asset classes and you don’t want someone who’s only got experience in residential doing the commercial side.
The next ones are things like, uh, how often do routine inspections get carried out? The other one I always ask is, can you give me some examples of other properties you manage in the area? And then obviously asking things like, what’s the typical time to re let a property similar to this one? Can you give me some examples of what you’ve done in the past?
And then other ones are things like, how do you run marketing campaigns? What’s the procedure for tenant interviews? Or what’s the procedure for collecting rental arrears? So you just want to get a good overall grasp of how they operate as a business, the size of the business, who’s managing your property and things like that.
Another question you can ask them is when the last time they evicted a tenant and how did that go? You want to make sure that they have a well thought out process and that way you can see how they compare with other companies. So like a good property manager will have a solution or problem before they inform you of it.
So if there’s an issue, they’ll get the solution, then they’ll tell you about the problem with the solution. So that way you don’t have to worry because that is what you’re paying them for. You’re paying them to actually do the wiring for you and not just kind of micromanage the property for you.
Basically, you just want them to communicate really well with you. Like, so if they’re, they’re slow to respond to calls or emails, it might be time to consider someone else. But like I said, if you’re unsure, just reach out to someone who’s experienced commercial property investor like me and Andrew, obviously we’ve both got a lot of contacts and know a lot of people with properties all around Australia.
So your recommendations are the way to go. There’s nothing worse than when people come to you and they just bring you a problem and then there’s like, they’re like, just looking at you like, okay, what do you want me to do? Like, what’s the solution? It’s always a lot nicer when someone comes, okay, I had this problem.
I’ve got these three options as a solution. Which one do you think we should use? That’s such a better conversation to have with your property manager. And it’s actually their job. Their job is to fix the problems. That’s what you’re paying them for. Yeah. A hundred percent. All right, mate. So after you’ve selected a property manager, what’s the actual process of engaging them?
Once you’ve appointed a property manager, they’ll send you through the paperwork needed to authorize them to carry out the management activities. So if you are interstate investor, they can send it through like DocuSign and things like that. However, there are some old school kind of guys that still do the old paperwork.
So, depending on whether they’ve previously managed the property or not, you might have to provide them with some documents. So, that’s things like the lease agreements, copies of the current and outstanding invoices. The dates on which the tenant pays rent, how much any bonds are and where they’re held, whether outgoings are paid on demand or allocated monthly and the current amount, and then the settlement statement if you’ve got it purchased.
So, note like in contrast with residential properties where the bond and this property manager’s trust account, bonds for commercial properties, they can actually be held by the owner, even in the personal bank account. So, like, I actually find most commercial investors actually elect to have it in their own account because that enables basically control the funds and invested elsewhere.
However, there are some rules about doing this and where you can put the money. So just make sure you talk with your commercial comparison. Basically, the manager will then contact each of your tenants about the future procedures. And then ideally at this point, your work is pretty much done with the commercial and you’ll hopefully then have a set and forget property.
So Steve, I just wanted to have a quick chat about maybe when you’re changing over a property manager. So say you bought the property, you’re in, you want a new manager. What kind of notice or a phone call do you have to make to the old property manager to basically say, sorry mate, you didn’t get the job?
Basically there’s no responsibility on you. Like you can give them a call and tell them why if you like, but basically once you’ve got the management contract, you can go to your new property manager and they’ll handle all that. They’ll call the existing. Property manager and get the keys and all the documents that they can and things like that.
So they’re used to it. It’s a business. They might call you up and try to find out what they could have done to get the deal over the line and things like that. But it’s an unemotional thing, Andrew. It’s your investment. You’re choosing the best person. I wouldn’t worry about hurting someone’s feelings. A hundred percent.
I mean, it’s a business decision, isn’t it? And you want to have the best person managing your property to get the best outcome for you and your tenant. Like for me, as a buyers agent, it’s actually quite a hard one when I’m buying properties from sales companies that actually don’t have a good management arm, because I obviously want the relationship with them long term and telling them no to the property manager is obviously quite difficult, but my job is to represent the actual buyer.
And if I think they’re a poor management company, you just have to be honest with them. Yeah, well, it’s always one of those potential negotiation points where you can say to them to kind of sweeten the deal when you’re trying to get the deal is, oh, we’re going to need management for this. Do you guys do management as well?
So you can kind of get them thinking that you might give it to them, but then you don’t obviously have to at the end if you don’t want to, but it’s always a good point to bring up there because then they obviously know that they’ll be getting the business from just the sale and then also managing.
Yeah, exactly right. But sometimes the sales team is different to the property management team and the smaller companies will really try to hone you in onto the management. But like I said, just vet as many property managers as you can and just make sure you choose the one that you’re happy with. Yep, definitely.
So mate, what would be the upfront cost to get that property manager into your property? A typical commercial property, like in terms of time, you’re looking at a couple hours per month for the average property manager and that’s just for invoicing and general management. Most property managers charges, they’re based on a percentage of the gross rent.
So keynote there, gross rent, so just be mindful of that if the tenant is paying the outgoings. Usually it’s calculated like a tiered approach. So like managing a lower renting property requires the same amount of work as a higher renting property. So managers charge a high percentage on the smaller ones to make the same money.
Most of the fees in this market are varying between about 3. 5 and 7 percent of the gross rent. However, these are very much negotiable. So make sure you do try to negotiate at the start before you sign on with them. So like for instance, If you have a tenant paying 300, 000 a year, the fee is actually going to be closer to kind of 2 3%, whereas if you’ve got a tenant only paying 30, 000 a year, the fee is probably going to be close to say 7%.
So most property managers are looking to get paid between like we said before, about that kind of 2, 000 and 5, 000 a year. That will change obviously if you’ve got like a big commercial, like a multi tenancy one or a shopping center or something like that. That’s obviously a lot more work. So it’s just going to come down to them covering their time.
Like we said, Andrew, like for a few thousand dollars, keeping the basically headache free and not having disputes and having to do other things, it’s worth its weight in gold, like just spend your time looking for the next property and you’ll save more than 3, 000 just off the purchase price. A good point to note is that the fees are tax deductible as well.
So you’re typically getting your tax bracket back anyway, so it’s really not that expensive. So, mate, what are the possible charges or fees that a property manager could be charging you over the lifespan of their contract with you? Yeah. So, like, as I mentioned before, you’re going to have your generic, like, percentage fees.
So, like, so that might be, say, 5 percent and that’s just going to cover general management. So, things like the invoicing, disbursements for the clients and the tenant. Payments of accounts, issuing notices of remedies and breaches and things like that. However, you do have extra costs as well. So, you got things like lease renewal fee.
So, this can erode your net yield a little bit. So, like every time you say you might have a lease renewal, you might be paying that property manager say 10%. That can actually change depending on the length of the lease. So, if you’re getting a five year lease, that might be a high percentage. If it’s just a 12 month lease, it might be a smaller one.
So that’s mainly just to cover the things of like writing the new lease or kind of talking to the tenant or getting them to sign and things like that. And then some property managers will actually break down other fees. So like, they may even charge you some individual fees, like doing a rental comparison.
So they can obviously pay the tenant. Or charge you to like issuing like notices of remedies and breaches and things like that. Or even things like just issuing like notices to terminate. So if the tenant stops paying rent, you kick him out, they might charge you like a balancing solicitor’s fee there.
So with anything, just make sure you do due diligence and go through their kind of property management agreement really tightly. Yeah, well, in the property management agreement, they’ll have all of these in a table for you nicely spread, like put together so you can understand them. And one of the ones that I think that people might get caught out with is if they’re buying a vacant property, they don’t factor in the letting up fee in the sale price.
So, like when you’re thinking about buying a vacant property or a property with some vacancy, there is a letting up fee of, was it one to two months potentially, Steve? Yeah. I’ve been saying up to three months, Andrew, but yeah, normally they’ll, they’ll take the first or two, one or two months rent similar to residential as well.
So obviously when you get a new tenant, they’ll take the first week or two’s rent works with commercial, but in the month periods. Yeah. So if you can figure out what that fee might be, cause it’s changes per property manager. Then you can potentially negotiate that off the sale price. So you like, you need to ask the agent, look, I’m going to have to let this up.
This is how much it’s going to cost. I want to be paying this price less, the letting up fee to make it fair, because you don’t really want to be going into the property, buying at a full blown market price and then have to spend, you know, another five, 10, 000 with a letting up fee that you weren’t calculating into your numbers.
So it can definitely erode your cashflow, your positive cashflow at the end of the day. Yeah, sometimes you’re going to have to make like a little Excel spreadsheet just to compare property managers because a property manager that might have a lower general management fee might actually have higher kind of individual lease option renews and things like that.
So they can actually end up being more expensive. So you just got to go through and just work out on the whole which one’s actually cheaper. But as we mentioned in the previous episode, don’t just choose the cheapest person you can. Paying a good property manager an extra 500 bucks a year is worth its weight in gold.
Yeah, definitely. I mean, usually if you’re going for the cheapest option, you’re going to get a cheap result. You’re going to get a bad result. Sometimes it’s just better to pay a little bit more to get a really high quality agent that’s going to take care of all of the issues that you have and make your life easier.
I cannot stress that enough. Yeah. And you’re missing the point. And like, if you’re trying to scrimp on a few hundred dollars here and there, you’re missing the whole point with investing, like focus your attention on getting the next property, you’ll make that back from having better negotiation skills or looking a little bit harder and things like that, but trying to save yourself a few hundred dollars here and near there, like in the grand scheme of things, that is not going to make you wealthy.
Yeah. So when you’re actually looking for a new tenant or the property manager is looking for a new tenant for you, how does the selection process go for re tenanting the property? Basically, obviously the property manager is going to advertise and try to find as a bigger pool as possible for tenants.
And then when you’re selecting this tenant, it’s basically you’ve gotta do your due diligence on them. Similar to doing due diligence on the actual property itself, you’ll need to do it on the actual tenant. So basically on on my due diligence checklist, there’s actually a tenant checklist you can go through.
So it’s gonna be things like getting reference from their previous landlord if possible. Asking them how long they’ve been in business, what was their previous location, and why did they move? If they’re a startup, ask about a business plan. You can request rental ledgers. I generally go 12 months as a minimum, or bank statements, just to make sure they are paying rent on time at their previous location.
And then just assessing, like, are they actually a good business? Like, is it a long term business? Are they capable operators? Check things like the identity, Andrew, as well, because you obviously want to make sure that they haven’t kind of liquidated a business in the past or something like that. So run credit checks, other things as well, just the general presentation.
So like, do they look like a professional outfit? Are they going to pay on time? You can request evidence and their assets as well. So you can find out kind of if they can kind of pay and back up their, obviously, guarantees. And then what’s their experience in the actual business that they’re proposing to operate as a tenant.
So, as we all know, like, operating a new business is always a risky proposition and failure rate is always going to be high. So, like, you need to work out whether the prospective tenant are going to be good in the long run or is it better to actually keep your property vacant until you find a better tenant.
The answer is going to depend on partly on like the supply and depend of your location. If it’s a struggling area and you need to get a tenant ASAP, it might be worth the punt. But if you’re getting a lot of applications, sometimes just waiting an extra few months is much better because with commercial, they are long leases.
So if you’re thinking short term in the next kind of 12 months, The next tenant you waited three months later for could be the tenant you have there for 15 years. So selecting the right tenant is paramount. The biggest common issue I see with tenants is actually their lack of understanding the lease.
Like a lot of the tenants actually look at the lease and they look at the price they have to pay and then that’s pretty much it. They don’t look at all the other little bits and pieces. Making sure that your property manager explains all these kind of idiosyncrasies clearly at the start means that they’re going to have less future problems.
So if you do have any questions with leases, obviously go to your solicitor and conveyancer and just make sure that you’re happy with it as well. So Steve, how much of this due diligence and research is the property manager going to be responsible for and how much are they actually going to do? A good property manager should do all of it and then this is part of your vetting the property managers is to find out what they actually do and that’s like with the questions we went through before that we should be asking them how they vet tenants so they’ll give you a procedure if they’re a good one they’ll actually have a process for it and they can actually provide okay this is exactly what we’re going to go after so they should be doing most of it.
If they’re just bringing your tenants, I know they look all right, let’s, let’s chuck them in there and give them a crack, probably not the right property manager. So mate, what about maintenance? I’ve noticed that, you know, sometimes even though the tenant is responsible for the maintenance, they’ll still be hitting up the owner for the maintenance.
Who’s responsible for the maintenance, like taking care of all that stuff and what have you found in your travels? Yeah, so this is kind of what I said before about like, they need to understand their responsibilities from the onset, because like I said, they’ll look at the cost they have to pay, but they won’t read the nitty gritty of the kind of lease.
So even though the lease might actually say they’re responsible for the maintenance. If they don’t think they are, there’s always going to be a conflict. So just making sure that they understand it inside and out. It gets hard as well with things like, say you’ve got a freestanding industrial building and the roof collapses, even though that’s theoretically maintenance, they’re not going to pay for that.
They’re going to call the owner saying, Hey, your roof just collapsed. Can you fix it for me? So there was always a bit of a to and fro between them. One thing to note, Andrew, like, even if your tenant moves out of the property, you then become responsible for the maintenance. So, I quite often see things like, um, like warehouses with refrigeration or like a commercial kitchen.
It’s all working well when the tenant’s there, but if they move out and you have a long period of vacancy. When the new tenant goes to move in and the refrigeration system isn’t working, you could be up for 20, 000, 30, 000 just to fix it. So just be very careful when you’ve got those special asset type classes and just make sure you are still getting them maintained when you don’t have a tenant.
One tip, Andrew, I’ve actually done in the past on my own properties is actually offer to renovate the property for the tenant and a lot of the time, they’ll actually Now, I should be really thankful when you actually get them to sign a longer lease. So spending 000 on renovating their property, but they signed a fresh five year lease will actually increase the capital value of the property anyway.
Just personally on one of the cafes I own, the tenant actually renovated the building, the whole building himself at his own expense. And obviously the benefit to him is. He wants a nice, clean, like beautiful shop front because that brings tenants in. The benefit for me was I actually got some capital growth out of the property because I got to fully renovate a property.
So that’s one of the benefits of commercial is the tenant actually, especially in the retail space, wants the property to look attractive. Yeah, definitely. I mean, in a residential space, they’re not going to fully renovate your house, are they? Yeah, exactly. And then move out. And it’s also a good sign that you’ve got a long term tenant.
If they’re spending 20, 000 renovating the building for you, they’re planning to be around there long term. They’re not going to leave in 12, 24 months because they’re not going to recoup that. Same thing as if you get like a medical tenant and they fit it out with a big medical suite, cost hundreds of thousands of dollars.
They’re not planning to go anywhere. So it’s a good sign that you’re going to have a good long term tenant. Yeah, definitely. So one of the things that is only really prevalent in commercial property is the tenancy mix, having the right type of tenants that take care of each other and complement each other in the space that they’re in.
Say you’re in like a retail shopping center. Can you explain why it’s important to have a good tenancy mix and to put a lot of thought into who you’re actually putting into that space? Yeah. So like you said, it’s really important in the retail space because when you’ve got something like a suburban shopping center, you want the foot traffic to compliment the other kind of tenants.
So you don’t want too many competing businesses. Like you don’t want four cafes in a row or competing, but then none of them have a successful business. So you want to get the mixed possible. So you want to obviously have like the medical center, the hairdresser, the barber shop, the cafe, the specialist goods stores.
So getting the right amount of foot traffic is really important. Retail tenants will often place like a high value on the property’s image and reputation. So, they’ll want the business as a near to complement it or increase the foot traffic or exposure to their business. So, one tenant’s business can actually contribute to the success of the ones next door.
So, it is really important. When you are choosing a new tenant, it’s best to analyze what kinds of businesses will fit well with the others. So, communicate this with the existing tenants to ensure there’s no clashes or competing businesses. And then the complimentary services that worked well together, but on the other hand, will still offer a wide variety of tenants can actually bring more traffic to the property.
And just to like kind of explain that a little bit more, it’s like if you have a supermarket there, you might want to put in a liquor store there because they’re both kind of on the same path as they’re buying goods, but one compliment each other, you’re going to go to the supermarket and you might want to get a couple of beers on the way out as well.
It’s like complimenting things like that really can help each other out, especially if it’s not a supermarket that sells alcohol specifically, but it can really help each other out like that and compliment each other’s business. Yeah, and like you might have something like a fine dining restaurant, they’re not going to want like a gambling agency right next door because the people that are rocking up at 5, 6 p.
m. to kind of put a bet on, they don’t want that out the front, so you really got to make sure that they complement each other. Yeah, like a nail salon and then a hair salon, something like that where it’s complimentary but they’re not competing. Yeah, and sometimes you actually can have competing ones and they work quite well.
So like a baby shop, for instance, places that sell strollers and prams and baby goods. Sometimes you actually have a whole complex dedicated to like baby or we’ve seen like the furniture superstores. So more in like the industrial space, you’ll have all the furniture stores in one complex. And that’s because people want to roll through and look at as many options as I can.
Same thing with obviously like car dealerships in the industrial space as well. So you can have the same, you just got to assess what the purpose of the industrial property is in that location. Yeah, well, you see this in medical, don’t you? I mean, they’re not particularly the same business, but you’ll have these really, really good complimentary businesses like a chiropractor, a doctor, maybe an optometrist, like.
All these different things for health that will be in that one area and you get this kind of like medical hub and then what that actually does as well as when you have a vacancy, then you can find another medical tenant to come in there because you’ve already got medical tenants there. So it, it just, uh, it snowballs and makes it easier in the future to get the right type of tenant in there as well.
Yeah, like how often do you see a pharmacy right next to a GP clinic? Because guess what the first thing you do is when you leave the GP clinic. So those businesses are symbiotic. They work well off each other. If you had a vacant space that was a pharmacy and it was next to a doctor, I wonder if you could charge a higher rent to an incoming pharmacy because of the location that it’s so great next to the doctor.
I’m sure people do that. Definitely. And that’s the whole part of it and vice versa as well. With like GP clinics. So if you, there’s a really big pharmacy there, they’ll have a next door because if they’re getting the foot traffic, they’ll get that business anyway, because people will start to kind of realize when I can go to this pharmacy, there’s actually deep and they’ll actually have the organic growth that way, just from the foot traffic.
Yeah, that’s right. Well, speaking of our rental increases, what should you consider when you’re coming up to a rental review or end of a lease and you’re starting a new lease? How do you determine the rent that you should charge? Obviously, as a landlord, you’re going to want to maximize your rental return and yield.
However, this doesn’t actually mean always getting the highest market rent and that’s a kind of a rookie mistake I see most first time investors come in. They always want to kind of come in and get something with the highest rental increases and the perfect and the highest rent. Having the highest rent doesn’t mean you’re going to have a good long term tenant.
Like the biggest thing I see is the new owners, they look at trying to increase the rents way too quickly. Having steady rental increases is actually a better way for the tenants as well. Just for their cash flow, their cash flow management is quite important there. I find most investors spend way too much attention focusing on what rental increases are in the lease.
However, like in, in reality, Andrew, if the increases far outweigh what the market’s actually doing, even if they’re during the lease period, the tenant is going to give you a phone call and ask, can they bring it back to fair market rent? And typically as an owner, you probably will because annoying your tenant and having a disgruntled tenant, you might squeeze an extra one or two rent out of them.
But if they don’t like you and they want to move on because they think they’re getting hard done by it, they actually will. Sorry. Just having a good relationship with the tenant and being fair is the best way to have a long term kind of tenant. One of the tips and tricks I use, Andrew, is if you are looking to give some form of rental reduction, try to offer like three months rent as opposed to actually a rent reduction.
Because as we know, like the strength of the lease and the net yield that you get on that property is tied in with the value of the property. So giving a couple months free rent is actually a better outcome than a kind of a three year lease on a lower rental amount. Tenants on their part, they’re always going to weigh up what they’re paying against what they’re receiving.
So, like, it’s essential just to provide them with good value. The benefits of this long term are far out going to weigh the short term gains that you get from higher rents. Like, as we mentioned before, with the cost of getting a new lease kind of renewed and things like that, there are quite a lot of costs there.
So having the period of vacancy plus the leasing cost, it’s actually better just to keep your tenant if you can, even if it is a small kind of five or 10 percent reduction. Yeah. And what you might actually also be hopefully doing Steve is when you’re buying this property, you should be doing a rent review to make sure that you’re on market or you’re below market.
You definitely don’t want to be buying property over market rent because you’re one, paying too much for the property. And two, you’re going to have to reduce that price eventually in the next rent review, like you said. So, you know, you really need to be doing and hopefully everyone is doing a market rent review when they’re buying their property anyway.
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, well, let’s move on to the next.
Topic of today’s podcast and that’s surviving a downturn. So Steve, can you just explain what a downturn might look like? So a downturn can be actually anything that kind of negatively affects your commercial profits. So it could be like the economy, the demand for your type of commercial premise, an act of God for instance, or just the tenant struggling for instance.
So, Like in these circumstances, the ability and value of your property manager, if you’re using one, will really shine as we mentioned before. You can mitigate the risk of downturns in general by just buying a versatile commercial property that’s flexible and that you could have multiple uses. Like for instance, like buying a retail space that can be turned into office space.
This could reduce the length of the vacancy if the tenant unexpectedly gave up on the tenancy. Yeah, and also one of the main things to really think about here is having a sufficient buffer in place when you’re buying these properties. Like, I like to think about having a three to six month buffer of interest repayments in place.
And that doesn’t have to be lump sum if you have other property as well. So, if you have Other properties that are paying you a good cash flow per month, then that could also be used as a buffer for your other property and one of them goes vacant, or you could even have some kind of a only use this credit card in case of bad times kind of thing as well.
And using credit cards isn’t my first option, but it is a good way to get out of trouble if you do get yourself into trouble. So having a good buffer or a cash buffer is always first preference when you’re buying property as well. Yeah, like you said, you just got to assess your own personal risk profile.
So if you’ve got a big passive income from other properties, you know that that’s going to be out of the kind of weather any storm that you might have, but it’s just going to depend on the property itself. So like, if you’ve got a really regional property, that’s on a high yield, but you know, vacancy rates are two to three years, but you’re willing to take on that risk because you’ve got a really high yield that you’d have a longer buffer than say something in the, in a CBD that has a one to three months vacancy rate.
It definitely makes a difference to where you’re geographically buying these properties and also the value add strategy as well. So, if you’re buying a property that you know has a long vacancy, but you’re developing it as you go and you’re developing more space that’s got a low vacancy, it really just depends on the property itself.
And speaking to probably someone like yourself, Steve, or a property professional that has experience with these type of things. So, mate, can you list some of the different types of downturns we could encounter? All right. The first one is acts of God. So this is actually sometimes called force majeure.
You’ll hear that sometimes in the industry, and that’s like the big thing. So like natural disasters like earthquakes, tsunamis, etc. So like these in Australia are going to be basically floods, cyclones, bushfires, and droughts. Recently after COVID 19, legislation actually got changed to say that a pandemic is considered an act of God.
So insurance policies must be checked closely when you’re having a look at this. It’s also essential to check whether the building and landlord insurance will cover these possibilities. So we all know that sometimes if you buy in and say like a flood zone, flood might be excluded. So just make sure when you’re doing due diligence that you’re checking kind of what zoning you’re in and we spoke about this on the due diligence episode and then cross checking it with your insurance.
So, if your insurance isn’t willing to cover these events, then you really need to make sure that you actually got that kitty sitting there that you can handle these kind of storms, pun intended. The economy has quite an impact on property prices and business success. So, like a global economic crisis is always going to affect your commercial property.
So, depending on your tenant’s industry, it may increase or might decrease actual business. In Australia, like our largest recession obviously happened in 1990 91 and unemployment rose to about 5 percent and the share market actually dropped 40%. So, we obviously saw a lot of tenants struggling during that period and obviously large rental concessions and those larger periods of vacancy.
However, at the moment of this kind of podcast in 2022. We’re actually at 3. 5 percent kind of unemployment rates in Australia. So I’m fairly optimistic for the next 5 10 years of Australia’s future. That’s historically low, isn’t it Steve, for that kind of percentage for unemployment? It’s basically as low as it can be.
So any lower because of the outliers in the stats. So we’re actually a really strong economy at the moment in terms of jobs. So all those people kind of talking at the moment about raising interest rates and things like that. You can also, businesses are kind of in demand for workers. So we should always have people in commercial properties.
Yeah, well, that’s right. I mean, right now, if you’re looking at moving up in your employment or looking for a new job, you should have no problems getting lots of meetings and, and lots of interviews to try and get into a better position for your financial future. Yeah. And some industries, like I say, this is a buyer’s agency.
I see a lot of what people want. Some industries are just booming. They’re in such demand. They’re just charging 300, 400, 000 income. Like it’s just, yeah, just, just look at what a job you’re doing. Just have a look what’s out there. Cause there are some opportunities. Yeah, now is the time. Previously, it had been a employer market, but now it’s very much an employee’s market to get a new job.
So it’s good stuff. I’m actually really enjoying the state of the economy and everything that’s happening right now because it just gives you more opportunity with commercial property. And like, if you hadn’t been investing before 2010, and you weren’t interested in all this stuff, like I wasn’t interested in, in commercial property in 2010.
I wish I was, but I wasn’t. I was playing baseball. Um, Bye! Overseas and things like that. So we’ve always been, had a good market. It’s always basically been booming market. It’s been going great. Everything’s been going up and up and up. Interest rates have been going down and down and down, and it’s just really nice to see a change where in bad markets, the best deals come out and you have to take that contrarian kind of view of investing where just because the herd or the crowd are saying, no, I don’t want to invest.
Doesn’t mean that you shouldn’t, you know, so you should be doing the opposite of what the crowd is doing. And I’m really, really excited about the next three to five years about the great deals that I’m going to be able to find. And I’m sure Steve’s going to be able to find many, many deals as well for his clients.
Interest rates are going up. It’s a great talking point with the agent to get a better deal. And I’m just really looking forward to what’s next, mate. Yeah, exactly. Then there’s also some really low risk commercials you can get. So like for instance, I saw some data last week that. All the capital cities in Australia, industrial vacancy rates are actually sub 1.
6 percent in all capital cities. So there’s a lot of chatter about interest rates going up and things like that, but if there’s such a demand for that type of asset class, you can weather the storm. You can hold the property long term. It’s still going to be positively geared and that demand and those lowering vacancy rates is actually just going to show you’re going to get bigger rental increases.
So your cashflow should be increasing over time, which is nice. Now you just have to kind of be looking at it like we have to be getting a reasonably high yield to whether that or if you have enough cash in the bank to be more of a neutral play. But I mean, I’d always prefer to have a positive cash flow from commercial property because that is really why we’re actually doing it.
We do definitely kind of don’t want to be doing it in a negative sense as in negative gearing the property unless there’s some kind of huge value add strategy to it that we’ll talk about later. Yeah, exactly right, Andrew. That’s also why I love commercial property because even like when you’ve got to say a 70 percent loan, interest rates actually have to go to say 7 8 percent before you actually start dipping into your own pocket.
And like I, I had this argument with a client the other day where they were saying, Oh, they don’t want to buy commercial. It’s too high risk in this market. They’re going to go to residential. And I was just like, hold on a sec. So you’re going to go out and buy a million dollar residential property.
That’s 10 grand a year negative. If interest rates go up, that’s going to become say 15, 20 grand a year negative. Whereas my commercial properties for a million dollars is going to drop from say 30, 000 passive income down to 10, 000 passive income. So why is your one kind of lower risk when you’re costing money just to hold the property?
If the market doesn’t move, you lose out least I can weather the storm. And that’s part of why I like commercial property. Yeah, definitely, man. I totally agree with you a hundred percent. So, mate, just on the inflation piece, I mean, this is really the flavor of the month. Everyone’s talking about it. I’m sure we’re going to be talking about it for a lot longer.
By the time this podcast probably comes out, the RBA is probably, you know, going to be jacking up the cash rate another, another 0. 5 percent or 0. 75%. So what’s your real view and how do we really navigate the inflationary environment? As an Andrew, I actually don’t care that much about what’s going on in the economy.
Like I’ll look at it in terms of longevity, my tenant, but when I’m analyzing a commercial property, I’m looking at it. Is it going to be more demand in 10 years time? I can’t control inflation. I can’t control interest rates. I can just look at the property itself and go, is this going to be demand long term?
I’m yet to meet anyone who’s been able to pick the market to a six or 12 month period. So all those investors that sit on the sidelines and kind of wait for them, the market to turn. If everyone’s saying that, what’s the chances that you’re going to be able to jump in five minutes before them and pick up a bargain?
So, you should always be looking to pick up a bargain no matter when you’re buying. But I, like I said, the right time to buy is now. Like, if you can find a good quality asset that’s tenanted, got good demand, and long term it’s going to actually have good demand, I’d say jump in now because buying, say like, I’ll use a million dollar example again, that’s a million dollar property that might be, say, 30, 000 a year.
Passive income versus someone who sits and waits out of the market for 12 months, hoping for a 5 percent drop. You’ve only saved yourself 20, 000 by sitting out of the market for a year, and you’ve actually missed out on opportunity costs. The market might actually still go up. Like, there are some peasant misses at the moment, but how many people do you know, Andrew, at the start of COVID, said the market was going to grow 20, 30%?
Not many. Everyone was crying poor and saying it was going to fall off a cliff, didn’t they? Yeah, exactly right. So, and vacancy rates are dropping with most commercial assets. So, there’s still demand for it. I don’t foresee really, really large growth, but I also don’t see the kind of downturn that everyone’s thinking is coming with the prices.
Yeah, well, I mean, personally, I am starting to see a little bit more of the negotiation and wiggle room in potential prices, like in some in marketing material for commercial property on a listing portals, I am starting to see more sixes again. One to two years ago, it was easy to see a six and you might even seen a seven, but I am starting to see a few more sixes creep in when previously 12 months ago, that could have been a five and a half percent or even a 5 percent yielding property or advertiser that so I am seeing a slight change and I think there will be a little bit of a soft softening or just a sideways stagnation.
I don’t think it’s going to be a fire sale like people would probably be predicting and it really does come down to. The asset type as well. As Steve was saying, the asset types that are in demand are not going to see a huge loss of value. But you know, the asset types that aren’t in demand that have higher vacancy, there is going to be some concession there for those trade if they have to be sold at that time.
Yeah. So one of the things, cause we are seeing high interest rates, but people are forgetting the rental increases. So we’re actually seeing on average, like 20 to 30 percent rental increases in the last few years. And because commercial properties have obviously a long lease period, You don’t realize that value.
So this period of where we’re having the chat now, it’s August 2022. In the last three months, we’ve actually seen between six and seven percent increases in rent across the industrial market. And that’s just in the quarter. So you’re actually offsetting the interest rate rises with the rental increases.
And like you said, Andrew, I think there’ll be a bit of a softening, but that’s probably, we spoke about the cycle of market emotions. We’re just in that kind of cool off period where everyone’s not just rushing and paying whatever dollars I can. Yeah, and when you’re actually investing in anything, markets that go up and down, they actually provide opportunity.
So you can buy on a down or you can try and buy on a down and then they can go up and down and going back again. When a market is steadily going up all the time, there’s a lot less opportunity on that market because it’s a stable market. So markets that do go up and down are preferable for finding great deals.
If you read rich dad, poor dad, you would know how much money Robert Kiyosaki made during the GFC. He was out there buying things, cash. Like the problem with this particular time now is that if markets are softening and they are slightly, and I think they will a little bit more. It’s harder to get money to lend, so you need to be liquid.
So that’s the problem, is when there’s a downturn and there’s more deals to buy, there’s not as much money to actually go and buy them. When it’s a great market, money’s more accessible, it’s easy to buy them, and then that actually perpetually like snowballs the better market. So it’s quite interesting if you start thinking about it like that, and I thought that was just an interesting little thing there.
Yeah, but by having more options just means you can buy better as well. And that flows into the next topic we’re going to talk about as well as the value add opportunities. You’ve obviously got more choice, so you can actually find more opportunities as well. But, but we’ll quickly touch on the last act of God before we go into value add and that’s obviously pandemics.
So we’re, we’re obviously hopefully on the tail end of that kind of effect of the market, but. Obviously, during COVID, we saw kind of a shift. Office spaces as well, obviously a really hard hit. And most offices now have kind of changed to like the hub and spoke model. So they’ve kind of got more kind of satellite offices, or they’re going in less times per week.
And it’s a bit more of an interactive kind of lifestyle type of office space. Anytime we’ve got a pandemic though, there’s a, there’s a few things you can do. So first one’s obviously this refer to any government incentives because there were some incentives that governments offered your tenant and owners and lenders as well.
Could obviously put like your loans on hold and you could consider rent deferrals for your tenants, rent relief, and also just have a look at government legislation. So this is part where a good property manager comes into play. They’ll understand all this criteria because they’ll be doing it for kind of 50, 100, 150 properties.
And then I can handle that part of it. So mate, what happens if a tenant is just struggling? What do you do then? So you’ve got a few options if your tenant is struggling. Like the tenant’s business is going to affect your business. So they are keeping them happy and profitable. Is it really going to have a long term tenant?
So having a little bit of compassion is important, but just be aware it is an investment. So you do want to try to keep your emotions separate. However, like giving them a rental reduction or free rent doesn’t necessarily solve the tenant’s problem. Like if they are struggling business, you’re just pushing the problem further downhill and actually eroding your net return from the property.
So sometime it is, it is important to play hard ball and know when to stop. So if they do go into rental arrears, quite often it’s best just to cut that cord because most businesses, once they do start struggling, they don’t come back. So just weigh up whether it is worth giving them some concessions or not, and then make the decision from there.
Yep. Good stuff. All right, mate. So let’s move this party along to one of my favorite subjects and that’s how to add value, creating a value add strategy plan. So mate, in your opinion, how important is having a value add strategy plan when you’re buying commercial property? Really important, Andrew. Like this is why I love commercial property.
Like it has way more possibilities than residential property when you’re adding value. Anything you can do in residential like renovations and subdivisions and things like that, you can also do that in commercial, but you can do much more in commercial as well. By having a bit of a plan for adding value, it means you can weather those downturns we mentioned before, or just basically increase your profit or your cash flow, or increase the capital value of the property so you can go again sooner.
And with, uh, thinking about, uh, a value add strategy, this is not something you just come up with after you bought the property and go, oh, geez, how am I going to add value to this bad boy? You should be looking at this property, uh, and even searching for this property when you’re buying it and saying, hey, I can see how I can add value to this.
We’ll buy it for X, I’ll execute the plan, and then I can refinance it for X and go again. So, this is really, really comes down to finding a property. There’s something about it that maybe someone hasn’t seen or it’s a too big a problem and no one wants to fix it because in property, the more problems that you can solve, the more money that you can make.
So just finding a property that has a clear value add strategy that you know how to fix is really key to potentially building a large commercial portfolio and then going back to Steve and asking him to buy you another couple of properties. Yeah, and inversely buying one that has a future value add as well.
So you might buy a property that stacks up on its own merits now and you find part of your due diligence. Oh, I can actually do this to the property and you actually do it down the track as a bit of a value option as well. So your strategy is perfect if you want to be really aggressive and you want to keep building that portfolio quickly, but you can just have the more passive kind of value add opportunities as well.
But one thing to note is if you do find this part of your due diligence, a value add strategy, Don’t tell the managing agent because a lot of the times they’re not aware of how to fix the problem. Just keep it to yourself. Yeah. Oh, the sales agent, definitely. I mean, you don’t want to be giving them, um, you know, it’s really under rented, you know, it’s under rented like 20 percent before you’ve actually bought the property.
What do you see as some of the best ways to add value to property, Steve? Alright, so as I mentioned, there’s quite a lot. So the first one I typically kind of look at is changing the property’s use. So you can always repurpose like part or overall. So like that could involve like converting an unused or common area into actual lettable space or upgrading like a storage area to office or industrial space, for instance.
The simple one, raising or lowering rents. So, like you mentioned, if you buy something that’s 20 percent under rented and you bump the rent up at the end of the lease term by 20%, you’ve effectively, assuming you’ve bought the property at that standard cap rate of the current rent, you’ve disfabricated 20 percent capital growth just from signing a new lease.
So, that’s quite an important one. Improving the property’s quality and image. So like this, as we’ve mentioned before, like renovating the property, making sure it looks better, that’s going to give you a high rent from the tenant and keep your tenant there much longer term. Another is creating new sources of revenue.
So this could be things like installing like an ATM machine or solar panels on the roof, vending machines. Renting out parking, which I actually do on one of my properties, so I should get an extra kind of 10, 000 a year rent just from renting out car spots to train commuters, taking off peak rentals, putting advertising space on it, or mobile phone towers and repeaters on the building, or offer something like a serviced office, so like a shared office, things like that.
Another one that doesn’t get spoken about too often is adding or upgrading the property marketing. So like additional marketing that can actually boost rents and lower vacancies. So this can be as simple as having like a better street signage, better website for the kind of the block that you’re buying in.
Just generally creating a high demand and basically for that type of location, will increase the rental rate. We touched on this before about kind of tenant mix. So removing underperforming tenants is quite important as well. So like if you get a tenant who is adversely affecting the other tenants, or just not kind of going the way you want it, it actually is worth getting rid of them at the end of the lease term.
So that’s quite important. Improving property management. So we’ve spoken about this a lot in this podcast. Having a good property manager and keeping them happy is really going to give you a long term tenant and minimise vacancy. And then the last one, Andrew, is actually development. So much like with residential, we can do development projects.
You can do all those things, but more with commercial. So you can build a new retail center, office tower, industrial complex, things like that. So you can do the subdivisions, build new buildings, add extra stories, the buildings, just increase that value and the cashflow. Yeah, I really, I really like all these because you can basically all do all of these if you really want to like putting in an ATM and getting a cell tower.
It actually is quite difficult. You need to be in the right position at the right time to be able to do that. It’s not very common. You’ll have someone say I bought a commercial property and then Vodafone came or Telstra came and wanted to put a cell tower in on my property. The tower is probably already there in another property.
So it’s not 100 percent easy, although it does happen occasionally. I actually had it happen to me a few months ago for a client. So when we bought a building in Perth, it was just like a multi tenancy kind of retail industrial building. So it was like a CrossFit gym and office space, a retail shop. We bought that for 2.
2 million. They’ve just put a telephone repeater on top of the building. They got it from Optus and Vodafone. Ten year lease, 1 million. So they’re actually getting paid 100, 000 extra per year by having some towers on top. Yeah, so it does happen, but it’s not common. Don’t just think I’ve got this property.
It’s definitely going to have a cell tower on there because it’s not exactly like that. Although there are some companies that you can contact and they can assess your location to see if it would be worth Putting a cell tower on that property. Another one that you said talked about is the advertising.
Advertising is a very, very good one. If you’re on a main road, but do note that when you have advertising, it doesn’t always flow onto the capital value of the property. So when you actually get into the property value. A value often doesn’t take into account the, the advertising say you have a digital sign that’s on your land.
It doesn’t always take into account that into the valuation. So just because you boosted the rent by 20, 000, which is significant in commercial property. If it was for a actual building with advertising, I have been told by some very, very experienced commercial investors that it doesn’t always increase the value.
It won’t increase the value in the bank size. It may increase the value and actual realized value if you go to sell the property. It’s just not basically money you can pull equity out of, but obviously having a higher income is going to be more attractive to owners. Yeah. It’s not bankable. Like you can refinance it and get that money out just because you improve the cashflow.
Although the cashflow is great and it’s definitely worth doing, but it’s not a hundred percent bankable. But there are a few other different things you could do as well. Like if you have, you know, a little bit of space that’s not being used, Getting a mobile food truck to come in and actually operate there as a good one as well.
That’s quite easy. Anything mobile that can be just brought in on site. They don’t have to go through a DA process to put on your site is always a great way to add value or just add cashflow. Because it’s almost actionable straight away and you can start reaping the rewards straight away. Yeah, exactly.
You might have saw the one in my book, Andrew, where I drove past that corner fish and chip shop in Sydney and it had like a rental property on top, a residential rental property on top, an ATM machine on the side of the building and telecommunications on top. And I just looked and I went far out. That person is maximizing their cash flow on that property.
Yeah, definitely. I mean, the best way to add value to commercial property, buying a property that’s under rented because it costs you absolutely no money to understand and do the research to find an undervalued property or under rented property and then bringing up the rent to fair market rates. It doesn’t cost you any money.
So that’s probably number one way to actually add value without any outlay from your pocket. My second kind of way to add value would be understanding the use of that property and understanding how you could potentially change the use into a different use that has a higher rate per square meter. So in general, industrial property has a lower rate per square meter than office or retail.
That’s across the board, right? So if you can find a potential industrial property that obviously it has a high floor area and you could convert some of that to say it’s an industrial area and you convert that to some kind of a retail cafe or something, and you can charge them. A higher rate per square meter.
Well, you’ve essentially added value to that property because now that floor area is worth more because you’re charging a higher rate per square meter. And that’s the kind of really powerful way of understanding the zones of the property and understanding the potential uses of the property. Because some retail is usually the highest rate per square meter across the board.
In some locations you could be paying thousands of dollars for retail space per square meter, and in some locations you could be paying a hundred to even sixty dollars per square meter for industrial. So it varies widely across Australia, but if you can find a use that is a higher rate per square meter and also has lower vacancy than the current use, then it’s just a win win.
Why not do it? Yeah, or even similarly, like actually reducing the kind of floor space in terms of splitting up the tenancies. So if you’ve got like an industrial shed where you can actually split it into two tenancies, you actually get a higher rate per square meter for smaller tenancy spaces than you do large ones.
So you can increase it that way. However, just be weary though, obviously having a smaller kind of industrial space. You’re going to change the type of tenant you get as well. They’re going to be a smaller kind of tenant there. They’re a bit more volatile and transient as opposed to a larger one. So just this weapon.
And this is a whole part of due diligence and why it’s a lot harder than residential is you have to go through all this on every single property. And you mentioned the zoning as well, Andrew. So like make sure you’re checking the zoning and planning laws every couple of years on your property, even talk to like a property town planner, for instance, because They’ll give you an update on any zoning changes because if there is a zoning change for the type of use that you can have on your property, like you said Andrew, that’s where you can really make some good money.
Yeah, well splitting up a tenancy has been such a great strategy for retail property in the past, hasn’t it Steve? Well you buy a really large retail premises that might have two doors on it. Then you split it up the middle and you’re getting a higher rate per square meter for each side now, and then potentially in those old traditional retail stores with a, with a house on top, you could potentially change the use of that residential flat into an office use if there’s a separate walkway or separate stairway up to that as well.
Or you could keep it as a residential use as well. So there’s all these different ways to, to kind of add value to commercial property. And it’s, it gets very, very creative as well. Like, you know, you’re thinking outside the box. It’s not just numbers and spreadsheets. It’s really gets really creative. And that’s the thing I really like about it as well.
Like the more that you think about it, the more knowledge you have of the zones, the actual type of use the actual market that you’re in. The more tools you have in your tool belt to take advantage and add value to that property. So that’s the really like, that’s the awesome part of our commercial property.
Yeah. And there’s no limit to how much you can know. Like you do a lot of interviews with people and you’re not purchased thousand plus properties. I’ve still learned something every day about a new value add technique with commercial. So it’s just one of those fun ones. You can actually have some fun with it.
Yeah, definitely. All right. Well, I guess that wraps up episode nine. Steve, where can the listeners go to contact you and also get the free giveaways? So just go to my website, www. leasyproperty. com. As we’ve mentioned before, you can get a free copy of my commercial book, Commercial Property Investing Explained Simply there.
I’ve also got plenty of free resources on there. So I’ve got my due diligence checklist, cashflow spreadsheets, sample property plans and things like that. So got any questions about any of the spreadsheets or checklist, just feel free to reach out. You’ll be able to find me somewhere on social media.
Awesome mate. Well, stay tuned for. Episode 10, where we summarize the whole process and go over the 10 step process to put it all together so you can get started in investing in commercial property yourself. This has been author Steve Polisi and Andrew Bean on the Commercial Property Investing Explained Series.
Thanks everyone. Thanks, Andrew. Thanks, everyone. Thanks for listening to the Commercial Property Investing Explained Series. This show has been produced by the Commercial Property Show Network.
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