residential portfolio stops making sense - Property Inc

[ Podcast Transcription ]

Inside Commercial Property with Rethink Investing. Australia’s largest and most comprehensive podcast covering all things commercial investing. It is big. It is comprehensive. It is Inside Commercial Property. Phil Tarrant, your co host. I’m joined by Scott O’Neill, who’s Director of Rethink Investing. We chat things all through commercial property and I’d like to think that, uh…

We’re behind this surge in interest in commercial property. Every man and his dogs out there investing in commercial property these days. Um, what do you reckon about that, Scott? Are we doing a, a service? It’s going to be an order of Australia for you for services to commercial property investment, or you think we’re just going to be chased out of there?

Or you, you’re going to get chased out of town. I’m just an impartial bloke, mate. Oh, look, it’s definitely increased the interest, like, I don’t know what percentage of influence we have on the market, but I definitely feel like it’s becoming quite mainstream all of a sudden. And, uh, it’s not just us talking about it, you know, there’s obviously thousands of people that listen to this podcast every month, but there is, uh, I guess there’s a need for people to get.

Better cash flow and the yields in residential are just almost forcing people to look at this. So I think we’re just in the right place at the right time talking about the right asset class. And, uh, yeah, it’s, it’s going crazy. And, um, yeah, and, uh, and then look, you know, we do talk about cashflow a lot and.

And I think we’re dispelled, we’re myth busted the idea that commercial property is only good for cash flow. There’s no capital growth in commercial property. We’re not going to go into that. We’ve spoken about it at length. However, one of the upsides of investing in commercial property is good cashflow outcomes.

Now, Scott, I’ve just gone through, and for a lot of our listeners here listening to this particular thing on the smart property investment podcast network. I share my journey as a property investor. I’ve got a reasonably large residential portfolio, and I’ve just spent probably this last. Month in lockdown when I could feel like it calling up banks, negotiating on interest rates.

So looking at this portfolio, Scott, from a P and L sort of point of view, not at a balance sheet point of view, it’s got plenty of, it’s had heaps of capital growth and the LVR position continues over time. But if I look at it, the holding cost of these properties still cost me a few shekels to keep it going.

Now I’ve, I’ve spent. A month renegotiating interest rates from a lot of them come off fixed rates, which were high fours, trying to get back into variables. I’ve got some good rates sort of circa two point. Well, I say good 7%, a lot of stuff in the early threes, which is much better than four. So I’ve worked bloody hard to try and recalibrate the cash position on this.

And I’m pretty much done. I can’t do anything else on it. I cannot shave any more costs out of it. I’ve lifted the rents where I can do. So it is what it is right now. There’s not much I can do. However, what I could do is chuck a commercial property into that and that would instantly fix the cashflow position on that.

And that’s often a journey for a lot of property investors, isn’t it? Yeah, exactly. And it’s exactly the reasons you mentioned, like there is a point where a residential portfolio doesn’t make sense. And, uh, I think you’re running into that. Like you’ve mentioned that a few times there is. So there is a need to sort of have your investment stand up on their own and not just stand up on their own.

They’ve got to support you. And, um, you can’t do it if it’s an evenly geared property or negatively geared property, you’re there showing up the work for your portfolio. And at what point does that switch around to look after you? And that that’s where a lot of investors get it wrong. They, uh, They play the long term game too long term.

And, you know, it’s just not how you’d run a business. You don’t, you wouldn’t be running a negatively geared business for 20 years, hoping, hoping for a valuation uptick, you know, decade or two later. So cashflow is part of doing well in investing and commercial. Is the quickest, most direct route of getting those results.

Yeah, absolutely. And, um, um, essentially on this smart property investment portfolio, I’m talking about Scott, I’ve got it down to about costing me about 80 grand a year in terms of holding costs. And this is across 17 or 18 properties, right? So it’s, it’s not that bad and a big scheme thing. The things get up in value quite a lot, but, um, I think there’s 40 or 50 grand of that is, is now principal.

Repayments on top of mortgages, which are P and I, so to be fair, I could probably shave that out if I refinance a lot, which I will do in time, but whether that’s a whole bunch of other costs in there, like accounting costs and stamp duty, sorry, and, uh, land tax and all this sort of stuff. So I’m pretty much done.

So we’re going to be looking at commercial at a point in time to put into this portfolio, which we will do. But, you know, back to the point, there’s a whole bunch of people that would feel. Investing a lot more in commercial property. Now it could be one of those, uh, a symptom of, you know, when you want to buy a new car and you see it everywhere on the road, um, we’re talking about commercial property, therefore everyone else is talking about commercial property, maybe, but there’s a lot of interest in this podcast and you’re getting a lot of really good feedback into your channels from, from people who are just a lot more open to.

Commercial property. And I think we’ve done a pretty good service so far, but I think the opportunity now for us also is to get down into the, some of the nitty gritty and the dirt sometimes of a commercial property, investing, how you go about doing it most effectively. Do you think this sort of current lockdown before we go there, this current lockdown is, is sort of giving more time to people to go out there and start considering and being more proactive about investing in probably cause another myth I can dispel is the fact that.

Property is a passive asset. You just sit there and wait around and, uh, and it does it all for you. That’s not the case. It requires a lot of work to manage a property portfolio and particularly commercial property portfolio, I would imagine. Yeah, look, it’s funny. We, we sort of worry about lockdowns now because it’s people have more time and there’s, this is a market, a rare market where you’ve got a lot more buyers and available properties.

And that’s probably both residential and commercial. Lockdowns is like, what is it? 13, 14 million people are in lockdown right now across Australia. So there’s a lot of extra people looking at this investment class right now. And, um, and yeah, the banks are stretched, solicitors are stretched, even building inspectors can’t keep up the demand of people sort of trying to look at properties.

So yeah, it’s a busy market. And, um, yeah, look, a lot of people are using this time to. Sort out their finances and, uh, you know, just getting on top of life after work. And it is a good time to do it. You just gotta be, uh, like you said, don’t just chase it because it’s a new shiny thing. Learn, understand about it, plan, you know, and just don’t just jump into it because it feels like it’s a good thing this month.

You’ve got to look long, long, you know, beyond those themes really. Yeah. And that’s good council. So, um, uh, there’s a number of different ways you can invest in commercial property. We’ve spoken a lot about the asset classes like office, retail, specialty, industrial with, you know, go and listen, but we’ve now got, I don’t know, probably 20 podcasts behind us now.

Uh, Scott, where people can go and get into that. If you at the education. phase and you’re just trying to sort out what’s going on here. Stop this now, go back, start at the beginnings. That’s the 101 stuff for you university people. Base level stuff, get informed, get educated. We’ve covered so much of it, but today I want to dig a lot deeper into the structures in which you can invest in.

Commercial property. And one of those is syndicates and most people will be familiar with syndicates. Some have heard about it or know someone who participated in it. So I want to get into the good, the bad and the ugly. And I tell you what, there’s a lot of ugly around syndicates in commercial property investing as our key focus today.

Now let’s go top line first to give us some, some base structure. What are the sort of syndicates? Scott that in gang get in. Some of them are highly regulated and structured like a real estate investment trust, which you can trade on the Australian stock exchange and other exchanges. But then there’s also this private syndicate.

So they’re the two key pillars of syndicate investing. Yeah, they’re the two main ones. So real estate investment trusts generally. Well, there’s two, there’s some on the stock exchange and some that are unlisted. So unlisted is, is just a, yeah, basically it’s a slightly more private version. Like it’s almost like buying shares, both unlisted and listed real estate investment trusts.

And they normally require you to sort of hold for, they normally hold properties five to seven years. So there’s all these set rules depending on the structure and the company you’re buying into. They’ll pay you a dividend or a return, which is just surplus in rent minus cost minus their management fees.

And they’re just, I guess the good things about them, they’re very easy. You can go in with lower deposit amounts. Like some will take as little as 10 grand, most take minimum 100, 000 amounts, but it’s just almost like an alternative to buying. Your standard shares, like a com bank, you’re buying part of like, you know, a larger portfolio, which gives you safety in the income because you could imagine these properties, some of these companies might have tens of billions of dollars under management.

So there’s lots of tenants involved. So you’re not really going to have a day where there’s no rent coming in because it’s spread over many, many assets. Potentially many asset classes as well. The unlisted structures are generally a little bit more specific. So they might be an industrial fund or a retail fund or a regional office fund.

Like I’ve seen all different types of commercial funds out there that can be a little bit more targeted. Which is obviously a good thing if you like a certain asset class and you want to be a little bit more involved in it. The things that are important to note is they will carry debt, these companies.

So pre GFC, the debt would have been higher, 60, 70 odd percent. But now there’s more regulation in that space. So you generally will find these companies run at, you know, 45, 50 percent debt levels, which is in a way a disadvantage to buying direct. We can go into that. Why it is a disadvantage later on, but yeah, having a, those debt levels means you’re basically spreading your money a little bit further.

You’re controlling more rents in a specific asset class. So yeah, they’re the main ones. And then outside of that, it’s more your individual private syndicates where you’re almost just getting a group of mates together to purchase a property that you wouldn’t have otherwise been able to afford on your own.

There’s no regulation with that or there is you’ve got to be under sort of, I think it’s 20 or less individuals. You know, you don’t need all responsible managers and stuff like that. You’re basically just sharing profits, not getting managed by a greater company. Who’s charging you fees. Okay. So either of those, so listed and unlisted real estate investment trusts.

So think more structured and more rules, more regulations, a lot more rigor around it versus something a little bit more private where a couple of people just club their money up together and invest in property. So let’s, let’s deal with the former first, who’s attracted to real estate investment trust.

So this is really non direct investing. This is where you’re just giving your money. It’s just another investment vehicle. Your hands off, you don’t have any decision making capabilities. You’re just saying, here’s my money, look after it and give it back to me. X plus whatever it is. And that’s the extent of it.

What’s the risk profile of these top investor? How many of them go bust? What sort of assets are they buying? And imagine most REITs are investing in probably large office or industrial developments. Who’s attracted to this sort of stuff? Uh, if you don’t, inverted commas, like property, no doubt, a financial planner might.

Pump you into a real estate investment trust. Tell me all about it, Scott. Yeah. So they’re generally for people that are not as passionate about property because they don’t want to get into the nitty gritty and understand an asset class and do the due diligence on a property. So it’s a good place for a lazy investor who just wants the protection of a, you know, a well known company that’s been around for decades that has produced.

X amount of returns per year. And it’s really just reputation security type of investing. I don’t know anyone that’s really got super rich out of investing out of REITs, but, uh, I can be, it doesn’t mean that that doesn’t happen, but the reasons why, like, you know, you can, I think do better out of an individual investment is number one, there’s a lot less fees.

So when you buy into a syndicate, you’re generally paying a manager one to 3%. Acquisition fee at the start, then every year we 0. 5 to 1. 2 percent annual fees as well. This is on the asset value. The like, if you buy a 10 million property, they might be charging you a hundred grand just to manage the asset.

And then there’s a sellout fee as well. So there’s a fee at the start fee during fee at exit. This is, it all adds up, you 7 percent of fees on the purchase price. And, uh, and then they will take a percentage of the capital gains as well. Sometimes it’s, uh, 25 percent of the capital gain. So if your 10 million property grows by 5 million in 10 years time, the managers will collect 25 percent of that 5 million.

And, uh, on top of all those other fees, that’s, that’s where I’ve personally not been too attracted with it. And obviously I’m a property guy. So I like being able to. Search and find a good asset, buy it at the right price, and then have 100 percent control. Because then the only fees you’re really paying are stamp duty and just purchasing costs.

And then if you are selling, you’re paying a sales agent. But, um, yeah, it’s a lot less fee intensive. But the benefits are you are dealing with a very I guess big general product that shouldn’t really go too wrong. And there was exceptions to this. The GFC did punish and close up a lot of rates because real estate investment trust, because they were too highly leveraged.

And you could imagine what a 30 percent fall in a, say an office building would have done to. An overextended reit, you know, they basically have their loans called in, and that was probably the worst side. But the benefit of all that is now they’re all in a, a much more conservative and safer position. So the returns aren’t as great, but the chances of, uh, things going wrong or lower, and you can train in and out of a reit reasonably easy.

Or if you go in there, your money’s tied up for 3, 5, 7 years. It’s all REIT dependent. Most will let you come in and out pretty easy just like shares, but some have minimum hold periods or penalties to exit early. I don’t think it’s the type of investment you want to sort of trade in and out of. Like if you, I still view it as property, if you’re going into it.

Buy it for the long haul, enjoy the full benefit of your capital growth. But yeah, they aren’t like, cause we actually at Reefing Investing purchase a lot of properties from REITs. Cause a lot of them from, from, from REITs, we’re finding a lot of them sell there, you know, every five to seven years. So it’s almost like, cause it now’s a time where you want to buy a property.

It’s, it’s a bit of a growth market. There’s not many people selling, but um, Mysteriously, they’re, you know, they’re some of the guys that still trade in and out. And reasons are there’s fees involved, so they make money when they trade in and out. So that’s their business model. A lot of them are transitioning into higher value assets we’re finding as well.

So I won’t name companies, but I know there’s a, there’s a few we’re sort of regularly buying from that they’re trading out of their sub 10 million stock into 20 million, you know, so they’re, they’re getting rid of smaller assets and. And that obviously brings properties to the market and in a marketplace where there’s not many, we’re sort of jumping all over them.

So yeah, they still sell in and out. And, uh, you know, if you’re an investor, you’re going to be, uh, along for the ride without the control of making the decisions generally. So REITs like that, who are sort of trading in and out and you’re sort of. Buying from is the purpose of the fundamental purpose of primary objective of the rate is to generate cashflow.

They can return to investors, or is it more about identifying assets that can be improved so they get the capital uplift at sale for distribution or is it both, both, both. And this is something rates are very good with because obviously they got. a solid management structure in their company. And if they’ve got some expert investors and their job is to find value add properties, a lot of them will buy, you know, a weaker position property, reposition it by strengthening leases, uh, refurbing floors or, you know, adding floor space and, um, going for a revalue or a resale down the track.

So There’s a lot of that that goes on and that’s, that’s a valuable product. Uh, these companies will bring. Yeah. So I guess that’s the beauty of this space. There’s so many different companies. Some are just passively holding, some are really focused on value adds. Some are just all out capital growth.

That’s where you can pick and choose what suits you better. And, uh, there is a company for every type of investor. It’s, uh, I guess the good thing is you don’t have to sort of action it. You’re just along for the ride. Yeah. And, and largely our discussions on inside commercial property Scott is around direct investment, but it’s also good to, to cover syndicates.

I don’t want to have a chat around syndicates versus direct, but we’ll get that to a moment. You’re in the business of supporting people. Identify commercial assets, uh, negotiated in the sale and then effective management of that. Who do you turn to for advice? And that’s not your bit and nothing we’re talking about at the moment constitutes advice in any way.

It’s just a couple of guys having a chat by way of a disclaimer, but who do you go to for advice on investing in REITs, whether listed or unlisted? Um, because you said there’s a, an opportunity or the some sort of offering for every investor, depending on where they are on their investment maturity level.

Um, Where do you turn to for that advice? Honestly, I just start with Google and they’re quite good at pushing out their own marketing. Like it’s like any business industry. There is, there’s plenty out there information wise. They’ll talk about their strengths, weaknesses, probably not talk about their weaknesses, but they’ll talk about their, you know, their system and how they make money for investors.

And I think we’ve already, the real important thing is just time in the market. You know, the, you know, in a growth market like this, you’re going to see a lot of new companies pop up. And this is what would happen just prior to the GFC. A lot of new companies formed and then they got burnt because the market changed on them.

They were over leveraged. They didn’t have the debts to their business to support weaker income periods and they vanished. So I think it’s an industry where you want to go with established businesses. And I guess it’s like any, you know, like even the buyers agent spaces, there’s lots of new buyers agents that pop up and guys that have been around for a decade.

You know, that’s history in the market. probably more important for a REIT than almost any industry because they actually will display their long term returns. And, uh, most of them will be in the, uh, the realm of 8 to 12 percent per annum returns. Which, which is not bad money if you can get it. And would a financial planner be able to give you some sense and advice around investing in REITs or should be, you know, if, if your financial planner is pushing a particular REIT, how do you work out whether it’s good?

Okay. It’s not something I’ve really been privy to. I haven’t really heard many. If financial planners refer rates, I’m sure they do. I know they normally will go through, uh, you know, stocks and look at it. To be honest with you, I really haven’t heard many, but, um, I’m very distant to the financial planning space.

I, I’ve got very little touch points with that industry. And, um, yeah, if any of your listeners know, you can feel me and I tell me where, uh, tell me who they are. Maybe, maybe we can get a financial planner on, have a, have a yarn around this, uh, at a point in time, Scott, we can, uh, I think that would work well and, and sort of listed Unlisted REITs, largely horses for courses, probably more risk inside the unlisted stuff in terms of, uh, rigor and oversight.

But some of those large unlisted REITs are also pretty significant run by pretty big organizations, right? Yeah. And a lot of the listed ones are open to retail level investors. So that means You don’t have to be classed as a, yeah, you don’t have to be a sophisticated investor or an institutional investor.

Yeah, that’s right. And, um, yeah, on definition of that, we covered it earlier. I think it was, you’ve got to have 2. 5 million net assets or 250, 000 per annum in income for the last two years, or I think investing over 500k capital at once. So it was along those lines. If you’re just a guy on the stock market trying to pump 10, 000 into a trust, you can do that if it’s open to a retail level investors and that’s generally your listed properties, because it’s almost just like buying shares, it’s just the shares are backed by property instead of just company earnings.

So, yeah, it’s, uh, one of the differences. All right, um, uh, go and check it out. Um, you know, just if you need more information about REITs, it’s, it’s all over the place. Uh, just be wary about where you do get your information from, make sure it is informed information. And if you do seek advice on REITs, make sure it is informed advice and the appropriate advice.

Now let’s talk about sort of, um, non sort of, not REIT based syndicates, more sort of private syndicates. I guess that’s the, the right term, a private syndicate, a couple of people getting together, you might know each other, you might not know each other. Pulling up their cash to club together to leverage themselves into commercial investing.

Good, bad, ugly, indifferent. No doubt people have had great experiences investing in syndicates. Uh, and I know people have had a horrible experience. Where do we start? Look, I think overall it’s good, but it’s got its pros and cons like everything. I’ll just use my example, why I jumped into them. So Uh, 2018, I, I bought a house in Sydney.

I basically, at the time, maxed out my lending and I, uh, it was a, you know, struggle with the bank and all that, just ’cause I was, you know, moving a lot of things at once. And I didn’t want to touch a bank. I’d really went off banks for nearly two years. So instead of just not investing, I started to invest in syndicates.

And, and this was just with clients of mine where we’d just grouped together. Purchase a property and uh, there don’t normally be like five of us in the syndicate and There would be a non recourse loan on the property So that means the loan would be on the property if the whatever reason the loan defaulted it would come after the property Not our personal assets only the property.

So it was a standalone deal. This allowed me and my investors to invest their own cash without having to personally back loans. And, uh, it was a real simple way of investing. And we, we jumped into two very good properties. One was in the ACT. I know it’s, um, It actually grew about 30 percent in two years, you know, we purchased it for 6.

4 and one of the negatives why is, is we sold it because some of the circumstances changed. We ended up selling it for about 8. 3, 8. 35 mil. So it went from 6. 4 to nearly 2 million up in two years. So that is an investment. None of us would have bought at the time individually. And, uh, we wouldn’t have got that type of sudden growth as well because the property was, we bought it.

Well, it was in a really awkward price point below the syndicate level, above the mumbins and dad’s level. And it was, it was just a well priced asset. We bought it. Well, we didn’t really do too much. The market grew and it was worth a lot more. So that was a very good experience cut short. Uh, you know, I think, Um, if that, that property is probably worth 9.

5 now, you know, the, the way, what was the purpose of the property, what type of property, what sort of property was it? It was a free hold shopping center with 10 shops and, uh, yeah, it was just in a real good part of like a shopping center opposite of Woolworths. And yeah, it was just a bunch of nothing special tenants, but, uh, it was fairly under rented and, uh, Yeah, that’s the type of investment you can target.

So the cut short, is that because people’s circumstances inside the syndicate changed? Yeah. Some people, they basically wanted money for other reasons. So there was an option to purchase out the other parties or just sell them, you know, the price was right. So we just made the call to sell out and, uh, and yeah, move our own ways.

And so this is a reason why a lot of people will go into private syndicates because maybe, especially in a market like this. Where right now the sub 2 million range in commercial is very tight because the competition is extreme. There is, there’s dead set thousands of people that all want the same product.

And if you can extend your budget to a higher price point, play around in the 2 to 10 million price points or higher, then you’re going to beat the competition or you’re going to get ahead of a lot of your, uh, your competition by outpurchasing them. And by nature, when you spend more in commercial, you’re actually probably going to buy a better tenant, a larger property, longer leases, you know, there’s going to be a better asset dollar for dollar as well.

So that’s probably one of the main reasons people will consider pairing up. The negatives are just probably the leverage though. Like if you can do it on your own, like if you’re lucky enough to have a million dollars Cash, and you’re going to invest that, you know, you could probably spread that up to about a 3.

5 million property, you know, with the bank loans on offer today. So that’d be sort of lease stock type stuff, or can you get your non recourse inside of personal? Yep. Yep. So that lease stock or full dock. Yeah, you’d be able to, and this is probably the biggest thing for me about why I wouldn’t want to sit in syndicates long term versus direct.

Because you can get a higher percentage bank loan and you can purchase a bigger, better property on your own without a non recourse, you know, shared loan essentially or a prop loan on it where you’re working off 50 percent leverage for 70%. And, you know, those that have bought the book that we wrote, uh, Rethink Property Investing, there’s a real simple table on page 160, which just shows The difference in returns based on a 50 percent leverage versus 70%.

So real highlight numbers. If you get a 7 percent return on your investment in a syndicate, that’s going to equate to 19%. Basically, that’s after you take into account your, uh, the debt on the 50 percent and, uh, it’s your return on your deposit, essentially. Now, if you direct investment, that same 7%, you’re going to get a 30 percent return because you’re leveraging at 70 percent versus.

50%. So the leverage actually makes a massive difference to your return on equity. And, uh, if you’re a long term investor or trying to get the best bang for your buck, it’s quite important to, to use debt efficiently because, uh, especially in a growth market, you will, we will make more money just by simply using the bank’s money a little bit more effectively.

So that’s the drawback about going into those arrangements, but, um, but yeah, there’s pros and cons. You can buy a better asset, but you’ve got to share it and have a lower leverage. Yeah. Someone’s got to give somewhere now. So what I’m hearing you, if you can do it alone, go alone. It just means that you might be operating at a different price point.

However, if you are interested in syndicate investing and you listen, it’s going, okay, I want to get in a syndicate, but I’ve got no friends with money. How do you participate in syndicate investing? Where do you start? Where do you find. like minded investors. How do you know whether or not essentially you want to go into business with them?

And then no doubt you need the rigor of a lot of commercial, legal, legally binding contracts to set the rules for syndicate investing. Yeah. So look, finding investors is the hardest thing. Like I was lucky because I run a business that helps people find commercial property. So I knew there was. It’s clients that, you know, I knew them because I’m dealing with them on a business level.

And uh, you know, the right people to jump into basically. If you’re just going off the street to find randoms, you know, that’s got all sorts of risk on it. But the key to setting a syndicate up is having a solicitor that has done this before. Make sure they know the rules. They can set the paperwork, the expectations, the, you know, the, the, all the different rules about who can buy out who at what price, you know, what the period of holding is.

Basically have it legally set up properly. The next step is to have a very good accountant to set up the right structure and you sort of want them to manage. the distributions as well. You can actually have someone in the scenic, send out the distributions, but I prefer an accountant to kind of, uh, take that.

So it’s at arm’s length. So, you know, if you all own 20 percent of the property, then effectively the rent’s getting split, you know, 20 percent each way. And then that’s what you’re collecting. So you want the accountant to sort of being part of that. So everyone’s, you know, getting treated the right way from a.

Tax point of view. And then, um, the other one is a mortgage broker. So just someone who’s been involved in setting up a proper non recourse loan that isn’t going to tie you into a mess where that loan still gets accounted for in your other finances and stuff like that. So you don’t want to get tangled up in this if you set the loan up wrong as well, because that could be, that just would defeat the purpose as well.

And, um, there’s a lot of loans that would tie you into that. And then next time you go for your own home loan, This syndicate would be, uh, you might be fully responsible for the debt, but only collecting 20 percent of the income, that would be it. Yeah, and this happens, and I could see your point, a really good mortgage broker is critical, this sort of stuff, because, yeah, you might get 20 percent of the upside, but the bank considers 100 percent of that debt, which means that you’re probably unlikely to be able to get, or secure any more debt.

So that will be a key point. So would you start, Scott, at that level, as in number one, identify the type of people who you might want to club together to form a syndicate. Then number two, start at the financing side of things before you ever start thinking or contemplating about the who, what, where, when, how of buying an actual asset.

Yeah, that’s exactly what I tell my clients. I say, yep, great. You’ve got this idea. You know how much cash deposit you can pull together. Now, go talk to the mortgage broker because it’s all until you sort of have a budget you’re working with, you know, it’s just hypotheticals and that’s not really going to help the investors.

It’s not going to help anyone trying to find a property, like learn what you can afford with the dollars you’ve got. And you might not be happy with the leverage. You might go, well, I’m having to put in 500 grand and then my mate’s putting 500 grand. That means if I can only get a 50 percent leverage, you have a million dollars, it’s only going to control the 2 million asset.

Maybe I’ll just go and use my 500 grand on my own and buy something worth 1. 8. At 70 percent live. Yeah, exactly. Yeah. And is there, you know, no doubt like in residential property, you hear a lot about it is these sort of sharks and charlatans that operate inside a residential property who are putting people into properties.

A lot of them, uh, mask themselves as. Project marketers and selling off the land properties or whatever it is, right? I want to go into it, but there for the unaware, there’s a lot of pitfalls and traps in resi does the same thing apply in syndicates. Is there people out there sort of operating at the sort of dubious level of ethics and right and wrong?

Trying to stitch up people in syndicate borrowing and lending and buying. Good question. Look, it’s a very highly regulated field. So you generally have to have an Australian financial service license to, well, if you’re trying to charge someone to, uh, manage a fund, you have to be an Australian financial service license holder.

And that means you’ve got to be a responsible manager of syndicates for at least three years. You’ve got to have, you know, it’s, it’s, Tough process. So I guess the, you know, they’ve engineered a lot of the risk out by having all these rules and regulations, which is good. Commercial is generally a lot more complicated and it just, I guess a lot of the residential field cause the barriers to entry are much lower and, uh, it’s more prone to that type of shock essentially.

Um, but they do exist in commercial, but you know, much lower levels. Like they’re, they’re probably just guys that might overstate. Future upside or, you know, I’ve seen a few sort of startups indicators out there that run a, you know, very low volume levels. And, um, I probably just think it’s more risky if anything, it’s, it doesn’t mean they’re, uh, bad intended, but, uh, yeah, it’s a space that it’s an old industry.

It’s been around for a long time and, uh, there’s a lot of eyes on it, making sure people do the right thing. Yeah. And the regulators, the government obviously don’t want to see people blowing their dough investing in this sort of stuff, but like, where should your red flags sort of be? If you look at an opportunity, say it’s listed or unlisted, or as a bunch of people getting together trying to get you to participate in their privacy and to get, if you’re getting promises of 25 percent returns, uh, is that big red flags?

When do you start getting jittery and nervous, mate? Well, the ones I’ve seen where they, they’re buying a property with an initial yield of 12%, or maybe they’re buying it where it’s renting for 5 percent net return, but then they’re selling their future leased income of fully leased income of 14%, you know, amazing numbers, but it’s normally too good to be true.

Like, why is it, you know, why are they selling at the price, especially in a hot market? Like, it’s probably just. It’s just the common sense numbers to apply like a property should not be renting that high. Maybe they’ve just started their first syndicate. That is something that I, uh, I think is a higher risk, especially if you’re just a passive investor that really doesn’t have much control.

And um, yeah, look, there’s, if you’re going down the syndicate route, like maybe you just test the waters with the big companies, you know, the ones that have been around for a while, proven returns. They’ve got all their licenses, they’ve been doing this since we’ve been born and um, that’s just a good starting point and then maybe, yeah, just spread your risk around.

Like I see a lot of investors invest in many funds as well, like you don’t just pick one, you might put, uh, you know, a little bit into five different ones. And that’s, uh, that’s what a lot of diversification and should you on that base diversification, if you want to operate in, in syndicates, whether it’s sort of retail or otherwise, you know, some industrial, some in offices or any particular syndicates operate better for different asset classes, uh, syndicates more skewed towards particular asset classes.

Where do you sit on that? Oh, look, they all have their own flavor. So there’s a lot of office. There’s syndicators. There’s a lot of, uh, neighborhood shopping center syndicators. So I guess that really just comes down to what, what I do as a day job. Like there’s certain asset classes I prefer over others, but they do change time to time.

You know, like, well, I’ve been quite public about industrials being. a really good place to jump into. And, um, it’s a market that you probably, you got to be a bit careful now because some industrial markets are getting overheated, but then there’s opportunity in some retail because it’s a little bit off flavor and that’s presenting opportunities there.

That’s probably going to happen to the office market at some point. And then industrial might be a good market in a different market. Like you just got to time the right asset class as well. Yeah. And that’s where a syndicator who only follows, you know, one asset class. Yeah. It might not be the right time for them at this point.

So yeah, nice one. Um, I think we’ve done pretty well on syndicates. Any, any glaring things that we’ve missed? No, look, not really. It’s just a, an area that you just got to do your homework in. Like there’s so much literature out there. There’s, um, I just think a lot of in my circles, a lot of people prefer, you know, owning.

Well, you’re putting large volumes of money into a direct ownership and then maybe a special little bit on the side into this stuff and, and, uh, yeah, but it’s very old industry been around for a while. I think it, uh, beats a lot of share property portfolios as well. So there’s, um, Give it a crack. So you don’t, don’t bet the farm first time around.

It’s one of those things where you’ve got to learn and inform and get educated before you get into it. So softly, softly and all that sort of stuff. You don’t sort of. Get people who are interested in sitting and investing together. Scott, you don’t do that. That’s not your thing. Oh, look, we, we do, but I’ll be honest.

We steered away from it just recently. The main reason was we did it to target the properties that we wanted to buy that no one could afford. But in this market, it seems like individuals can afford, you know, you know, we’ve got clients. Plenty of family office money around, isn’t it? Yeah. And like, we’ve got clients that look up to.

property prices of 25 million. So you, if you’ve got an individual that would buy a 25 million asset, that’s a lot better than trying to round out 20 people to buy that same asset. So I guess it’s horses, of course, as things will change in time. But, um, but right now, like it’s a really good time for individuals to get in leverage.

into a really high growth market. And then, uh, obviously we do the homework like your, uh, you know, life depends on it, making sure it’s a great asset and, uh, yeah, the returns are phenomenal. Yeah. Okay. Well, I think we’ve done well, mate. Anything to finish off, partner words on Citigroup investing? No, that’s really it, mate.

Unless you’ve got any more questions on it. No, I think I’m pretty good. If people, you’re, you’re happy to put people follow up with you and ask. Pick your brain around this sort of stuff. Yeah, look, happy to, to chat with people, but it’s probably the, the starting point is so making sure you’ve got the right people in your team.

I think once it starts getting over five, six people, it can get a bit messy. So try to keep the numbers low. And then once you’ve got that team, go talk to your broker, see what leverage they can work with. And, uh, then once you’ve got a budget, that’s when you can get serious about this. And that’s where you’ll need to tag in your solicitor and your accountant.

And, uh, between those professionals, it’ll be all set up properly and safely for your own interest and your, your, uh, members interests. And then, uh, you can go shopping for a property after that. Sounds all right, mate. Good work, Scott. Well, I do appreciate it. Any questions at all, just rethinkinvesting. com.

au is the place to start. Yep. Just, uh, Google Rethink Investing and, uh, Just shoot us an email and happy to answer any questions. That’s cool. Give us a book plug. What’s it called again? Uh, Rethink Property Investing. So we’ll, uh. Available in all good bookstops or in the, uh, discount special bins, mate. Uh, you probably need to go onto, uh, Amazon and Booktopia at the moment with all the, uh, closures.

That’s right. You can’t actually go to a bookshop. They’re, they’re closed. But, um, no, I’ve got a copy, signed copy. I think I was one of the first ones. So it’s a really good book. Um, uh, and it’s one of those ones where you should pick it up and put it down, whatever you just kind of want to bang out a chapter.

Um, You have to read it all at once and it’s really good to, to revert back to, uh, as you expand your mindset towards commercial property. Uh, that’s Scott O’Neill. He’s a director of, uh, Rethink Investing. This is Inside Commercial Property Podcast, the hottest podcast in town for commercial property.

Thanks for joining us. We’ll see you next time until then. Bye bye!