The 101 of buying in a super fund - Property Inc
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Inside Commercial Property with Rethink Investing. Australia’s largest and most comprehensive podcast covering all things commercial investing. G’day, Phil Tarrant, co host Inside Commercial Property. Hope you’re well. I’m with Scott O’Neill, director, founder of Rethink Investing. The man behind the not madness that is investing in commercial property.

Scott, how you going? You well? Yeah, very good mate. Good to be back again. End of the year. Christmas is almost here. A bit of buzz in the air. It is upon us. It is. And I’ve been out and about a bit on the cocktail party circuit, believe it or not. I get invited to a fair few things. Uh, so I’ll try and get to as many as I can because it’s a great chance to reconnect with people.

But, uh, there’s people out there. They’re all, it’s real buzz in the air. There’s a spring to people’s step, even today, like, you know, um, for those of you that don’t own Momentum Media, you might not. No, Scott, we’ve got a pretty big events business. So we’re smack bang in the middle of doing events. We’ve got two big events today, the Australian Broking Awards, which is for the mortgage broking sector and the Australian Law Awards, which is for Australia’s legal sector.

So it’s a big lunchtime event. And then there’s a big dinner event and there’s an after party for both of them. So. Uh, I’m subscribing to the backseats for this one. I might go and have a look, but I’m not participating. But everyone’s out there, like the people who are out and want to be out and they’re, uh, they’re smiling and, uh, there’s real energy out there, mate.

Maybe this is the birth, the true birth of the roaring twenties. Yeah, hopefully mate. And, uh, definitely. Makes it harder to stay on your emails. I know you’re a little bit slower these days. You must be enjoying those lunches plenty of times. So sounds like a good life, mate. It’s funny you say that it’s, it’s a bittersweet environment right now, because I still have the amount of work that I need to get done every day.

And, uh, I was only sort of lamenting to my wife just the other day around how much I do enjoy routine. Like I love routine and I know my job doesn’t always facilitate the maintenance of that routine. So when I’m doing other things, I’ve been traveling a lot. I’ve been down in Canberra and all over the joint lately.

I still need to do all my other job. In that bit as well, right? And then what often actually gets compromised with that is, um, uh, my own sort of personal wealth type stuff. So the property work that I do and also my, uh, my fitness. So I neglect, uh, I neglect exercising and because I’m typically out doing stuff as well, uh, I’m eating badly.

So it’s a, it’s a recipe for absolute disaster. So, but I’ll try and get pretty good on that. Um, it’s the life that everyone sort of involves themselves in these days. Yeah, exactly. And, uh, I’m with you. It’s, it actually can be a little bit more, uh, I guess, stressful because you know, all that works just building up in the background.

And not only that, I actually think the workload grows this time of year for property because I don’t, I don’t know about your purchasing history, but I, I personally have tended to buy more Thank you. Properties in December as a personal investor than any other time of year. And I know a lot of my investors are the same.

So we’re very busy up to Christmas day, trying to take advantage of the last stock coming through for the year. Because there’s a bit of a, there’s a rush to buy because we all know January is a bit of a dead month for property. So if you don’t buy now, you’re not really going to do too much until February.

You know, a lot of people’s circumstances change, obviously spend more over Christmas. You, you will get distracted and, um, it is a good time to sort of get in, in Christmas. And, uh, if not, it’s, yeah, it’s just about planning for that February purchase. Yeah, absolutely. And for those of you that tune into smart property investment and being sort of watching my journey or our journey, smart property investment, uh, through property.

And I invest with my business partner here, Alex Whitlock, who you’ve heard from before. Uh, we’ve bought some great properties in December. Uh, when, when everyone else is starting to slow down, uh, often you can actually, if you’re joining on the spot, the right place at the right time or the right options, or in areas where people aren’t really getting too involved because they’re too busy doing other things, there is some great purchasing around that.

I have been just in that regards also to, this is inside commercial property, bit of a newsflash, um, Phil Tarrant has officially signed up with, uh, Rethink Investing, uh, going to secure a property. Uh, commercial property inside of my self managed super fund, which no doubt Scott, a lot of people invest in a commercial property inside of the super fund.

So I was going to go down this pathway with you as an example to all of our listeners who haven’t purchased commercial before, whether it’s inside or outside of their super fund, how you actually go about doing that. And I’ll be a guinea pig for you, mate. So no doubt all the eyes of Australia will be on how good a property you find me.

Yeah, it sounds good. Look, it’ll show the types of conversations we have in terms of like asset selection, comparing apples with apples. Like it’s, yeah, look, it’s a very interesting scenario, but you may end up buying a property that you never thought you would. And that’s sort of what happens. So you might have all these.

Preconceived ideas of what you want, you know, it might be industrial or it might be retail and you might end up buying something totally different. And that’s the beauty of commercial investing. It’s sort of the deal or the property dictates what you’ll end up doing depending on how good it is. And sometimes there’s a bit of patience and a bit of just comparing that you need to go through just to get your head in the right spot to contract a property, but no doubt we’ll explore all that together and yeah, we can go through it.

Month by month, depending on how long it takes and you know, there’s no rush with this type of stuff. It’s really just about when you’re comfortable to pull the trigger on the right asset. Yeah. And, uh, I look forward to that pathway and I think a lot of people will learn from it. I’ll be the guy asking the questions, I guess that everyone probably thinks about that, but they’re too scared to ask, but I’m not too scared to ask those questions.

And, uh, I’m pretty experienced around property, so I’m not concerned about the process. But, uh, this is inside a self managed super fund that I’ve had for quite some time. I haven’t done a lot with, I’ve got some shares and stuff in it. We’ll go into that as well. We’ve got cash. We’re ready to go. So we just got to go through that pathway, but already my buying journey has been compromised by my poor administration as a property investor, which I’m probably well known for around the traps.

Um, I’ve had, uh, in my inbox for probably Two weeks, um, uh, some forms, uh, that you needed from me with information in regards to this, to actually formalize the process to go down with you. And I haven’t got them back until yesterday. I think it was all the day before I, I finally filled them in an airport lounge somewhere, I can’t remember where I was.

Um, so, so we’re now officially engaged. What happens like, what happens next? So next is I’ll ask a series of questions. So number one, we really want to know kind of what you’re working with. So. That’s going to come down to budget. So everyone’s got their budget. Like you’re mentioning you’re buying in a super fund.

So the things you need to consider in a super fund is you need a relatively passive investment. You’re not there to do some crazy development or, you know, you’re not going to refinance that anytime soon. It literally is a buy and hold strategy. And. What I would like to know to help me start searching for you is number one, it’s probably a good idea just to sort of understand how much in your super you want to allocate to commercial.

So in terms of a deposit amount, and then what we can do is back calculate that and work out your budget to spend up to. So first step is working out what you want to spend. And then, then I’ll literally tell you what types of assets you can expect in that price point. And. And yeah, and really it’s about me hearing what you want out of this as well.

Like you might have yield criterias, you might have certain States you don’t want to invest in. Like this is all good. Like a big part of my job is just listening. And, um, because the great thing about commercial property is there’s just thousands of options out there to, to choose. So me listening to, to really home in on your brief is the key.

And, um, and you may not even have a brief, it might be just budget related and go for that from there. So. That’s first step. And, um, second step is just understanding where you are on the lending side of things. Cause if you’re not up to date with your bank, you might need more time. So when a good asset comes up, you need to move pretty quick in this market because everything you’ve seen residential about how hot it is, how, how quick things are moving.

Um, it’s all happening in commercial probably even, even more than you think because stock levels are lower and there’s a lot of people wanting good quality property. So especially if it’s on market. a good let’s just use a round number of a million dollars a million dollar property might have when it goes online if it’s a good investment with a good tenant and a good lease there might be 50 people inquiring on that property within two days and then another 25 the next two days after and another 12 or 15 the next two days after so there’s nearly like there’s 100 odd people looking at one asset.

So to buy that, you need to move quick. So that’s just a bit of a starting point. And, um, I guess, yeah, you could tell me what you’re looking for in terms of budgets. And then I will challenge you as well. So that’s probably a good thing to hear. Did you have any ideas what you’d like to own in your super fund?

Well, this is it, right? Um, I’ve been thinking about investing in my super fund for quite some time, but I haven’t prioritised. I’ve prioritised other. Uh, investments in other vehicles. Um, so it’s, it’s relatively early doors for me investing my superfund. I’ve got shares at the moment. I’ve been watching them.

They’ve tanked 15 percent in the last two weeks. Right. And I’m sitting there just going like, it’s good to be diversified, but I’d like to be in assets, which I feel as though I have a lot more control. And therefore I feel as though I can have that inside of, um, Uh, property is an asset class. I appreciate the diversification outside of residential into commercial.

I think commercial real estate is a great vehicle for Australians to generate significant wealth. So where I’m at with it all is that I’ve made the decision, Scott, yes, I’m going to diversify inside of my self managed super fund into commercial property. I’ve made that decision. And you know what? The second decision is.

I don’t have the time, energy, and effort to do it myself and, or I would say the experience or expertise. I reckon I could probably learn that if I had the time, energy, and effort to do it, but I don’t. So I’ve made the second decision as in I need someone to help me do this because if I don’t, I won’t. So therefore that key decision was using a buyer’s agent to do this for me.

And obviously you are the obvious choice to choose you to do it. And that is pretty much the extent of where I am right now. And no doubt you have a lot of people, a lot of clients come to you. In a similar paradigm, pretty much going, I’ve made a decision. I need some help. What do I do now in terms of budget, which is probably going to be the key driver to two major levers, budget and finance.

So how much money have I got inside of my super fund today versus how much I can put into my super fund without too many tax consequences. This is a discussion and we could get my accountant on as part of this as well. I think we would benefit from that. Scott to say, okay, this is how much super I’ve got.

I pay into my super fund every single month, um, as in, you know, it’s normal super contributions based on my income. There’s a certain amount you can put into your super fund every year, whether it’s retail industry or your own self managed super fund before there is tax consequences to it. And there’s also tactics around doing one year of advanced inside of your super fund today and all this sort of stuff.

So that’s an accounting question and that will dictate and determine, I think Scott. How much budget I have as well. And I reckon that budget I could push up and down as required. But for the purpose of this example, going through it with you and for all of our listeners, I’d like it to be sort of about what normal is, if that makes sense.

Like, I don’t want to be too high or too low. I wanted to be sort of, you know, if you looked at a bell curve, you know, the, the, the 20 percent to the 80 percent of Australians who invest. In commercial property inside of their superfund, what sort of money would they be deploying per asset in order to do that?

And I guess that’s how long is a piece of string and how old you are and where you are in your investing journey, but I’d like it to be sort of quite middle. Yep. Yeah. And, um, look, lucky for me, I’ve got a very good cross section on this. Cause you know, we’ve been doing this for a while and yeah. And I reckon that we’ve invent like we’ve had 2, 500 clients and out of that, I’d say probably 500 would have been doing this in their superfund.

So it’s a pretty good cross section and the middle rung would be somewhere around a 1. 5 mil purchase. Lower end is that you need minimum 200k generally in your super to sort of leverage up and you can then buy a 600, 000 asset. So that’s entry level 600k and obviously people have different like upper end budgets.

Like that’s, uh, but most people sort of tap out around, uh, probably say a million, million and a half cash in a super. Account, um, outside super it’s, it’s a lot larger in terms of budgets, but middle rung would be investing around 500 K and that’s a 1. 3, 1. 4 million dollar type purchase. And that’s a good quality asset.

Like you, you, you’re dealing with freeholds, regional properties for that money. You can get into all capital cities with that budget as well. It’s just going to be a different size asset. You can buy a good quality retail, good quality industrial. Obviously office we don’t do as much office due to the current climate, but um, look, I think it’s, that’s a middle rung.

And obviously if it’s either side of that, it doesn’t make a big difference. It’s just going to mean you’ll see the less options because the lower the budget, the less good assets there are generally the higher. You’ve got more selection, plus you can see the cheaper properties well under your budget as well.

So that’s probably what I’ve seen over the years. So, you know, somewhere, you know, four or five, 600K invested is sort of where most people average out, I guess. Okay. So it sounds like to me, I need to have a discussion with my account to say, this is how much I have right now. And I don’t intend to liquidate my share portfolio nor to do this.

This is sort of residual. Cash sitting inside of an account I have, which I pay my super into and all this sort of stuff. Uh, and by the way, I’ve just gone through a process of rolling over some retail, uh, super funds that I’ve had inside of my self managed super fund. And that was a process that I, and for those of you out there who are thinking of doing this, I.

I nearly started down the process in February of 2020 and I actually got all the forms and stuff and I looked at it and I went, okay, I’m a bit busy at the moment. I’ll do it in a couple of months time. And then COVID hit and I looked at the value of my, um, my, uh, retail super fund and I just went, I just got to leave that moment.

Hopefully it’ll bounce back, which it did. Uh, so I actually rolled over a whole bunch of super in, um, Uh, probably would have been in July of this year, uh, once, once my retail fund got up to where it was and I was satisfied that I wasn’t going backwards. So, so that’s now happened. I’ve got money sitting in a, in an account that I need to deploy.

It’s the percentage of going up or down inside of that is absolutely a question for my account. So I’ll have a chat with Munzral and say, Munz, how much more money can I put into this super fund without any major tax consequence for, This current and next financial year. And what are the rules and obligations around that?

So do that in the right way without having to pay tax on additional funds that go into it. And that’s probably where my deposit will sit. Uh, I’ll probably throw all of it at this, uh, depending on, on where I sit. I don’t plan to buy any more shares at the moment. Uh, so I reckon. You know, I could probably sort of fall easily fall within that range between four and six hundred K for, for this particular purchase.

So we’ll operate on that budget, but there’s a fair bit of work that needs to happen prior to it. So that is the one lever. How big is your deposit? Um, but the second lever is your access to. debt, and at what rate you can access that debt at. Now, the good news for a lot of people out there is that in a retail side, and if you haven’t looked at this yet, I highly recommend that you do, uh, retail, uh, rates or rates investing inside of your super fund for residential property have come back quite a long way.

And, you know, I was chatting to some friends the other day and I said, Oh, if you look at your, your lending in this, because they were paying sort of 6. 5, so I think they’re now getting inside of fours. Don’t hold me to that. Go and speak to your mortgage broker. But things have changed considerably. So if you have any residential property in your super fund, I recommend you go and look at that.

But on the commercial side, there’s different ways in which banks assess your ability to borrow inside of your self managed super fund. And sort of broad brushstrokes, it’s probably a lot easier doing that inside a super than what it would be outside a super fair call, Scott. Yeah, definitely. And leveraging is, I think one of the greatest benefits of this whole commercial purchasing within your super fund.

Cause when you go to an industry fund, you know, they’ve got, obviously got their own, own internal debt levels with these companies, with the stocks or the other commercial investments they invest in. But when you invest yourself, You could get up to, you can actually get over 70 percent leverage. So there’s some banks out there that’ll go, uh, you know, 75, even 80 percent in your super, they’re going to charge you extra interest for that.

So for the sake of your situation, I don’t think you need to go to those levels, but a 70 percent debt level for you is going to be very. Simple, because these deals are standalone and this is the other good thing I remember when I, at the time where I had most trouble lending is when I bought a property in my super fund.

So I purchased about three years ago now. It was a 70 percent loan and it was at a time when I just bought a house in Sydney. So obviously I acquired some residential debt and the bank didn’t want to see any more loans at that point because of, you know, basically I hit the serviceability wall at the time.

So. In the super, not a problem. Cause it’s a standalone deal. They didn’t even look at the rest of my financials. It was great. So I just got it done on the side. And it was for me, it felt like a free purchase because I didn’t really, it almost felt like I didn’t deserve a property at the time because yeah, I wouldn’t have got it outside of super.

So it was a really convenient purchase and commercial or is he, that was commercial. So for me, I really think commercial is. It’s a no brainer for super funds because the interest rates you are charged a higher, you’re just going to end up in a negatively geared situation. If you buy a house and you’re super funded, I don’t really see that like, this is just my personal views.

Houses have a massive place for investing and you need to invest in resi, I think at some point, and especially when you’re beginning, but in super, it doesn’t make as much sense because the super is meant to create an income for you. It’s obviously got very little tax associated to it. And these properties are going to help you into retirement.

And if you don’t have a good income source in your super, you’re gonna have to find it other places. And, um, with that higher interest rate, it just makes more sense to go for a higher yielding asset because it does counteract that interest rate. It’s a lot of moving parts, um, with your super, and this is the interesting scenario for those of you who are thinking of investing in commercial property inside of your super fund.

You buy the asset, great, and you want the asset as a standalone asset that will grow over time. And we’ve spoken about it at length and in depth on, on, uh, inside commercial property, Scott. The idea that most people assume you invest in commercial property for the purpose of yield and cash flow rather than for capital growth.

And that’s, I think we’ve dispelled that myth. So. My requirements, Scott, for investing in commercial properties on my super, number one, I want capital growth uplift. Absolutely. Number two, I want yield. So I need income coming in from this asset into my super fund, which should, I would imagine support the holding costs for owning the asset and also put money in my back pocket.

But one of the great things about super is that going into that fund, I’ve also got my monthly contributions going in as well. So I get the compounding effect or impact of positive cashflow building up inside of my super fund. And we’re talking about a single asset here for the sake of simplicity, but then also the contributions going in those two together means that I build up my cash balance once again, more.

And I can invest in, in another property moving forward. So they’re the sort of three key drivers of, um, this particular asset that I want to be generating. So I want positive yield. I don’t want to be having to, to pitch in every single month for my contributions to hold the debt. That’s got to be the other way around.

Is that a fair expectation? Uh, look, I, I think it’s, it’s more than fair and it’s what I would recommend for nearly anyone in a super fund. You can get all of those criterias pretty easily in this market. So I thought to illustrate that using a sort of a circuit budget, what you mentioned, uh, you look, let’s use numbers on a 1.

5 mil asset. Cause again, at the end of the day, this is all about the numbers and what return you’re really going to get out of this. So let’s look at the returns. after an interest rate has been taken out and whatnot. So purchase price circa 1. 5 mil, that’s what you can be working with. So 70 percent loan on that, that’s a 1.

05 mil debt. So you’re paying interest on that 1. 05 mil. You’ve got a cash deposit you’ll need to put into this deal. So 30 percent of 1. 5 mil is 450, 000. On top of that, you’ve got stamp duty. Stamp duty is going to be 67, 300. If you buy a New South Wales, it’s going to vary slightly between states, but let’s just call it 67 for the sake of this.

Now, valuation costs, you’ve got to pay for valuations with commercial investing because it’s, it’s a much more detailed report. It’s also part of the due diligence that can. Be a tool for negotiation as well. Cause values are often quite conservative in their valuations and, uh, especially in a hot growing market, if they go off valuations from six months ago, that could be 10 percent ago in, in terms of capital growth.

So there’s that your solicitor costs now at solicitors cost more. We’re so what do you reckon of what would a valuation cost be on this couple of grand? Oh, yeah. So I didn’t say that. So about 2, 500 for that type of purchase price. So there’s no real general rule, but you know, if it’s, it’s normally, if it’s a 3 million purchase, it’s sort of around a 5k.

If it’s a, you know, 500 grand property, it’s around 1, 200, 000. So it’s sort of, it varies. It definitely goes up as the price goes up and the more tenants, et cetera. So 2, 500 for your example, give or take. Now solicitors. Will cost more in commercial and the main reason is you’re not dealing with you’re dealing with a proper solicitor who’s qualified and got all the tickets and they’re going to be experiencing commercial law.

The main reason is they got to do a legal lease review. So at least review in commercial is. like another contract. So it’s all automatically about 1, 000 more expensive than your average resi guy. So for your property price would probably work around a 5, 000 type solicitor cost, maybe 5, 500 that’s disbursements included legal lease review included.

And plus all the, uh, normal contract reviews. So 5, 500, uh, and that’s the big cost. Like you’re going to have, you know, 500 bucks here for the building and pest reports, maybe 700 for that total. So there’s, there’ll be a depreciation report you buy after settlement. So that’s not part of the purchasing costs.

That’ll be about another 800. So they’re, they’re your numbers. And then you go shopping. So you’re going to need. And also I probably, I gotta, I gotta pay you as well, right? Yeah. So there’s a buyer’s agent fee in there. So, you know, it’s a 1. 9 percent fee in our case. So that’s, that’s basically a similar to a sales agent commission.

So a bit of a background on fees in the commercial world. So sales agents will charge generally two to 3 percent to sell a property. Buyers agents. can be similar or they might be fixed or a percentage base. We charge 1. 9 percent and that that includes full due diligence and it has to settle and uh, yeah, basically that’s what will be in there.

So that’ll be including the GST about 30 grand in your case. Now that all totals. 556, 000. Yeah. 560, 000. That’s cash money. Cash in super. So now obviously the, if you need to spend less, you just throttle the purchase price down to 1. 4 and that has a significant impact because obviously stamp duty is going to be lower and, uh, and all the, and now that you probably provide that you provide those.

Calculations for me to give me to help me discuss with my account. Exactly. So it’s 1. 5, it’s 560 cash, it’s 1. 4, it’s this, 1. 3, it’s this. And it’s just, just a scalable. Yeah. Okay. And that’s part of our service as well. You might have a budget in your mind. And it’ll change because you might come into more money because you’ve, or, or it might go the other way.

You might say, look, it’s just pushing, pushing the buck a bit too far. I’ve got money. I want to keep for something else. My experience is people end up, it’s like when you go for a house, when you’re buying a family home, you always tend to go over because you can see what spending a little bit more gets you.

And especially in commercial, it does end up. Being a better and better investment. I know every time I’ve personally bought, I’ve got a budget in my mind and somehow I end up 10 percent over every time because there’s the, uh, the deal you chase because it is a better investment. So that’s just part of the process.

We will trial and error and look through many properties together. And one will stand out. I don’t know what price it will be. It doesn’t matter whatever it is. That’s the one we go for. And you know, if you can do it, you do it basically. Otherwise we just. Stay under a certain range. So the way to look at all these numbers, you’re investing, call it five 50.

Now the income you can expect from an asset of that, let’s say around a 6. 3, 6. 3 net yield is that’s probably an average, you know, slightly above average. What we’re seeing out there, Let’s just quickly, we’ve spoken about it before, but really quickly, Scott, net yield, gross yield. Net yield is after all costs.

So that’s the rent minus maintenance, minus, uh, insurance strata if applicable, land tax, everything. So basically, so this is money your, it’s money in your skyrocket after all the, all the, uh, yeah. Okay, cool. Yeah. And gross is basically when the tenant. Is just paying you a higher gross amount, but then you have to pay the outgoings out of it, but we will only look at net returns together, but gross returns mean nothing because you’ve got to take into the costs and because outgoings vary between property to property gross, and that’s where it’s funny when you transition back to residential, everyone’s quoting gross and you think.

Why? You know, you’re not, it’s only part of the equation. You’ve got to look at the whole net return. What’s a gross return is just, just ignoring. In my own assessment on my Resi portfolio, I have four different ways I measure a yield, right? You know, it’s on purchase price, it’s on full establishment costs.

It’s on, Current valuation of it and a whole bunch of other ways of measuring your return on your money. So in commercial net yields, if that means the money you get in your bank account every month after everything, and then from that money, you got to pay your mortgage. Exactly. And it’s good. You look at your resi like that, because I could say that not many people would.

Everyone quotes the gross yield of an area. And that’s when we, cause we help. Clients with resi, we’d like to show them the return after an 80 percent mortgage, a 90 percent mortgage, a 100 percent mortgage. Like you’ve got to look at the true cash outcomes because if you don’t, that’s when you can get stuck.

Especially if an interest rate rise happens and you haven’t really looked at the full equation, um, which a lot of people don’t, especially when they’re sort of emotionally buying a house to live in there. Yeah. I don’t think they’re, they’re looking at the true return on equity and, um, that that’s where you can get into those dangerous situations.

But for the sake of your type of property, you’ll be collecting around 95 grand income. So that’s going to be a 6. 3 net income. That’s going to be 95, basically, uh, 95. And then you’ve got your mortgage that’ll come out of that. So your interest you’ll pay, I’ve put a 4. 5 percent interest rate. So this is very high.

But it’s because it’s your super. So the return on equity, that’s after you’ve put all those costs, you know, buyer’s agent fees, stamp duty, I can send you this spreadsheet. It’s probably a bit easier than working through this. But once you take out that cost, there’s a 47, 250 cost to your mortgage every year.

So that’s what your super is going to cost you. You minus that from your 95k. Cashflow less the interest will equal 47, 750. So you’re going to be, your net cashflow is actually 47, 000 a year, uh, clear. And that, that works out to be 918 per week passive income, instant passive income after all costs. So this is income that’s going back to my original point.

I’m still paying my contributions into my super fund, but this is positive income also going back into that super fund. Yeah, based on an interest only situation. So obviously. See if principles paid off over a five year period, you’re just going to pay the thing back and create equity very quick. But you’re netting 920 a week clear.

And that’s the beauty of it. And let’s just stop for a second. So, um, Scott, um, so 3, 900 a month in positive income, just going back into this, my super fund. Yeah. So imagine you’ve got two of those properties. Which is very achievable for, for a lot of people out there. That’s instant retirement. You’re going to pay little to no tax on that because there’s large depreciation benefits on commercial.

You’ve got, you know, it’s still a fairly low debt level. So that debt won’t be hard to pay off over a long period of time. You know, you’re not 95 percent lending it. And then, you know, you’re left with this big elephant in the room later on to pay off. Like it’s. So if I wanted to, I could say. I want to zero out cash inflows back into my super fund and everything, everything, which is positive income, i.

e. the net yield that I get, 95, 000 minus the mortgage every year is about 37, 000. I just go put that, pay that down, pay the load down, pay the load down. So I’ve got to tip all of that back into paying down the loan. Yep. So on that point, if you put all that money back into your 70 percent mortgage each year, and I factored in a 3 percent increase annually as well, so your rent goes up, you will be debt free by year 14.

Okay. So that’s, you’re not contributing anything. It’s just putting back into the mortgage from that rent. So, In 14 years, you’re going to have a 1. 5 mil asset paid off, but here’s the great thing. It’s not going to be worth 1. 5 million 14 years. It’s going to be worth, if you just put a 3 percent growth rate on it annually, compounding, it’d be worth 2.

  1. So in 14 years, you’ve got a debt free 2. 2 mil asset. That you purchased using 550, 000 cash. So let’s just capture that. Um, a lot of people thinking why should you invest in, in commercial property insolvency? Well, it’s a wealth creation thing. And you know, at a point in time if you don’t want to work, that’s pretty cool, right?

So you’re saying in 14 years time, if I pump every single positive dollar that comes out of that asset back into the mortgage to pay the debt down so it’s zero, it’s going to take me 14 years. And you’re saying at a 3 percent compounding growth rate, i. e. every year it grows by 3%. It’s going to be worth what?

  1. 2. 2. 2, right? So I’ve got a 2. 2 million asset with no debt. How much money is that 2. 2 million asset in 14 years time going to be paying me as net income? In that period of time, it’s going to be 143, 000. And if you look at the 143, 000 a year in income. So that means it’s going to pay my Chico Royal bill for the year.

Right? Yeah, exactly. And, um, here’s another interesting line return on equity. So year one went back, rewind all the way back to today. That 95 grand that’s given you 47, 000 after your mortgage, that on your 500, 000 investment or 550 investment, it’s actually an 8. 53 percent return on equity, pure cashflow.

That’s not including growth or the 3 percent growth. It’s pure cashflow. Now you look at that year by year, if you sort of just remember what you put into the deal year two, it’s going to be a 9 percent return on equity. Again, this is just a 3 percent increase year 10 percent equity. Let’s fast forward it to year 11, It’s going to be a 19.

8 percent return on equity. That’s year 11, year 12. 21. 46 return on equity. Year 13, 23. 14 return on equity. So you can see, this is the whole beauty of why we invest in, in any type of commercial. You allow inflation. You’re buying a property in today’s. Dollars for, uh, you know, tomorrow’s benefits because inflation will just make everything look very rosy on a spreadsheet and that’s where you got to hold on to things long term.

You don’t buy and flip. I really can’t get my head around that model, you know, unless you do intend to at least hold something long term by the end of the flipping. You need to hold good property for long periods of time, sell off your bad ones and then keep holding the good ones. And that’s where this equation, yeah, it becomes amazing.

And that, that’s, that’s sort of what we’re all here for at the end of the day. Sounds really exciting. Uh, Scott, um, quick, hurry up. Let’s do it. That’s, but then, then, sorry, then you got the Phil Tarrant effect. You don’t have to deal with me trying to work. Anyway, luckily I’ve got good people around me, right?

This is, uh, I do podcasting for a living. I don’t do commercial buying for a living. I don’t do accounting for a living. So, um, mate, let’s get cracking. Um, so we just need to filter out exactly then. So the next steps for this process is. Number one, how big is my deposit? I need to chat to my accountant.

Number two, how, let’s get a pre approval to see what the borrowing criteria is. I need to speak to my mortgage broker. Yeah, exactly. And, and you’ll, you know, when we’re talking as well, you’ll notice how. Negative. We are with a lot of assets as well, because a big part of my job, and we talk about a lot on this podcast is understanding the economy, what’s happening, you know, even things like understanding what reactions the world’s going to have to, you know, the different variants of COVID we’re seeing, we’ve got to take all that into consideration.

This is not just. Oh, look at this great spreadsheet. It’s all going to work out perfectly. Like we’re, we’ve got to be realistic and we are, and we’ll walk away from many deals because they are not ideal and different asset choices. But, and the good thing is you have a lot of knowledge through your business experience with all of this.

So this is where it’s going to be easy for me because I don’t have to. Spell out everything. You have your own opinions. And this is great. I’ll work with those opinions. You might say, look, I’ve got an affiliation to defense force because I know you’re into that. So maybe we target stuff around certain expansions where the government’s spending more money into defense.

And that might mean we buy, I don’t know, a retail set of shops near a army barracks, or it might be, uh, it could be anything near airports, just, just something to do with industrial storage related things might be. Work out where the next government grants are like, we’ll look at these opportunities.

That’s a really important point. So, so what you’re saying is that you can cater for the needs of the investors. If I say, Scott, it’s really important to me is environmental concerns and a greener world. You can actually, or ESG type stuff, you can actually match my investment philosophy around the assets that you can find.

If it’s in our realm of knowledge. Yes. So if you’re, I had a client the other day asked for help with agricultural land where they wanted to basically grow crops. I don’t have knowledge of that. And, and that’s, that’s where I would be. And look, I have enough clients that are in that type of space, but I know there’s trends of them investing outside of that space because the yields are so drop, so low in, uh, agricultural land at the moment.

So. So yeah, I’ll operate within the client’s brief as well. If, and I’ll probably push you away from certain briefs as well, if it doesn’t make sense, but the great thing about commercial is there’s just so many opportunities. And if businesses make sense, if, if they’re in a, you know, renewable energy source and, you know, we’re, you know, solar panels and solar farms and all that are growing, like, yeah, we can a hundred percent go that direction.

It’s just got to be an available product in your budget. I don’t think I’m going to be too prescriptive, mate. I reckon. You know, I’ll probably just go pretty normal, you know, let’s, let’s, let’s aim for the middle of that bell curve. You know, I don’t know any sort of my investment philosophy is best property is going to give me the best capital uplift and the best yield in my back pocket.

And they should be the factors which determine it rather than any sort of personal preference to it. And I think sort of going in with that bias might compromise the outcome. So I’m going to be completely fluid on this, mate, I’m in your hands. And that’s really a good way to invest because. If you have this really strict, narrow criteria, it’s going to mean you see less deals.

So the deal flow will be lower. You’ve got less to compare. It’s it’ll take longer, especially in a growing market. You’re just going to miss out. And like, uh, next week I’ll, I’ll get my wife in and we can, sorry, next podcast. And we can talk about our portfolio and I’ll explain how we’ve invested as well.

And it’s the exact same thing. I have always had an idea. I want to invest in this sort of asset. And I always invest in something completely different because a deal will pop up and you’ll let the deal do the talking. And that’s the way to invest. It’s opportunist investing. And, um, and I think you’ll be very similar and that’s, uh, that’s how you’ll get the best return on equity.

Sounds good, man. Very cool. I’ve enjoyed that. Look forward to doing this. This is going to give us three or four months I reckon of, uh, good discussions on inside commercial property, like real life, real world example of going about doing this. We’ve done our homework. We’ve done, uh, the university degree now, uh, or at least the first Two, two years, uh, around, uh, the academic part of it.

Now it’s time to do the practice component of it. And, uh, it’s a really nice extension to this podcast. So, um, tune in everyone, um, as we go down this pathway, any questions at all, happy to answer them. This is the reason why we’re doing this. Uh, you can get a fly on the wall insight into how, uh, Scott’s going to deliver this outcome, uh, for me, in my self managed super fund.

What’s the best way to contact us, Scott? Um, probably just the, uh, Google rethink investing. Uh, that’s, that’s always the best. We’ve got a website full of previous deals that we sort of upload properties every, every week or two at the moment. So we do that to show you what’s out there, um, in terms of yields and assets we’re buying.

And yeah, you’ll, you’ll get a real good insight of what we’re actually acquiring. We’re not hiding. Uh, anything we’re very transparent with the types of properties and budgets we, we work with. And, um, yeah, it’s, uh, just reach out and we’ll, we’ll get back to you. Okay. And what can I do already? Give me some feedback on how I can be a better commercial investor.

Oh, mate, I respond to emails. Yeah. I think I’ll just text you instead. If, uh, if there’s a property lying dormant in your emails, hopefully, uh, Get you, uh, get you looking at it because, um, look, it’s a good point. You got to generally act within 48 hours of a property. So if I show you a property and it’s, you know, you contact three days later, um, especially cause we’re going on and we were doing about 70 percent off market.

So. The properties you’ll mostly see won’t be on market. So that means there’s generally a bit of pressure because the agent wants to list them as well. So we’re, uh, we’re generally working with that timeframe and it’ll give us plenty of time to look over it, discuss it. And, um, whenever we do put a property under contract, you’re going to have at least 21 days for due diligence and 28 for finance.

So you’ve got plenty of time to talk to the banks, plenty of times to, to go through all the, uh, the homework on the asset. And there will be a lot of homework. We do, we do a full on. What is it called a due diligence report for you? So that’ll include like cross checking the numbers, checking the CPI has been increased correctly.

Three years ago, building a pest reports are obviously very important video walkthroughs. If you can’t get to the property, we can organize all that. So that all happens after that initial yes, you know, in that 21 day due diligence period. Okay. So, so as a. Technical point of view, uh, touch on it very quickly, but I think we should go into depth in it.

So if you say, yeah, we’re in, you sign a contract, you have 21 days. And then 20 for DD and then 28 day for finance where you can pull out of the deal and and what is so similar sort resi property, you normally put a point 25 percent down and allows you go through that cooling off period to do that work.

How does it work in commercial what I’ve got a pony up in terms of a deposit to get control of the property so I can undertake that process. Yeah, so you generally put about. For your case, probably of 25, 000, 50, 000 deposit down, and then you’re going to… And that sits in trust? Sits in a trust. It’s fully refundable, so you’re not really risking anything.

You just got, uh, it’s like a holding deposit so we can then carry out our homework exclusive. So no one else is going to steal the property. gives you protection in terms of the money you spend. Like remember all those 2, 500 you’re going to spend on evaluation and a builder and all that kind of stuff.

You don’t want to spend that money unless you’ve got control of the asset. That’s the way to control it with a conditional contract. And that 21 day period will then allow us to do our homework on the property. And, um, yeah, if, if there’s issues, you just walk away. So it’s a nice, simple process. We’d never thought you’d just go, nah, I’m out.

You don’t need to explain why. Yeah, exactly. And that only happens probably 10 percent of the time. So it does, it does happen, but one in 10 properties will have an error. And most of the issues come from building and pest reports or valuers who have just come in way conservative on, on the Val and, and the other, probably third, most common reason we pull out a deal is misrepresentation.

So an agent has presented the numbers and there’s All these outgoings they’ve underestimated or maybe a tenant’s failed for somewhat, you know, it’s, they’re, they’re the reasons we pull out. So that’s good. So, so this is why I pay you. Okay. You go, Phil, I found these, I recommend they’re pretty good. Get into it and I say, all right, done.

Then you do all that stuff for me. Exactly. Okay. That’s good. Yeah. And we’re the first to tell you walk away. Everybody walk as far as I’m concerned. . Yeah. And look, we’re, we’re the first to tell you to walk away from a deal if it’s starting to look sketchy, because, um, ’cause one of the things we do is interview the tenants.

And if they say we’re struggling or the place is too small or the, you know, we’re just hate the neighbor. Like it’s. There’s another deal out there. We move on to the next one. So yeah, it’s easy to crash. Right. Mate, I’m excited. Let’s do it. This is good. It lets me reconnect with this and making sure it’s, it’s higher up my priority list rather than where it has been recently.

Well, very recently in probably long term is down the bottom of my priority list. So let’s get sucked into it. Mate, I’ll give you full permission to give me a hard time to get the deal done. And, uh, you know, how you choose to work with the buyers agent completely up to you, but. I find absolute transparency is best, warts and all, let them know what’s going on and tell them how you can be a better client by how you want to be communicated with.

If you don’t want phone calls, you don’t have time, you always have meetings, all this sort of stuff. Text message, text message is word for medicine, you know, which is, Hey, Phil, you got to call me, hurry up. And that normally gets the right result. Yeah. Oh, look, hopefully in five years time, mate, you’ll, uh, you’ll be fully hooked to a commercial and sell half your resi down and be a full time commercial investor.

Stranger things have happened. Stranger things have happened. Uh, but this is like, this is inside of the super fund, but I can actually see. And again, I think probably the next step. Scott, um, a podcast in the near future is actually get my accountant on to actually explain. I think a lot of the, the pros and cons of investing in commercial in and out of your super fund.

Uh, and it’s also applies in resi stuff. Um, you can’t manufacture like capital growth inside of a super fund. Um, you can’t knock stuff down and rebuild it and stuff. You can only maintain it, but that that’s not advice or anything that that’s my understanding of it, but we’ll get someone into as a professional experience to let us know.

What sort of stuff we can do inside of a, uh, super fund and what sort of commercial assets are probably best left outside of a super fund, uh, for those particular reasons. So we’ll get stuck into that. It’s going to be good, mate. We’ve got a good year of content, I reckon, ahead of us, uh, on, uh, inside commercial property.

I think so. And yeah, just. What we do for you will be the exact same. So there’s no special treatment. It’s, uh, when you see a property, you’re the only one seeing it. If, uh, it’s not for you, uh, we just take feedback on and move on to the next property and hopefully it’s closer to what you’re after. But yeah, I’ll, uh, yeah, this is like filter.

I’m just a client of, uh, rethink investing. I’m just sharing my journey. Um, I’m paying what everyone else will pay. I, I, there is. That’s absolutely exactly how it is. And, and we’ll put this up on smartpropertyinvestment. com. au, all these numbers and figures and all that sort of stuff. And, you know, you’re happy to share it with your client base as well, mate, if you want.

Yep. Sounds good. Cool. All right. Uh, Rethink Investing, go and Google them, find them. It’s probably too early. It’s too close to Christmas now, Scott, for you to pick up any new clients, but yeah, you’re happy to chat. Reach out and look, we’re, we will plan for the new year as well. Like, uh, I think it’s gonna be an interesting year ahead and that’s, you know, it’s all about sort of investing for the long term.

So there could be some opportunities to buy well, next year, and I guess we’ll just keep monitoring. Uh, what’s the new variance name at the moment? The, it’s, it’s, I’m trying to work out whether it’s Om Omicron or Omicron Amron or, yeah. I should name my wife’s Greek, so I’ll ask her. Omicron Omicron. All I know is that there’s that, uh.

Uh, Zerv from the planet Omicron Percy I8 on, uh, Futurama is what I always think about, which I like to watch, by the way. Anyway, uh, Scott O’Neill, Rethink Investing. Thanks for your time today. Hope you enjoyed that, everyone. Uh, remember, go and check these guys out, uh, Rethink Investing. Heaps of stories also on smartpropertyinvestment.com. au.

See you again next time. Until then, bye bye.

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