The fundamentals of commercial investing - Property Inc

[ Podcast Transcription ]

 Inside Commercial Property with Rethink Investing. Australia’s largest and most comprehensive podcast covering all things commercial investing.

G’day everyone. How you going? Phil Tarrant here, co host of the Inside Commercial Property Podcast. I’m joined by my regular co host, the brains of this operation, Scott O’Neill, founder and director of Rethink Investing.

Scott, how you going? You well? Very good, mate. Very good. Good to be back. You could probably forget more about commercial property than I could ever learn. There’s an old one. I don’t know about that. But I must admit, I’m really enjoying this journey. We’re on helping to educate Australian investors around commercial property.

And I’d like to think, I’ll chat to someone about the other day about it going, Oh, am I qualified enough to actually host this with you? And I sort of settled on the fact that, that I am, that I know enough. probably to probe and push you on particular things and help shape the narrative, but I’m very conscious that I’m not an expert in commercial property.

So as much as the education opportunity experience for me. So I do appreciate you coming in and having these chats. And, uh, you know, as I go down this path, I’ve always been thinking about a diversification personally, commercial, as everyone knows, if they listen to this podcast on the Smart Property Investment Podcast channel, we’re pretty heavy in resi.

So. I think as part of this, a natural, a natural outcome of it will be, you’ll probably help me in some commercial at some point, but I get to spend a year getting free education from you, before maybe they don’t need you. I like it. How you been? Very good mate. What’s been going on? Oh, just end of financial year stuff.

So there’s a lot of, it’s just the forever challenge of finding properties for clients. It’s been a bit quiet because a lot of people delay selling towards the end of the financial year, because you don’t want to sell and pay capital gains tax earlier. But having said that, it’s still been very busy.

There’s a lot of transactions out there still. And yeah, it’s just sort of full time in the business, but yeah, enjoyable helping clients, you know, see this other side of the investing world. Well, what we did, this is episode two of Inside Commercial Property. Episode one, which is our launch episode, which is really just me and you having a chat around.

Why we’re doing it and what we hope to get out of it. I’ve never seen such feedback coming so quickly. And, you know, I think a lot of it is to do with, there might be a fair number of property podcasts in relation to residential property out there at the moment. Some are very, very good. Some are okay.

Some are pretty indifferent. There’s one or two or three very good resi property stuff. And the Smart Property Investment Show would be one of them. But there’s not a lot on the commercial side. So I think we’re really filled a gap that was needed and as a demand for it, because we’ve had great feedback from a whole bunch of people directly via emails, but also on reviews on the podcast channel.

So thanks so much. All those people who have done that, but we struck a chord. And that’s really positive. Yeah, well, when I first thought we should do this, it was because there was a massive gap in the market. You know, it’s obvious that, like you said, there’s hundreds of sources out there of good residential information.

But commercial, there’s almost nothing. There’s a few… here or there, but they’re not really spoken by people that have extensive experience in buying commercial property. And that’s the big difference. I think like anything in life, you want to sort of walk it and do it first before being an expert. And you know, out there, there’s a lot of people that will claim to be experts before they’ve really done it themselves.

And that’s a risk, especially with commercial, because you know, you never can predict things properly unless you are, you know, see how the world. really works. Yeah. And that’s going to be one of the themes that we tackle as we do this 12 part series, uh, one a month inside commercial property. So here we are at number two.

And as we said in the first episode, Scott, it was, we want to be led by, by our audience, by you, the person listening to this right now. And it’s important that we can be reactive and responsive to that, but also pragmatic about helping us shape. The narrative and these podcasts and how we set each episode and, and today is going to be very much around, I think it’s done to death in resi property and most people know it, but it’s the information is pretty light on this in the commercial space.

And that’s the sort of financial components that come in with investing in commercial property. So this is, I’m going to say it’s getting to the basics of it all, the basic fundamentals mechanics of investing in commercial property. So that’s going to help shape the conversation. And this was some feedback we had from one of our listeners.

You know, the clarity they required around the total amount of money needed to buy a commercial property, and that’s going to help craft this chat. We’re going to cover off today, Scott, clarifying how much actually, how much money you actually need, what exactly it takes to make the first move in a commercial market, what kind of financial backing you require.

And sort of any hidden costs that you need to be wary of, and most importantly, how preparing your financials when investing in commercial differs to residential. So there’s some really good meaty topics there for us to get into. But just to pick up a quick remark you made, you said that it’s been a bit slow in the commercial space.

So I had a really good chat during the week with the gentleman who specializes on zoning. So taking land from one zoning to another zoning and that might be from in a resi play from a low density to medium density or high density or something, which is like a park land or, or acreage into industrial zoning.

And, and I thought that might be a really good way for us to start this chat today and talking about market fluidity when it comes to products, you know, speaking about COVID we spoke about when we got beforehand, it’s changed the way. In which a lot of people are approaching investing in commercial with a greater attitude towards a favorable attitude towards industrial stuff, particularly in the logistics area, which sort of shapes some of the conversation.

Is that market picking up? Yeah, look, the rental market’s quite strong. So one thing I always do every month is, or almost constantly to be honest, is talk to rental managers. So with the big companies, so your colleagues, CBRE, Knight Franks, they’re all guys that have a really good footprint in the market.

And when you hear. The rental market is going strong. That’s almost like a forward indicator of future growth. You know, if, if the tenants are coming in, that’s going to help with, uh, future yields, rental growth and future capital growth. And yeah, I’ve found that through COVID, especially towards May and now June or July now, the market was on pause in early March and early April or all of March, should I say.

And, and then a lot of businesses started making decisions again and started leasing out property. So I’ve been seeing on. Like my LinkedIn rental managers leasing out like 15, 000 square meter warehouses and, you know, another one, 10, 000, another like big, big warehouses. So that shows there’s a lot of activity on the upper end of the scale and on the smaller side, there is definitely activity as well.

So a lot of businesses pause their decisions in the early COVID. Uncertainty period and now that many people have seen it hasn’t been as bad on the ground for most states It’s sort of coming back on. So yeah, it’s looking good from that point of view and You know Like I said the reason why it’s been a little bit slow is just from listings a lot of people hold off listing Property, but the demand is actually higher than I’ve ever seen and I think it’s just in small pockets So demand for certain types of assets are dropped, you know, like, you know, we mentioned the CBD office space last time That would be a hard sell But, um, but even then like every property is a case by case, you know, that you might have a great tenant on a 10 year lease and a really good yield and you’re buying it under market value, you know, those types of things can help you make a decision in an asset class you may not, you know, that might not be in vogue right now.

So what I take from that is that you’ve got to be attuned to the fundamental dynamics or drivers behind why assets will go up and down in value and one of them is attitude towards rent and rental upticks. So. And industrial, particularly logistics stuff, you’re saying, you know, we’re housing is up at the last scale.

That’s a really good indicator of large corporates attitudes towards investment. That’s a good thing, but the inverse applies in terms of if people are struggling finding tenants in particular sub sectors, or a office markets in capital cities or large. Cluster based commercial or office based, um, uh, markets like Parramatta or even like a Hornsby or somewhere, that’s where you’ve got to start going, hey, something’s not right here.

Yeah. And one other indicator is the incentive amount. So we’ve seen the office incentives, like, so if you sign a five year lease, you might have to offer 30, 40 percent of the first year’s rent as a discount or, um, you know, a rent free period to get the new tenant in. When those incentives increase over the, uh, you know, average, you’re going to see, it’s basically a weaker market.

So industrial, especially the smaller stuff, there are no incentives with the properties we’re dealing with. You know, the tenant takes their face value rent and that’s it. But if you start struggling, you’ve got to start throwing baits out there to get tenants to come in. So incentives are a good idea of market strength as well.

So we’re talking about some of the activities at the top end of town, which is a little bit outside of the scope of inside commercial property. So we’re not essentially talking about the huge commercial market, the sort of instos type investments. We want to get this frame towards more of the everyday investor, which we’ll call them.

And that might be people like myself who has a considerable portfolio looking for a commercial diversification or someone with two or three properties. So that’s where we want this frame. But we’ll touch on the top end of the commercial market every now and then, because it helps sort of shape the market moving forward.

A bit. To the point around how much money do you actually need to invest in commercial on the basis of the type of investor we’re talking about? Where does it start? Where does it end? Well, I did a little Facebook video on the Rethink Facebook page just about this, because you’re right. A lot of people were asking this question.

And um. I basically work off a 300, 000 price point. So, yes, there are deals under that. You know, you can find a, you know, a small office in Melbourne in the, you know, the high 100, 000s. You can, uh, definitely get warehouses in the mid 200, 000s. Like, we bought three of them in June, actually, for clients. But, they’re rare.

And, um, generally with the smaller ones, there might be a bit of a riskier tenant because they’re smaller, smaller business, you know, less stable. But 300, 000 is a nice price point. You can do a 20 to 30 percent deposit on that. So if you work off the minimum, that’s a 20 percent rate. So 20 percent of that is 60, 000.

And then you’ve got your costs. So you’ve still got stamp duty. You still have a building report. You still have a, potentially a strata report you need to order. So you can see the maintenance history of the building. You still need to pay, you know, the solicitor two or three grand, including disbursements.

And, um, that’ll all equate to about another 15, 000. And… We’re up to 75 grand. So I normally say with my clients save about a hundred thousand to get into commercial. Cause it means you’re not just only looking at 300. You’re also potentially factoring in a 25 percent deposit, not a 20. But, there’s your rule of thumb.

Absolute minimum, 75, but uh, you know, probably work towards more of the 100 just to be safe. So, a 300k asset, I can’t imagine you buying yourself an industrial unit 10 kilometers from the Sydney CBD or right next to a motorway. You can. Or they exist. Yeah. So this is a key point, because I think a lot of people, they frame markets within a residential lens and think, oh, there’s no way in the world something like that exists so close to the city or close to a transport hub or a linkage or whatever the rationale for it.

So these do exist. Yeah, all the time. And it’s because of the square meter. So yes, it’s not going to be a 500 square meter warehouse, because everything’s really built in commercial off two things, you know, the rental value, but the rental value is written off the square meter rate. And so if you’ve got a small warehouse, like a hundred square meters, you’re not going to justify a big rent for that.

So a hundred square meters with a mezzanine, you know, that might be renting for 20 grand a year. You know, you divide that by your six or 7 percent net yield, you know, there’s your sub 300k purchase price. So, it doesn’t need to be out in Woop Woop to be cheap. It’s just got to be small, but I actually find those, um, well located, smaller industrial units.

And, um, even the right office space where, you know, like, we bought things with, like, you know, MP offices in, like, you know, federal government offices. I bet they’re good tenants. Six, six year leases. Well, it’s really funny. Yeah. It’s really funny to say that because I was chatting with Dave Sharma MP, who is the member for Wentworth.

Yep. During the week. And, um, and I was having a chat with him over zoom and, and I went, that’s pretty nice office you got there. And I go, where is it? He told me where it was. It’s sort of on the. Malcolm Turnbull’s. And he goes, yeah, I’m actually sitting in Malcolm Turnbull’s old office. So, so the parliamentary system owns the lease on the office.

So irrespective of. Who’s in the seat, they use exactly the same office. So, you know, that there would be a office. Would you call that office? Yeah. A lot of them are kind of a office retail feel, you know, like those shopfronts that can double up. There’s like a, maybe a mortgage choice or, you know, one of those mortgage companies or you might have a dentist in there, but they’ve got a shopfront appeal to it, but they’re really an office.

So I would say that’s probably a pretty good, stable customer to have. I personally, we bought. For clients, many of them, or probably, when I say many, maybe five of them over the years and yeah, they’ve never missed a payment and if they lose the election, they still stay there as a, you know, on the opposition side.

So yeah, they stick by. It’s good. Good to know. Okay. So I think that’s a really good point. A lot of people, I believe, maybe, uh. Either not informed enough or ill informed, or I’ve got some blinkers on thinking that in order to invest in commercial, you’re talking millions of dollars. What you’ve just there is painted a picture of that.

You can get in the market 300k. Now to put it at a 300k purchase, but you probably want a little bit more. To put that into context, Rethink also works on the, the resi space. So a 300k investment in commercial versus a 300k investment in residential. It’s probably two very different assets. Yeah, so, residential you can work off your 90 percent lend, so 10 percent deposit down.

But then you’re liable for a lender’s mortgage insurance, so LMI. So, you’re still going to have to pay for that extra, you know, amount because there’s more risk by the bank. I guess the big difference is instead of like a house is just going to be like an outskirts, you know, far outside of Brisbane, maybe like 45 to an hour or a tiny little one bedroom unit in outskirts Sydney or similar kind of thing in Melbourne, they’re not the types of assets that I think a seasoned investor, like a great entry level, like I think, you know, stepping stone, I’ve personally bought these types of properties myself and they.

They’re great. They get you on the property ladder. They’re cheap. There’s not much money down. It gives you a taste of how to deal with tenants. And, but the idea is they are a foundation thing and you want to grow from that. You don’t like I’ve heard stories of people buying a hundred of these types of properties.

That’s just in like, without sounding too rude, it’s almost uneducated. You don’t keep. Buying those types of assets, you need to start moving up into more of the, uh, the higher grade stuff, I think. And, um, the commercial, even though they’re, they’re cheaper ones, you know, they’re a similar price point. They actually can be very good and high quality.

Like, you might have a tenant that’s got a five year lease or a three year lease and they’ve renewed twice earlier. You know, like we, uh, helped a client into one recently, which had a business that was there for 23 years. And they’re just literally renters forever and they didn’t want to buy and that’s what they, uh, that’s how they operated.

They didn’t want to invest capital into a property. They’d rather do it in their business. So, forever tenants. So, you know, I think they’re, um, you know, the cash flow difference is quite large. Like the, a rent you might get from a 300 grand property, maybe 320 a week. You know, you get that sort of four and a half, five percent, maybe six percent gross yield.

But then the rates as a proportion of the total rent are quite high because rates don’t… Discriminate, there’s sort of similar value for a 5 million house to a 300 grand house. So the outgoings hurt more in those cheaper price points, but with commercial, the tenant pays the outgoings. So I guess the equation looks a lot better from a net cashflow point of view.

And again, this comes down to, you know, resi versus commercial. We spoke about it on the first episode of Inside Commercial Property, so go and check it out. It’s a real foundational discussion that everyone at some point in their time will have, but when either people. See a need to invest in commercial or they get the right advice that opens their eyes to invest in commercial or balancing out a portfolio, whatever the objective is, you actually got to make that first step.

And some of the feedback we’ve had, Scott, from our first episode is like people going, yeah, I get it all. But you know, what exactly does it take to make that first move into commercial property? Is it a real brave leap forward or it shouldn’t need to be? Look, if you don’t have the right education, then that’s, you know, why we’re running this.

So one of the reasons you do most people start on a cheap, you know, 300k type residential property is because there’s not too much that can go wrong unless termites go through the property. Or if you lose your tenant and trash it, you’ve hopefully got insurance. Like there’s a lot of safety nets, but if you get commercial wrong, You know, and you buy the worst property on the worst street, you’re going to suffer, you know, it might take two years to fill, you know, like if you’ve seen the little regional shopfronts in a town that got bypassed, you know, where was the other one?

I was driving up the Pacific Highway the other day, I think Buller Dealer. Oh yeah, Bullet Dealer, great pub at Bullet Dealer, but got to get off the highway to get there, right? But imagine you dropped, you know, half a million, a million dollars in the wrong shop front there, you know, like you’re finished for a while.

So, you know, you can get it wrong, but it’s probably just like residential. You need to, you know, research the fundamentals, look at the readability and factor in those types of, um, big risks that might never eventuate, but just plan for them. And that’s what it takes. It just takes a lot more planning, but.

It is harder, but that’s why the payoff is greater because there’s less competition in this space due to that reason that people are a little bit gun shy because we don’t often have parents or friends and family that are all done commercial investing. We can all find someone who’s invested in residential extensive, you know, over the years.

And that’s why we, most Australians take advice from their parents or their mates and stuff like that. But there’s not many people in this. So the resources to get info are very limited. That holds people back naturally. So the discussion is around, was it take to make that first move in the commercial market?

And I reckon this is a really good opportunity for Scott to create a. A list because people love lists and makes for good content. We’ll get up on the smartpropertyinvestment. com. au and no down on the Rethink Investing website. So number one, we could say it’s got to be attitude, right? So really understand the numbers.

So have your buffer, you know, the attitude must be you’re buying it for a reason. So the reason most people come to commercial is to improve their cashflow. And that’s sort of, I guess it’s not just buying a commercial property for the sake of it. You’re buying it to, you know, we use the term set up a business.

This investing should be treated like a business. You’re creating extra cash flow for your future retirement business. And that’s the attitude part. Okay, and then I think point number two is education. Has to be. Yep. So education is really about, around things like what’s the rent, uh, the rental market like in that area.

You know, what’s the, uh, current tenant’s business is looking like? Have they got good history? Educate yourself around why the owner’s selling. Is there any, uh, I guess relationship to the tenant and the owner, which sometimes can be hard to find. And that’s, you know, you just got to find all these little things.

It’s just, it’s time. And, um. You just got to connect all the dots as quickly as possible when you put an offer on. And points three and four I would say would be, three would be deposit and interconnected with that would be, four would be finance. Yep. So deposit and finance sort of hand in hand. So a good commercial mortgage broker is key.

The residential broker is out of simplicity will tell their clients just to probably look at another residential loan because that’s their core business, but if you’ve got a broker that is very experienced in both, I think you’re going to get. Very good advice there. And a mortgage broker can be someone on your team that will actually help with the attitude part.

And you’re going to really, you know, you’re all on the same team. If you’re all moving in the same direction, they’re going to be looking after you on the finance, you know, and when you find the right asset, you need them on board and move from nice and quickly. And then you’ve got valuations that come out of it.

So there are some safety nets, like a third party valuer will come out and look at the property in a negative light. That’s what they do. In any case, so that’s brilliant for commercial because if you have made a mistake the value will probably point it out to you but you don’t want to get to that point you want to be able to be two steps ahead of the valuer because you know if you’re relying on that then you’re in trouble.

So point five on our list and it’s nice to summarize so I hope you’re taking notes. on what it takes to make the first move to the commercial market. I would probably say is the assessment. It’s got to be a go, no go. And that’s a catch all of, you know, the first four points, attitude, education, positive finance.

But you’ve got to question whether or not you shouldn’t be investing in commercial property. Like is commercial property for everyone or should some people just stay well away from it? Look, I think it should be for everyone, you know, personally invested extensively in both residential and commercial and, you know, I took a while to get into commercial, but uh, you know, it took me about 1.

8 years, oh sorry, one and a half years of just non stop looking and, you know, educating myself before I was comfortable to go into it. But knowing what I know now, I think any serious investor must have commercial in their portfolio because, you know, I was going to use an example, you know, like. It’s a little bit detailed, so it might sort of muck up your list, but consider most people’s goals to retire in property will come from income.

So income from residential property, let’s use about a 4 percent gross yield. That’s sort of, you know, standard across the country, 4 percent gross yield. So if you buy three 700, 000 residential properties, and so there’s 700, 000 times three, that’s 2. 1 million in assets. Now, if they’re debt free. Debt free, with only that 4 percent gross, you’re only going to be collecting about 84, 000 in income.

But then out of that, you’ve got three times rates. You’ve got three times insurance, three times maintenance, you know, that’s going to basically turn your 84, 000 income into about a 60, 000 rental income. What’s the point of having a paid off 2. 1 million asset base, which is huge because like not many people will ever have 2.

1 million in paid off property, to get 60, 000 income. So that just doesn’t stack up. You can’t retire on that unless you’re very frugal. Using those same numbers. If you then put it in a commercial and get a 2. 1 million in assets and you’re getting a 7. 5 net return, that means the tenant will pay all your outgoings except for the mortgage.

But just for the comparison numbers, we’re just going to say there’s no mortgage here and you’re getting that 157, 500. And that’s it. You’re retired from only a 2. 1 million asset base. So you’re comparing 60, 000 net income from residential versus 157, 000 commercial. You might split that between three or four commercials as well.

But you can see… I think it’s madness not to consider commercial because we’re all here to invest for an income, to retire. Like, it’s all about the numbers. If you’re only into a residential, you’re simply ignoring the numbers. Or you’re just conveniently saying that’s just too hard. You know, that to me is, it’s almost lazy.

You know, you need to consider this if you actually want to retire. I reckon a lot of people would benefit from if you’re happy to share those numbers. Let’s get it up somewhere. What’s the Rethink Investing website? Uh, Rethinkinvesting. com. au Well, we’ll check it up on Smart Property Investment as well, because a lot of people wouldn’t want those numbers.

You know, it’s quite heavy what you put through there, but it paints a really important picture. And I guess this sort of takes me to the next discussion that I want to have, uh, Scott. is around what kind of financial backing you require. Now you painted a bit of a picture or a profile for, you know, 300 grand scenario, right?

So we sort of spoke about the numbers, you spoke about 75, 000 bucks, but financial backing is a lot more than the deposit that you’ll have. Your financial backing might be your ability to extract equity out of the current portfolio you have, whether it’s a resi or commercial, your financial backing is going to be a lot driven by your cashflow position at any given time.

So it can get a lot more complicated. So how would you summarize this whole idea of a financial backing? Well, there’s a few ways, like, in general you need larger deposits, so you know, 20 to 30%. So yes, there is more deposits needed to buy the average commercial property. But one thing about finance is you can get things called lease stock loans.

So you may not have any income to show. But you’ve got a deposit. The banks will actually lend you against your cash deposit because it’s called a lease stock loan. So you just need a property with a good loan and the banks will assess the property and go, look, that’s a strong lease, we’re going to lend to you.

So it’s just like all the managed funds in the, you know, that have billions under management. There’s no personal guarantors on those loans. They’re actually lending, whether it’s 50, you know, 50, 55 percent debt levels on the asset base itself. So you can do leased stock loans. They’re normally about a 65 percent LVR.

I think there’s some 70s out there. But yeah, lower LVR, but you basically just need cash deposits and you can buy these properties. And residential, you could never do that. So that is a big difference with lending. You just can’t go into those 90 percent lends. That’s where residential has a massive advantage and I’m not negative about those 300 grand type assets.

I think they’re great because you can get in with such little money and that’s the reason people buy it. But if you’re in a position where you might have 200, 000, you know, saved or you might have a Sydney property that’s grown, you know, a million dollars over the last 10 years, there is easy money to use in that to make quick passive incomes through buying good quality assets.

So a lot of my clients are just refinancing against their Melbourne or Sydney or Brisbane house and, uh, and using that. to generate themselves a passive income. Okay, so a lot of people are probably going, okay, I really like, and I’m starting to understand commercial property a little bit more, or changing their perception and attitudes towards it, but you’ve touched on it beforehand, it’s very different to investing in resi property, and there’s probably a lot of the dynamics, or the commercial dynamics of commercial property, that a lot of investors don’t know about.

And this might be sort of connected in with hidden costs. So yes, you buy the place, but then there’s a whole bunch of other things connected with it that you don’t, don’t normally have to pay for in the resi space at the point of sale. So the acquisition of it and then the ongoing holding of that property.

Let’s have a chat about some of those hidden costs, Scott, that people might not know about. So yeah, the costs you always, you know, associate yourself with purchasing a property or your stamp duty. So, stamp duty is roughly the exact same for residential and commercial, pro rated, however there’s two states which that differs.

There is no stamp duty for commercial purchases in the ACT under 1. 5 million dollars. We actually did an article on SPI about that a couple of years ago when it came out. There is also no stamp duty for commercial properties in South Australia, so, you know, if you’re short on a deposit. Maybe look at those two states as a little bit of a, you know, That’s such good intelligence that a lot of people wouldn’t know.

Yeah, it’s just, you know, and a lot of people might go, I’ve got a million dollar budget in New South Wales, but without the stamp duty liability, I can go to 1. 1 in South Australia. So that stretches out your workable income as well. But yeah, look, I find that solicitor costs are a little bit more with commercial because it’s more involved.

So, I like to get solicitors to do lease reviews and that’s almost like reviewing another contract because every lease in commercial is, it’s not a standard lease that’s just created off a government website or, you know, it’s, a lawyer’s created it. You know, sometimes there hasn’t even been a lawyer, but it’s an agreement between two parties.

It’s a business agreement to pay future rent. So you need someone to review that because often there is contradictions in leases to say, look, that tenant pays 100 percent of the outgoings, but then they don’t pay that. And, uh, you know. I’ve read through a few commercial leases. If you’re not familiar with them, they can be.

Complicated. Yeah. And like, if you’re rushing through a, you know, a quick settlement process and you, you just want a good commercial lawyer to just shred through that, summarize it for you. And if there’s any issues, you go back to the selling party and renegotiate. Good tip. Okay. So the ongoing costs associated with the purchase of a commercial property, upkeep.

You’ve got to pay maintenance and repairs on a resi property like you do a commercial. Is there anything else that you need to know about? Look, most of the time the tenant will pay the outgoings. So that means insurance and maintenance are covered. Look, every lease is different. That’s the, like, if I had to sort of summarize maybe.

80 percent of the properties we buy have, you know, a full net figure, but then they don’t include land tax. But then sometimes leases have one single holding of land tax paid by the tenant. So tenants can often pay the land tax for you. So again, it depends. But the one I find that is not included the most is rental management.

Because rental management is considered a variable cost. So, Because a lot of owners self manage commercial, you know, I’m finding more and more of my clients have decided, especially bigger assets, like if you’ve got a, you know, a two or 3 million property and you’ve got a really big global tenant in there and you’re just dealing with an accounts payable department, you don’t need to pay someone 4 percent of the annual rent to manage it.

But then sometimes it’s easier just to offload it completely and just let someone. You know, send you a nice monthly statement. So, rental management is something you need to factor in. But, uh, you know, and it’s really just your land tax and then your interest on your loan. So, there is generally no other costs outside that.

So, you pay away 4 percent normally for someone to manage your properties. Is that the sort of standard? Yeah, it’s, it is. It’s lower than residential. I find that residential, let’s use Brisbane as an example, the average rate they chuck around is around 8 percent up there, maybe 7. 5 of the gross rent. But commercially you’re looking more around 5.

But if you’ve got a big lease, it might be three. So, it is a little bit lower because again, commercial tenants are generally a little bit easier. Because you’re not cycling a new tenant every 12 months, you might have the same tenant for 20 years. And that’s probably a point where you go, do I need to pay someone 4%?

But I personally have rental managers for all my properties because I think they’re worth it. You know, they package it up, they make it nice and easy for your accountant to do the tax returns with. They collate the outgoings and um, Action the increase each year, because in a lease you have a, maybe a 3 percent per annum increase in rent.

They will do that for you, you know, you don’t have to get down and communicate and calculate it for them, it’ll all get done. Yeah, and there’s also that detachment which makes management easier, which is akin to residential property, I’ve got sort of… Managers from my resi stuff, but I think we probably should dedicate a little bit more time to having that discussion about self management versus paying a manager.

But we can do that for a later episode. Scott, we’re running out of time, but this is an important point. And again, this is probably something that needs maybe a little bit more rigor from me and you in an episode in the future. And this is around. Some of this comes back to the financial backing you have.

So that’s your capacity to actually invest in property, whether it’s resi or commercial. But one of the challenges I have when I’m looking for, um, a new property, a resi property is preparing financials for the lender and it’s no different with most investors. Once I start getting a more sophisticated portfolio with a number of properties, it is pretty heavy lifting.

And everyone who’s in this space knows that it’s a bit of a headache, no doubt that you probably get the same thing, Scott. But, um, How is getting your financials packaged and prepared for whichever stakeholder it is, and let’s talk about a lender. How does it differ when you’re investing in commercial versus residential assets?

Look, it’s very similar. You know, it depends on the type of loan. Like if you go into a super fund, they can look at the super fund standalone. So they exclude your, uh, outside your super fund lending. So. I did a Superfund purchase myself. I bought a commercial property and it was the easiest loan I’ve done in many years because I didn’t have to look at all my other properties and all those other loans because you’ve got to collect all those and get the latest statements and if the bank delays you’ve got to get all the next month’s bills and so I’ve actually just tried something new and I’ll let you know how it all goes in a future episode but I’ve got onto one of those.

Portals where you just put all your info in there. So you’ve put your, um, if you’ve got stocks, you link it to that account. It has all the, your properties and it does like automatic valuations. It captures your current balance of each bank account. And the reason a lot of people are going into that technology is it automates everything.

So if your lender has access to that, they can just get an exact snapshot. You don’t have to collect all these things. So, I’m a little bit slow at taking up technology myself sometimes, and I’ve been told to get on one of these things for many years, but just checking how it looked like the last month, I’m pretty impressed so far because it’s, it’s nice seeing it all there.

I imagine it’s a headache getting it set up, but once you’ve got it, it’s good and this lends itself to open banking as well, which is a really important point, which is, I guess the portability of your own banking information from financial institution to financial institution. So it’s getting a lot more regulated now and it’s Tech is really picking up.

I haven’t done that myself yet. I just sit there and just think, it’s just not going to be built for someone like me who is just a bit too complicated, but you know, I’ve thought about doing it. Let me know how you get on with that and I’ll, you can put your, your businesses in there. You can, yeah, I’ll let you know.

Yeah. It looks good so far, but I haven’t properly used it. So the same rigor when it comes to preparing your financials, irrespective of if it’s residential or investing, if you’re a. Uh, SME, borrower, or if you’re an SME investor, banks like to see profit. And this comes back, we, we speak a lot on the Smart Print Investment Podcast Network, where a lot of people try and minimize their tax to the detriment of their ability to borrow money because lenders go, well.

I’m not going to lend you any money because you’re showing not a lot of tax on your tax returns. And you go, Oh, no, no, no, no, no. That’s not really how it is. Well, yes, it is because that’s what it says on your tax return. But this is a really good solution for those types of businesses. You know, your typical guy, like you said, they’ve actually got real good profit, but they don’t declare as much.

If you use a lease stock loan, you can basically lend like a normal person. You might pay a 1 percent higher interest rate. It’s not, you know, you don’t get penalized too bad, but you can actually really maximize your lending still. So residential, if you’ve got a great business, but it’s not on paper. You can’t do much, but here you can.

And that’s why, uh, you know, it’s very popular with those types of businesses. And, you know, like everything, if you’ve got the backing and you can, uh, especially if your budget’s a little bit larger, you can buy really good assets without having to go through too much. But look, the banks are slow at the moment, you know, but they’re still lending in this space.

They’re actually going for market share. You can tell cause the interest rates are getting lower and lower. And, um, what are you paying on a sort of commercial interest right now? So. About two, a couple of years ago, we used to have in our models like four and a half, five percent interest rates. Now they’re sort of around three percent on average.

Okay. On average, so. Pretty good. And some clients are getting in the low twos. And there’s, I’ve heard one the other day in the high ones for a commercial loan business. It’s not bad. It’s like free money, isn’t it? One percent, one and a half percent. So the yields on that, your yield position would be pretty good, right?

You know, you’re, you’re making what, eight, nine percent? Well, and this is the key, two, three years ago when we were buying commercial, the interest rate was say five percent and we were buying seven percent net yield properties or seven and a half. We’re still getting yields that high, but the interest rate’s not five, it’s now three.

So there’s going to be an advantage in growth because once cheap money flows into the market, it pushes asset values up. You know, that’s one of the reasons residential’s grown so well for the last 10 years. Interest rates have dropped. But the commercial market, it hasn’t flowed through to the same severity yet.

So I think. Now that everyone’s looking for yield because the assumption of growth for residential is going to be lower over the next decade It’s going to push more people this way and I think there’s going to be a bit of a free ride with growth in some areas And what are you sort of getting interest rates in SMSF in commercial?

It’s higher. That’s the only issue with that. We’re looking probably sixes, mid sixes, which is ridiculous. It’s like there’s only five banks, I think, lending in that space and they’re just using it as an excuse, the COVID excuse, as a way of just making bigger profit margins. Yeah, I don’t know how they have rates that high, but if you’re buying, you know, a property with, you know, you’re putting 30 percent cash down, seven plus percent net return, you’re still well and truly positively geared in a super fund.

You know, it still makes perfect sense from a cashflow point of view. And, you know, in terms of capital growth, there is this sort of idea that, uh, investing in commercial, you do it for cash returns and yields versus capital growth. So investing in a commercial property in a super fund, if you’re limiting your ability to generate positive income out of it, there must be a capital growth play.

Yeah, well, I’ve had some of my. personal best ever results through capital growth of commercial properties. You know, I had, I bought a warehouse in Newcastle, I got 25 percent growth in 12 months just because, you know, the market tightened down there and, uh, you know, I got a better lease on it. But most of it was just through tighten, you know, a tight market.

So the assumption commercial property doesn’t grow is, I don’t know who came up with that, probably a residential guy. You know, but look, there are some assets that won’t grow and um, people will obviously focus on those. But I think the next few years ahead, there’s, it’s rental growth, you know, so if you’re buying into a market where rents are declining, it’s going to be lack of growth or no growth or even declines in those areas.

But there is an interest rate advantage in front of us over the next few years. And, and uh, you know, even the government has said, don’t expect rates to go up. You know, we’re looking for, as it stands, maybe five years of rates this low and might go longer. So. The threat of an interest rate rise hasn’t been so low in my life, you know, it looks like there is none, so that’s going to be good for investors.

Okay, so lots for us to explore. I think we could probably dedicate a whole episode to investing in commercial in your self managed super fund on the basis that the commercial or the economics of it is different because of the interest rate disparity, but, you know, how you can get the most fit. That’s been a typical, you know, piece of advice that a lot of SME business owners have from their accountants.

You set up a self managed super fund and, and buy the place that you’re operating out of, which is one of those tactics. So I’m sure we can have a chat about that and even bring an accountant in and have a discussion. So lots for us to talk through Scott. We also want to do some Q and A stuff as well, don’t we?

So start writing into us. The best place to visit, I think, uh, is Rethink. I think is Rethink Investing. So it’s RethinkInvesting. com. au is the best place to get in touch. Yep. That’s easiest way, direct contact with us. So, uh, we’ll answer your questions on the spot. Otherwise we’ll answer them in the show later on.

Okay. Nice one. And there’s a contact or a form on the site you can click on. Yep. Or if you just email info at RethinkInvesting. com. au. We’ll get back to you via that. All right. Well, let’s get those questions answered. And they’re often the fun stuff because we can be really organic and off the cuff and our attitudes or perceptions towards those questions.

But there’s a lot coming through. So please keep them coming. Thanks for the feedback again. Um, you know, it’s just not myself and Scott here having a chat. Uh, there’s a big team of, uh, really capable broadcast professionals here who make us sound good. So, um, they get a real kick out of the reviews. So please keep them coming.

Uh, they really are appreciated. Uh, Scott O’Neill, founder and director of ETHING Investing. Thanks for your time again today. No problem, mate. And this is, uh, me signing off. We’ll see you again next time. Until then, bye bye.