The top 5 tips - Property Inc
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Inside Commercial Property with Rethink Investing. Australia’s largest and most comprehensive podcast covering all things commercial investing. Hey everyone, how are you going? Uh, welcome to the podcast. Phil Tarrant here, your co host of Inside Commercial Property. Hope you’re well. Today, recording for the first time.

We’ve been pretty good through the whole of COVID 19. We’ve been able to do it in person, but for the first time remotely, as a result of the most recent lockdown here in Sydney, Scott O’Neill, Director of ETHING Investing, all the way from, where are you, Eastern Suburbs somewhere? You guys are bad over there at the moment, aren’t you?

Yeah, the Yepi Centre, mate, so staying home, doing the right thing, all the usual. So you guys are responsible for this latest outbreak, or you, uh… Bondi ites sort of getting together and having rave parties and all that sort of stuff. Well, that, uh, that bloke in the, uh, the cab, what was he’s, uh, he’s taken air hostesses around or something like that.

Wasn’t wearing a mask. Yeah. Well, here we are. Here we are. So what is the big question is that there’s. Any impact, any sort of immediate short term impact on commercial markets as a result of COVID lockdowns or it just gets a bit harder to review properties? So what happens for our business? Inquiries go up for new clients.

So I guess people are, you know, using that time out of the office to look into their… Investing, you know, personal finances, all that usual stuff, but listings become harder because agents find it hard to go out and view properties and bring them to the market. Normally we would have thought that it actually bring more properties to the market because confidence could be perceived to be lower from an investment point of view.

But I feel like this lockdown is a bit of a being here done that type scenario. So. So there’s less listings as a result because it’s a reason to delay the decision if anything. So, you know, sell in three months time type of attitude. So it’s good and bad, you know, more clients, but you know, it’s the, it’s the whole property shortage issue that we’ve been talking about for the last 12 months, which is one of the reasons the market’s rapidly growing because of short supply and increased demand.

So yeah, it’s very interesting times, but overall very good times. It is. And, uh, I think it’s on the tips of everyone’s tongue in the audience picture right now, if they know you’ve been closely, remotely connected with property, everyone’s asking what they think’s going on. And we’re here to talk about commercial property on Inside Commercial Property.

We’ve been doing this right through the COVID period. And, uh, we’ve held a pretty firm position of commercial property as an asset class helping to educate many Australians. It is a lot, it feels like it’s a lot more Australians investing in commercial property now than what they would do resi. Well, at least they’re opening up their minds towards the opportunities in diversifying or.

only investing in commercial property. So we’ve had a lot of fun over the last sort of 12 months or so getting into that today, Scott, I really wanted to sort of, you know, irrespective of where you are on your investment journey, whether you’re new to commercial property or you’ve been at it for some time, the five tips, the top tips that all commercial investors at every level need to abide by.

So we’ll get into that today. We’ve got some structure to our podcast and I. Like a bit of structure, it helps us navigate this particular conversation, but sort of in, you know, considering this current COVID lockdown period. And the idea is that we come out of it at the end of this week. Um, we’re waiting for numbers that could be handed down today by the New South Wales government.

My inkling is they’ll probably continue to expand it for another week, potentially. Who knows you’ve got school going back next week. So that’ll be a factor, but do you think once we come back out of lockdown, this sort of elastic band will just snap back to where it was. And that’s a lot of positivity around property.

It’ll just be a bit of a blip in the radar and we’ll get back to normal. Yeah, look, it feels that way. Like the pent up demand of this market is it’s almost unrelenting at the moment. So, you know, whether it’s residential commercial or, you know, anything in between, it really seems. It’s, yeah, it’s just kind of going forward at the moment and it’s, yeah, like the low stock environment and the fact that money is cheap and it looks like it’s remaining cheap for now.

It’s a good recipe for, I guess, this momentum that keep going on that we’re seeing. Yeah, it’s good. So, um, the commercial property markets and renting property markets, they do run in lockstep. They do have their own nuances and that’s what we like to talk about on inside commercial property. Let’s kick off, uh, Scott, point number one, top tip.

All commercial investors at every level need to abide by one of five is how to value commercial property and beauty is in the eye of the beholder, right? Does the same apply for, for commercial property? Probably not. It’s very different mechanism for determining the value of a commercial property versus the residential properties.

Tell us about this Scott. Yeah, look, it’s you still get those valuers out there that just defy all logic, which, uh, you know, it’s one of the pet hates in this industry when you’ve got someone to value the property that really has missed the mark. And I feel like it doesn’t happen often, but I’d say in our experience, probably one out of 10 properties will come in short vowel and it’s for no real reason.

Most cases and, and like, I want to call out something as well, which I’ve seen there’s some valuers out there that like, I won’t name names cause it’s a bit crook, but they actually go, well, your vows come in short. We’re going to charge you 75 percent of the valuation costs, which could be two, three, four grand, but you don’t have to pay that extra 25 percent because we won’t send you the full report.

Cause why would you want it? Your vows come in short. So to me, that looks like a way of getting 75 percent of their fee for doing no work. So hopefully that doesn’t keep going on because that’s just a way of a busy value to get money for nothing. So that’s a real ugly side of the industry that has popped up a couple of times.

Hopefully it won’t keep happening, but most valuers. pretty on the market with commercial because they’re very good reports like they’re detailed they’re very numbers orientated yeah it’s just a I guess a different level of report that can be a hundred pages some of these things as well and they break down all the different valuation methods replacement costs yeah it’s quite detailed stuff and um they’re still In, you know, it’s still open to interpretation because if there aren’t many comparable sales to go off, you know, you can still play around with the numbers, how you see fit.

And if you’re not up to date with how hot this market is, you might be running off results from 12 months ago, which could be 10 percent less. So we can talk about all the different valuation methods, but yeah, look, there is still fluctuations in there, which, you know, can actually jeopardize the sale as well, just like, yeah, the way that you value commercial property with you to acquire it on behalf of one of your clients, is that consistent with how the value is do it.

So you try and put that in lockstep. So you’ve got at least some continuity of what that sort of valuation would be. Yes, because I see thousands of evaluation reports, so I know what they look for, how they, how they sort of run their numbers. My favorite way of evaluating property is the capitalization method.

So that is really just looking at the market rent. So you’ve got to dig up comparable rentals and then look at the yield for that type of asset. So let’s say you’re looking at a industrial property in a capital city. Let’s say it’s Adelaide. Adelaide might be running at a 5. 5%. capitalization rate. So that means if your property is getting 55 grand rent and the rents at market level, that property should be valued at 1 million because that’s 5.

5 percent the cap rate. Sometimes that’s the simplest, quickest way of valuing. And, uh, that capitalization rate is good if you’re valuing properties that are a little bit more unique, like Dentist, FETS, server stations, all that kind of stuff. Server stations is not a good example, but where there’s not many comparable sales, like maybe cold room storage is fine.

You need to look at what the cap rate of that area is and then apply it to that type of asset. And that’s a quicker way of valuing it compared to sort of just looking at square meter rates for the building or, you know, replacement costs, all that kind of stuff. And, um, Yeah, it’s a bit of a dark art, valuing a property.

And if you’re not sort of across this stuff, uh, you can be widely off. You can be 50 percent off your values without even knowing it. And that’s why there’s less protection in commercial versus residential. Cause if you’re buying a four bedroom house in a suburb, you just look up. All the recent sales for similar aged four bedroom houses on similar sized blocks.

Commercial, it’s just not that simple. There’s extra columns you need to, uh, factor in on your spreadsheets. And that’s sort of what, uh, a good, uh, commercial do. Yeah. And for you, do you, do you enjoy the evaluation part of the process with commercial property? Or is that just an inherent evil that you’ve got to get absolutely right?

I don’t, yeah, look, I enjoy it when we find an undervalued property for sure. So you’ve got to kind of dig through the basic numbers, but I’m lucky enough because I’m looking at quite literally a property almost every hour of the day, all day, every day, you kind of get a gut feel straight up where the price is at.

So, you know, in my head, I know roughly what the square meter rate should be for each of these suburbs and You know, for all, like all across the country, there’s many markets I’ve got no idea about, but the ones we’re in, you know, I will know within 5 of the square meter rate for that property. So if you see a property and it’s valued at 2 million and you work backwards the square meter rate, you can quickly see if it’s worth putting an offer in.

If you’re coming in cold, that’s where you’ve probably got to manually dig up the numbers yourself, and that’s not, I don’t think that’s enjoyable, really, it’s just like doing homework on a property, you’ve got to do it, it’s a necessary evil, but it’ll allow you to offer with confidence, and I like the negotiating part, because, uh, you know, if you know what the value is, negotiating is quite easy, because it allows you to negotiate So, With facts and figures rather than just trying to verse someone else.

Yeah, absolutely. And you sort of spoke about the valuation methods, uh, comparable sales methods, summation method, capitalization, replacement costs, hypothetical development. The challenge is, is that there’s so many different ways to slice and dice it. Again, it’s going to be. Dependent on where an asset will sit within your portfolio, what is your utility is going to be, what your outcome is from it.

Now, you know, in residential property, a lot of people chase capital growth rather than yield, whereas largely commercial investors are chasing yield as well as capital growth. How much does it matter who’s buying the property? What its actual real value Oh, look, I don’t think it varies a great deal because we’re all numbers orientated investors.

Like if you’re an owner occupier versus an investor, that’s probably the real difference. A vacant shed will value different depending on the market, it might be 10 percent less than a tenanted investment. Some markets, they’re actually worth the same. Like it really depends on the amount of owner occupiers in that market.

So yeah, to answer your question, it’s probably just the difference between an investor to an owner occupier and, you know, developers and all that kind of stuff will probably target different types of assets, you know, vacant land, for instance, or, you know, old sheds that need to be knocked down. So obviously you wouldn’t really value the rental income.

Um, in those circumstances, you’d be working off, uh, yeah, basically the, the bill costs and the, uh, the land value is vacant. Yeah. So that’s the sort of tip one of five, um, of, uh, the top tips at all commercial investors at every level need to buy, buy. So this is the secret is effective valuation of the commercial property is the building block to all other decisions.

So it doesn’t matter where you are as an investor, it’s always going to be absolutely fundamental. Let’s go to number two, Scott. This is the art then of renewing commercial leases with the leasee and the tenant, again, a building block to all effective transactions and holding an asset. What’s your sort of particular method to this or how do you approach it?

So when it comes to releasing a property or negotiating it, I really just like digging up a bunch of comparable rentals. So let’s say your tenant is paying 150 a square meter. Per annum on their rent. You want to go find all your neighbors rentals. And if they’re all going for 170 on average a square meter, rather than just say, look, you need to go up 20 bucks a square meter just to, you know, because I want you to, you show them, you show them what all the neighbors are going for.

And then you can actually go and. Negotiate with facts and figures. And then the tenant will hopefully see the logic in that. And you might offer them a free month’s rent or something like that just to get them to sign earlier. But it’s really just using a spreadsheet. You can do that hand in hand with your leasing manager as well.

And, um, that’s what I really like doing. It’s just, it’s not doing anything without the facts and figures and commercial is just so numerical based. It can take some of the emotion out of it. And, uh, no one likes getting a rental increase, but if they know they’re not going to get it cheaper somewhere else, or you are going to give them a bone by maybe doing some maintenance on the property or, you know, give them a month or two free rent, then all of a sudden those conversations can go a lot better.

And, uh, You know, it can still go south and that’s when you’ve got to, you know, you’ve got to be in these situations where someone is going to potentially allow the tenant to leave or the owner’s got to accept a lower rent. Like there will be, uh, you’ll reach loggerheads every now and then in these negotiations, but hopefully with just some, uh, good communication, you’ll never get to those ugly points because.

They are rare in general, you know, they’re, if you’re working together, it will be a win win solution. And they should be in, I’ve been involved in quite a lot of commercial lease discussions and um, you’re either the person renting the premises or the owner of the premises renting it to someone. Now, it’s at the point of renewing a commercial lease that you could really change the valuation of a property and there’s a whole bunch of different ways you can do it, but many people try and lift the, The gross rental on the property with giving some incentives and stuff, because that can change the way your financier views it or what the top line sort of rentability of the product is.

If you’re sort of in the process of upping or wanting to create value by renewing a lease, is that a base philosophy, which is try and increase the gross rent because and then underwrite any sort of savings in incentives? Yeah, look, that’s, it’s very common with CBD office space. Like, so I assume that’s probably what you’ve run into with your business.

And it is like, sometimes it could be 40 percent of the rent value, which is enormous. And that is really, it comes out of two things. Number one, there’s a lot of supply out of particularly the CBD office market. So that supply makes it a little bit, I guess owners have less influence over what they can do because they’re only, they’re playing in a market and they’re just one of.

you know, hundreds of thousands of square meters out there available. So you want to offer larger incentives to keep a good tenant. So you’ve got less power as a landlord in that case. The other reason is like office space. It’s generally a little bit more of a, I guess it’s just a culture thing, almost like it’s part of how valuations have been increased for many decades.

It’s done through managed funds. You know, these guys that sort of own the whole buildings, they, they want to increase the face value of the rents. And this is really going to help their valuations when they, uh, you know, want to pay more dividends back to their investors. So they’re, they’re really working hard to, you know, almost artificially lift the value of the rents.

It’s a murky, murky world. It is. It’s, uh, just, it’s funny money, some of it. And some other industries, like smaller tenancies, you generally don’t see those types of numbers. Like, you normally work off for industrial, one free month for every year the tenant signs up. So a five year lease, five free months.

Three year lease, three free months. it’s pretty palatable to deal with when you’re an investor. Imagine dealing with 40 percent of the total rent. It’s just, I struggle to get my head around it. And this is, this is what I do as a day job. So there’s obviously many examples where that’s not true and many that this is true, but it does vary between industry to industry and the larger tendencies can have more of it, particularly when it comes to office.

How do you go about and, you know, when you’re renegotiating a commercial lease and, you know, you want longevity, you want to try and generate as much income as possible without giving too much away by way of incentives. You know, when you’re looking at incentives, where does, uh, rather than giving away free rents, where people will say, well, I will contribute as the owner of the property to the fit out of said property, no doubt a fit out, does that actually change depending on the asset?

No doubt. Does that change the actual value of the property? If you change the. fit out of it. So the internal parts of it, the number two, how does it work from the investor’s point of view, if you are paying for fit out the tax benefits around that? Yeah. So that’s one I actually don’t mind. So increasing the value of the fit out is good because it means you can amortize that value.

Like let’s say you spend 500 grand on a fit out for a Whatever, let’s just say it’s a dentist for, for argument’s sake. Let’s say you own that fit out and then you amortize that as a 50, 000 per annum for the next 10 years into the lease. So basically you’re lifting the rent by a fair margin each year.

So not all of that will be captured in the lease because obviously you still got your square meter rates that need to be at fair market value, but. You can definitely attribute some of a higher rate, good fit out. So that will increase the face value of the rent. It also allows you to depreciate against it.

So you’ve got a better tax outcome out of that situation. And a lot of the time you’ll be able to negotiate a longer lease. So that’s my favorite way of increasing the value of a property. Just getting a longer lease because you’re not screwing the tenant over with a higher rate. You’re not playing with funny money.

You’re actually just increasing the security of the asset. And banks like that, you like that and investors like that. So longer leases can come from you spending money on fit outs. They can come out of just goodwill out of a location. They really don’t want to move anywhere because tenants spent their own money there.

And you need to capitalize on that. If you know the tenant’s happy. Don’t just go with the average three year lease, which sort of, you know, rolls through work out ways, how to get them to sign onto a 10 year lease or a seven. The minute you do that, the value has got more reason to increase the value of the property.

And if you are like many investors I deal with, you want to actually pull equity out of that deal and move on to the next one. And hopefully. Keep building a larger portfolio and, and, uh, the more you do that type of stuff, the quicker you’ll move on. Yeah. I was going to ask you, we’re talking about sort of valuation of a commercial asset and increasing the valuation.

I don’t know too many people who want to decrease valuation of their property, but the question is why, why do you want a better valuation? Well, if you sell the property, that’s good because you realize that, but what would be the other reasons you’re talking about refinancing there? Yeah. So you can actually get better lending terms.

So. Most investors try to go for a 70 percent loan with commercial, but once you go into the higher price points, you know, your fives, tens, 20 million types, your lending ratios tend to be a little bit lower. They normally max at 65 percent LVR. So by increasing the value of the property, you can actually have on paper, a lower LVR, which means the banks will see you as a more conservative investor, which technically should mean you can negotiate harder on your interest rate.

Better loan terms. Basically you can make yield more, you know, you can lower your costs of lending that way, and that’s going to increase your cashflow, which is obviously good for you as an investor, even if you’re not selling, even if you’re not trying to pull equity out, but most people would like to pull the equity out because you, you know, you can basically leverage up to say 65 percent and, uh, you know, if that frees up X amount of dollars, you can use X amount of dollars for you to deposit on your next property and.

And, uh, every time you buy it with commercial, remember, you’re going to be creating a pretty large passive income. So that’s where it gets a little, almost a little bit addictive, this type of stuff, because you’re not just acquiring a portfolio that is a neutrally geared. Like every time you buy, it’s like increasing your profit margin and.

You know, sitting on, uh, one or two properties can get boring. If it’s working, you want to keep doing it. So that’s where you’ve got to think about where’s the growth going to come from. Where’s the value add going to come from, but also remember, don’t take too much risk because readability is still going to be a strong pursuit, you know?

So, you know, as your portfolio gets larger, you want. You know, more tenants spread out different industries and you’ll be protected with that income as well. Sounds good. Okay. Point number three then of top tips for commercial investors at every level need to abide by, you’ve got to manage your commercial property effectively.

Um, you can self manage a lot of people use a property manager, how you should be approaching this. What’s your particular approach to this Scott? Look, I personally hire experts to do this just because I don’t have time to even look at my own properties these days. Like I, if I was retired out of, you know, rethinks the business, I’d probably self manage a little bit because it does allow you to self, you know, connect with the tenants and stay a little bit closer to your, the assets you hold.

And I know a lot of these properties we buy from, especially the higher value ones, like. Almost like when you go over 5 million for a commercial property, I’d say 90 percent of owners self manage. When we’re doing the due diligence, there’s no rental manager there. We’re having to rely on statements and stuff like that from the owner.

And, uh, it makes our life hard because they don’t have paperwork set up. We’re literally trying to get itemized bank detail searches just to see when the rent was deposited in the account each month. So that’s just each to their own, I guess. But if you’re in Sydney and you’re buying in Perth and Adelaide and Brisbane, I honestly think it’s just easier to, to let someone, uh, manage the property for you and your accountant will like you for that as well because it’ll come in a nice accountant friendly statement every month.

But one other factor as well is many leases have the outgoings of the rental management as an outgoing that the tenant has to pay. So if it’s a 5 percent management cost, the tenant pays for themselves to get managed. So. Why would you not allow someone else to do it if that’s the case? So yeah, each lease is different.

And I guess if you buy a little shopping center with five tenants, you wouldn’t want to manage that. But if there was one big logistics business like toll, you know, do you really need to pay someone to manage that? Like probably not, you know, so. Different properties for different methods, I’d say. Yeah, and how often should you be checking in with the leasee or the tenant or your property manager to see whether everything’s okay?

Again, like, I’ve got some properties that I haven’t heard from either party for five years, and that is really just… The only time I hear from them is when… Like send me the receipt, but even that comes automatically sometimes. So it’s really just chasing up statements just when you’re doing either a refinance or doing your tax time, when things are going well, there’s nothing really happening.

Cause sometimes it’s just a direct debit set up from your tenant as well. So they don’t even know what they’re doing. Like it’s just happening because it’s, you know, it’s all previously agreed on, but when stuff goes wrong with commercial, a good rental manager is on the ground. They’re going to search for new tenants.

They’re going to deal with disputes with tenants. So. All the usual stuff will happen. But, uh, yeah, you just gotta, I guess you deal with, you know, those issues when they pop up and having someone on the ground is great. But if you are self managing, it doesn’t mean you can’t just call a rental manager up that month that you have the problem, employ them, and then let them sort it out.

And then maybe Let them keep the management after that. So it’s something that’s sort of a case by case. That’s a good approach. We spoke about adding value to an asset by way of a fit out or some other sort of changes to its footprint, which is good. But that’s for the purpose of either increasing value or increasing the rentability of it.

What about sort of repairs and maintenance? When should you consider upgrading components? So electric piping, roof extensions, do you be proactive or you just wait until it gets to a point where it’s just unserviceable? And we’ve all been no doubt in commercial properties where the air conditioning has been crap for the last five years because it was installed in the 60s and everyone complains about it, but it never gets upgraded.

So if you’re paying the bills, what do you do? Hold on for as long as you possibly can. Look, most people wait for the tenant to complain and then you fix it, but you can use that maybe, you maybe time the repairs and maintenance. Like if a lease renewal is coming up, get it all fixed and say, look, we’ve fixed all that.

We need to recoup some of the costs. You know, this is, it’s just business, you know, that’s the way. Sort of upgrading is, I think it’s a good thing as a landlord as well. Like particularly things like solar paneling and that. So. So, valuers, back to the valuers comment, will generally value the savings of solar panel at a 10 percent cap rate.

So what that means is if you’re saving 10 grand of outgoings because the electricity bills lower each year, that’s going to be cap rate at 10%, which means your value of your property has just gone up a hundred grand. So by putting solar panels in there, not only do you save outgoings, you’ve got something to depreciate against.

You will actually, so you’re getting a 10 percent cap rate. conversion. Okay. So that all sounds complicated. No doubt your accountant can help you out with that sort of stuff. Yeah. So, and I do, and I guess you can talk to your leasing managers and they can sort of point out how, you know, what value adds could be done.

And look, I guess that’s why you see solar panels on most big roofs around, you know, in the industrial areas, things like, I guess, just your general, you know, repairs and maintenance. Like if a lot of the times the tenants will be proactive enough, just do it themselves. Like, remember, this is not. This is their business.

Like they’ve probably got their own clients coming there. And in most cases, they’re going to have a very high level of, I guess, quality themselves. So they’re not going to let the property go to crap because that means their business looks terrible. And then, uh, it’s poor reflection on their business and their brand.

So you generally don’t really need to worry about this compared to the likes of residential, which, um, You know, you normally are the one that cares about your property way more than a tenant. And it’s more of an equal balance for commercial. And if you’re going to sort of work on or fix things or improve things for the purpose of increase the rent, but also minimizing repairs and damage.

You know, when you look at resi properties, they say, Oh, look, your money’s best spent in kitchens and bathrooms. So for a commercial property, where do you get the biggest bang for your buck? You know, piping electrical work, you don’t really see it. So does it matter that much? Uh, air conditioning, maybe you feel it if you’ve got lifts and stuff, you know, it doesn’t really matter that much.

Uh, but where do you get the biggest bang for your buck? So if you can increase floor space. That’s the biggest thing, whether it’s an internal mezzanine or a, you know, a bit of a unused car park area. If you can increase the floor space, under roof floor space particularly, you can charge per square meter for it.

So, you know, even an industrial shed, you know, you can charge say 100 and 150 a square meter. That’s going to be sort of going on to your bottom line as income and then you can cap rate that new income for whatever the cap rate is for that area and you can get a very quick return that way. Fixing things like.

Air cons and maintenance. That’s really just to keep the tenant and the property going where it should be. It’s almost expected in the valuation. So if you don’t have that, it might just hurt you in the valuation rather than you spending a little bit of money on a lift or stuff like that. That’s just not really going to give you much bang for buck.

But if you don’t do it, your tenant won’t be happy and it’s not going to be easy to re let if you’ve let your property go to fall away a bit. Yeah, no reading the unclear. Make more floor space as you can. Uh, uh, number four, uh, the fourth top tip for commercial investors at every level need to abide by pickier timing to sell.

Don’t always hold right. There’s sometimes it makes sense to sell. Yeah. And look, this isn’t my, I’m saying this a lot at the moment. Like, so everything investing we’ve got. a large amount of people trying to sell smaller assets to get into larger ones. And the reason for that is, you know, generally you spend a bit more, you’re going to get a better dollar for dollar deal.

That’s just a very basic general rule, which seems to apply in most markets. So if you’re selling a million dollar property, You know, you can sell it at a pretty sharp cap rate, you know, like might sell that at a 5. 5 percent net yield, but then you can use the profits from that lend a little bit more and they might be able to buy a 2 million or a 3 million property.

All of a sudden they might be getting a 6. 5 percent net yield. So they’re getting more return for their money. And, um, yes, they’ve got to pay tax. All the usual stuff, but a lot of the selling I think really comes down to is that the type of asset you want to hold for the next, you know, 30 plus years of your life.

And I’ve been quite vocal. I’m selling some of my cheaper properties because I’m going into larger ones because I’ve decided I’d rather have. Less larger assets because there’s less touch points. It’s, you know, longer leases, all that usual stuff than having a whole bunch of little ones. Cause yeah, I’ve got 32 of them and they’re just, you know, it’s a problem.

So, you know, if I sell one third of those and end up replacing that one with one or two bigger properties, to me, that makes more sense. And in this hot market, this is a good time to deleverage out of poor quality. or lower quality investments because there’s buyers for any type of property now and if there’s not you’ve really bought a dud and uh if you can sort of then quickly get back into the market At a higher price point or a better yield.

That’s what a lot of people are doing. And same goes with, uh, people selling out of residential, like there’s some markets that surely must be hitting their peak or getting close to it. And you can take a pretty big profit and That’s attractive to people. So, you know, my message is don’t sell unless you have to or if you’ve got a really good plan.

But, um, if that’s not the type of property you want to hold for the next 30 years, there’s other opportunities. You don’t just have to blindly hold a property. And that’s what we’re all being told. And, you know, holding properties forever, it doesn’t make sense if you, uh, can buy a better asset at the time and then hold that one forever.

Yeah. I completely agree with you. And the number of properties in your portfolio is absolute vanity for someone with a number of properties. It’s the bigger headache, the more properties you have, because there’s more touch points and more things to manage and more things to go wrong and blah, blah, blah, blah.

But I think it’s a journey for most property investors. They use those type of assets as an enabler to get into the market and start building capital. But I know all investors at a point in time have this realization going. I just want less properties now, but I want different types of properties with different outcomes and different upsides.

So, um, you know, you’ve got to get involved, you’ve got to start somewhere, but, um, what you start with today, your, your chapter one doesn’t necessarily need to be your chapter six and chapter seven. So don’t get wed to the idea that you’ve got to keep building and building and building. Um, I guarantee you will start rationalizing your portfolio at a point in time.

Point number five, Scott, we’ll finish with this on top tips or commercial versus need to abide by, irrespective of where you are. It’s this whole idea of investigating and continue to be involved in syndicates with commercial property if you already have skin in the game. So for a lot of people, this is a step outside their comfort zone where they go from being involved individually into a group of people who are trying to maybe get an uplift on the type of assets that they’re buying in or operating in.

Your views, your opinions towards syndication, Scott? Yeah, look, there’s pros and cons. Like the biggest thing. about syndicates that I don’t like is the leverage. So you’re normally working off a 50 to 55 percent debt level. So that means if you’ve got half a million dollars cash, you’re only going to control a million dollars of property.

Like it’s not, that’s not that exciting. Like if you buy it by yourself, you know, you can leverage that up in some cases in commercial up to, uh, you know, 80%. So you can stretch that 500 grand a lot more. And that generally means a better property as well. Rather than owning a smaller portion of a very large one.

So the larger property will be better, but you’re only owning a very small part of it. And I personally have invested in syndicates. I’ve set syndicates up. They make a lot of sense if you’ve got the right group of people together and it’s a really exciting deal. But, um, the issue with syndicates as well is.

There’s individuals out there now buying at syndicate levels, which means like if you get a bunch of guys together and purchase a 5 million property, that’s not a really lonely part of the market. Like a 5 million property will have a lot of competition on it. So you’re not really beating the game by, I guess, getting into a price point no one’s involved in.

And that’s generally the idea of syndicates. You get a whole bunch of people together. And you purchase in a price point that no one can afford in this hot market. Uh, like I hate to say it, it seems like everyone can afford everything. You know, there’s buyers out there buying 25 million properties on their own.

And then all your big syndicate businesses, like you’re, you know, the ones on the ASX, they’re buying stuff into the several hundred millions of dollars. And there’s a lot of those businesses as well. So if you can do it on your own, I personally prefer it because it means less stress, higher leverage.

More control. And then you’re not having to deal with, I guess, inconsistencies humans will bring with their own lives and you know, whether they might have a divorce or someone’s bought a family home they shouldn’t have really gone for and they can’t afford it and they need their money quickly and you’ve got to buy out the other partners and all that kind of stuff is almost a daily or not, you know, a monthly occurrence with a syndicate with 10 people in it.

So it does, it does get a lot more complicated. And if you want to operate. In a syndicate fashion and commercial property, there’s other ways you can get exposure to commercial property. If you’ve got a super fund, you know, retail or industry super fund, no doubt you’ve got exposure into commercial property just purely because that’s where a lot of those dollars go.

So, you know, or you can specifically get involved in managed funds or other investment vehicles that just. target commercial property. So you don’t necessarily need to do it yourself. You can chuck your money into other vehicles that can get that exposure and get that uplift, which for many people, it’s a lot easier to trade in and out of it.

You don’t have to deal with the personalities of what you just mentioned. Yeah. But look, if you do do it, and the reason I went into it, you know, I was buying into these a couple of years ago. I just didn’t want to talk to the bank at that time. You know, I just bought a house in Sydney and I was just like, well, the last thing I want to do is go near a bank.

So I was investing my cash. Someone else was dealing with the loan and it made sense from that point of view. And that might be attractive to some people. So if you are going down the syndicate route. Number one, just talk to the bank. You know, there’s no point going, Oh, look, I’ve got all this money. These five different people talk to the bank and make sure, you know, the leverages and the structures you’re going to work with, because you might be investing with, you know, you might have some brothers or sisters and you’re all going to pull, you know, X amount of dollars together.

And that might make perfect sense, but. Talk to the bank first. If it still sounds like a good idea after that, then yeah, start, start committing to it. But, uh, yeah, without the bank conversation, it’s really not even a conversation worth having. I don’t think. No, absolutely. I agree with you. And again, it’s just going to depend where you are on your investment journey.

If and when you consider those sort of opportunities. Scott, we’ve done a pretty good job there. Um, five key points. I think it doesn’t matter where you are, whether you’re new to investing in commercial property, or you’re thinking about it all the way through to those people you’ve spoken about, those sophisticated investors who are operating that 5, 20, 100 million dollar Take care.

You too. Bye. Bye. Brackets. All this stuff is just as relevant. It doesn’t matter what the asset is. The baseline philosophy is that you get these five things right. You’re probably doing well. If people want more info on this, Scott, what’s the best thing for them to do, mate? Uh, just go to rethinkinvesting.

com. au. And yeah, we’ve basically got dedicated people that’ll answer all these questions for you. And, uh, yeah, just reach out. We’ll answer the questions in this big dark world of commercial property. Try to clear it up for you. Nice one. Well, let’s hope, uh, next month, mate, when we get together for inside commercial property, we can do it in person.

I missed, uh, your coffee delivery. So I’m going to try and track myself one down, but, uh, uh, stay safe, mate. Stay, uh, I know you’re in the, the, uh, the, the evil Eastern suburbs there, or you rich folks out there are the biggest spreaders of, uh, this COVID 19 pandemic. Not to laugh at it at all, but, um, I think we’ll come out of lockdown.

Uh, it sounds good, mate. Well, uh, Thanks for having us and yeah mate, hopefully next month we’re out of it because it is a bit boring sitting at home. Scott O’Neill, Director of Rethink Investing. Check him out at rethinkinvesting.com.au. We’ll see you again next time. Until then, bye bye.

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