Many property investors tend to think of property investment only in terms of how to get the best out of residential property. However, there is so much more you can do.
Commercial property investment can yield incredible results in terms of cash flow, and you generally get long-term tenants. However, a lot of investors are hesitant about getting into this field as they subscribe to a number of misconceptions about the viability of commercial investment.
“One of the first things that seems to come up is that investors believe there's no capital growth or a lack of value added opportunities with commercial property,” says Scott O’Neill, director of Rethink Investing.
“It's a big myth because I've seen the largest spikes in commercial [real estate growth] than have been in residential.”
O’Neill has personally gained experience with a number of different ways of creating equity through commercial property.
“It might be through strata titling. It might be buying into a market which has got a lot of demand from tenants. That’s going to push rents up, and as the rental value increases, so does the value of your commercial property,” he shares.
As with residential property, paying attention to the supply and demand levels in the market is crucial to smart investment.
“You want to pick the markets where supply is not keeping up with demand. You'll find tenants quicker, and that contributes to reducing vacancies and getting more equity out of your property long term through growth,” O’Neill explains.
Contrary to popular belief, he adds, you also don’t need to be a millionaire to get into commercial property – there are affordable options out there.
“There are financing options to get commercial bought with a 20% deposit. I know those banks out there lending 80% will be honest on commercial properties. And you can find commercial properties for less than $400,000, which is kind of in line with the residential market. You're not going to go buy a multimillion-dollar asset for the same reason you're not going to do it in residential: if that's what your budget says you can't do,” he says.
“But if you can get into a low-value commercial property with a good tenant, the financing options around in 2019 are actually quite good. And I'd say they're going to get any hotter based on recent conversations I've been having with rent mortgage brokers.”
In line with his emphasis on commercial being quite similar to residential investment in many ways, O’Neill points out that there is actually no need to “practice” with residential property before going into commercial.
“You don't need to go and purchase 20-odd properties in residential before transitioning –I've got regular clients with 0 or 1 property getting into commercial. They spread their risk by buying some $400,000 properties so they're not going all in, and the cash flow they're getting from that portfolio is quite impressive.”
He notes that with commercial property, investors can expect yields in the range of 7%-10%. However, investors do need to be careful with high-yield properties.
“Once you start getting beyond 9%, you’ve just got to be careful. I generally find that there's a bit of a sweet spot between 7% and 8% percent net – if you can stick between those two, you're generally going to be in a capital city.”
For more, be sure to listen to episode 6 of YIP Talk.
