1 Tip For An Instant Equity Boost

There are a few things which I like to pay attention to when looking for commercial property.

Once of the simplest ways to grow your equity very quickly is to look for properties where the current rent is below rents of the area.

Some agents will know what the rent for an area should be based on the property type; others can be very vague about it.

You might think that this is not something that would happen very often, but it can happen.

The most common way this happens is when a tenant has a long lease. Rental increases are generally written into a lease so that each year the rent goes up roughly in line with CPI.
The problem is that CPI can sometimes be outstripped simply by having an area become more popular over time.

The more popular an area, the more people want to have premises to run their business in that area.

Let's say the local government decides to spend big on infrastructure and all of a sudden a group of shops starts getting more traffic. Businesses in that group will start to make more money and demand for a shop in that group goes up… For those businesses that were already established and stay on rent will increase in line with CPI but not in line with increases informed by a spike in demand.

Lucky them.

I'm very vigilant with this sort of movement, and I recommend to my students that they check and review all leases to make the most of these kinds of situations. The other thing they get from me is all the little lease inclusions that I have discovered over the years which can really help with these sort of changes.

I've seen this happen right here in Byron too with shops, cafes and also holiday accommodation. The big chain stores have all come in which has driven rents up dramatically.

If a landlord wasn't as diligent as me (and there are many who are not) and did not have the right leases in place they would be stuck with a rent that was below market until the lease ran it's course.

Amazingly I have found properties in the past where the owner was oblivious to market rents, and I'll bet the tenants were keeping very quiet about it if they knew because they knew they were onto a good wicket.

When you pick up a property like this, you are buying at the market cap rate for that rent…

Once it's yours, you put the rent up to market, revalue the property and boom! The value of your property suddenly goes up.

This is instant equity.

Of course, whatever the yield is for your property at the time of purchase, it's not going to stay there. As rents go up, values go up, and equity goes up…

…and your repayments stay the same over time… meaning your yields will increase…

Going back to our newly purchased property returning under market rent…

The other thing I look for is hidden upsides.

There are of course tons of upsides to look for…

But let's say you find retail that's under market rent…

… and has one large space which you can split into two with some new doors and windows at the front, a wall in the middle and amenities for the second shop.

On the one hand, you might say to the tenant I'll give you cheaper rent if I can halve the size of your shop so I can put in a second shop… and they might be happy with that.

But at the same time, I have to put rent up to market because it's currently below what it should be…

And this might offset some of that rental decrease…

Then you also get a second rent, at current market levels, and a second income.

Those changes are going to make for a considerable jump in value when you get a revalue…

…and that equity could be made available for your next deal.

And on it goes.

Even if you don't find a property that has under market rent, the fact that your rent increases every year means that each year you own it your equity will grow.

That's the same with all well-chosen property, the difference here is that I look for these upsides so that I can get more proactive and make that equity grow faster…

… then revalue and refinance to release that equity and make my portfolio grow faster.

It's not that I have to… I just love property and if I didn't do these things… I'd be bored.

It's these little tricks, these little wins that make commercial property so much fun… and if you are anything like me…

Commercial property is a great game to play.

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