I reckon that only about 10% of the pool of investors in Australia even look at investing in commercial. The rest squabble and fight it out over underperforming residential stock.
Why do you think that is?
There are a few reasons, but I believe that the biggest is fear and misinformation.
The one causes the other.
I was looking at a property the other day, and the seller wanted way too much for the property. I did some quick calculations and worked out what the property was really worth, which was some $150k less than he was wanting.
He was gutted when I showed him what it was really worth in today's market (this is something I teach all my students to do as part of negotiation training because it can often get you a better deal).
It turned out that he got the idea into his head to buy commercial because all the property people in the BRW rich 200 were into commercial…
And he bought this property five years earlier based on the agent's calculations.
He did very little due diligence to check those numbers and consequently bought way too high, which kept his yields low the entire time, which puts him under pressure the entire time the property remains his.
How many mistakes can you cram into a single deal?
He has them all.
It's unfortunate because had he known how to do the numbers the right way in the first place none of those mistakes would have happened… Nor would he now be forced into selling it now and left trying to get more than it's worth to try and make back his losses.
Sadly this guy will now be out there in the world telling anyone who will listen that commercial is risky, and he took a loss from it…
When the reality is that he took a huge loss not because of commercial but because of lack if knowledge and education…
This goes out like a virus in the minds of the people he is telling and infects many others.
Like the news… bad news travels fast.
How many people do you hear telling the story of how one guy invested $450k into a $3M property and by the time he settled on the property he had already increased the value of the property from $3M to $4.2M and locked in $240k a year positive cash flow?
Hardly anyone… yet this is what one of my students was able to do last year.
What's the difference? My student knew what he was doing… he was educated. He bought for the right price, he bought the right property with good upsides and knew how to engage them.
There is so much media coverage about residential investing, and most people innately understand it because they have bought their own house or been part of a house buy at some point.
Buying residential is almost an innate part of the Australian dream
On the other side of the coin commercial property is pitched as being risky, expensive and overly complex…
I'm not about to join the tinfoil hat brigade, but you've got to wonder about whether conspiracy theorists are right don't you?
The mass media is delivering just the right information to keep the uninformed out of the commercial property market.
The advantage is that if you have the vision to see how powerful commercial property is then you enter a market with much lower competition and much higher returns.
Things that used to keep people out of the commercial market have changed dramatically in recent years. Interest rates for commercial loans have come right down; LVR's have gone right up.
It's now possible to get a loan on an 80% LVR for as low as 4.5% which is comparable to a residential loan, yet you could be getting yields of 8% or more – net.
That means you not only get yields much higher than residential investment but your tenant is also locked into typically a much longer lease term, and they pay all the outgoings…
When you consider that most people try to get into investing by buying a house which could be worth $300k to $600k (if they have the savings or equity to back up a purchase like that) but you can get a commercial property for less than $200k…
It means that the educated can get into a property sooner and get better returns for longer than anyone starting out in the residential space.
This kind of information is hard to come by. The media just don't want to talk about it…
Rathert than make it accessible as a means of investing they only seem to focus on the latest $15m Bunnings development.
The perfect commercial investment is out there – you just need to know what to look for and how to make sure it's the deal you want.