If you’ve got some equity in your home… say $200k or more, chances are that you want to invest it to make your life better.
That gives you a lot of options. Recently a saw a similarity in one of my own properties and another commercial deal I saw happen, they were both valued at a similar price so I thought it would make a good comparison of the choice at hand… whether to buy commercial or residential.
Despite the perceptions of some (and my obsession with commercial property) I do actually own some residential property. After all being a former estate agent, you can't help but want a piece of all kinds of property.
They always tell you to “diversify your portfolio”.
Last week in a flash of synchronicity I got a house revalued, and I also heard of one guy's commercial deal… and they were about the same price, so I thought this was another good opportunity to explore the differences.
I bought the house 11 years ago for $328,000, and the most recent valuation came in at around 800,000 (after a bit of money was spent doing some small renovation).
Not bad capital growth at all. It happens to be in a good area that is still now, even after the boom that's occurred, still growing and gaining interest.
Ok over to the commercial. The guy in question bought the property which had five factories and a hard stand area, for around 800 about 15 months ago.
Now, it's not a direct comparison because one property was about 11 years ago for much less… but if we take them as being around the same price 15 months ago, we can make some leaps of understanding.
The house now is mostly renovated so there's not a lot we can do. The garden is still pretty ordinary and could do with some landscaping, which could help with a future uplift.
If someone were to buy it now, it would cost them 800k, and they could do the garden to add extra value.
Now let's look at the commercial property.
He bought it for 800k, so, a similar price. However, he was able to split up one of the factories into several storage spaces, each with an individual lease. He was able to renegotiate the existing leases which were all on a month to month basis. Now they are all longer term leases.
And he was able to add in some shipping containers in the hard stand area so create more income streams.
The upshot of all of this is that he was able to increase the rent which ultimately increased the value.
The house currently rents for $500 a week and is positive cashflow now – to the tune of about 12k a year gross (before expenses but after loan repayments)
If someone bought that property now for 800k though it would be cashflow negative because the loan would be bigger (remember I bought it for $328k)
The commercial rents out for 80k net.
Ummmm hang on… 80k!?! Net?!?
Yep, with the additional rentable spaces, he was able to double the rent from when he bought it. That means two things:
1. The property, as an investment, is much safer because he has diversified the income streams from the property.
2. Since the value of commercial is based on the lease income, and he was both able to increase that income but also increase the length of the leases, the new valuation came in at $1.6M
He was able to create $800k in equity in just 12 months.
This is doubling his investment and creating a very healthy income to boot.
The problem with the residential is that buying that property at 800k (if I were to sell it) would mean that the purchaser would be in a worse position for many years until the equity in the house caught up because of capital growth.
With the same amount of money, this one guy was able to double his investment in just 12 months.
Of course, this is not an apples to apples comparison – but that's the point. When it comes to looking for an investment property, residential and commercial are apples and oranges.
They're not the same level of investment; they're not even in the same ballpark… they're not even playing the same game.
Next time you've got 800k lying around you'll know what to do with it.