It’s funny; I got an email today from someone telling me that they thought that it was not a good time to buy commercial property.
They claimed that cap rates are too low to make a profit and the market is too unstable. That interest rates were about to rise, and we are all due for another recession.
They also quoted some newspaper talking about how Amazon is coming to Australia, and it was going to kill the retail market in Australia.
I dealt with the Amazon issue in my previous blog post…
But if you have heard any of those sentiments from others or thought them yourself – I’d love to stand on the other side of the fence and give you a new perspective.
Here’s my perspective…
When I started investing interest rates were at 18%
Just take a second and take than in… 18%
Yes interest rates are going up… have already gone up… 0.9%
From my perspective – big deal.
Some of the best investments I’ve ever made have been at times when it was “Not the right time to buy” or “Interest rates are too high to invest right now.”
Forget that stuff… it’s just market noise.
What you have to realise is that if interest rates rise other things rise with it.
Back then when the interest rates were 18% cap rates were much higher too. Rents were in line with those interest rates, and commercial property was still cash flow positive.
This didn’t mean that no-one could afford to run a business… as some will have you believe.
Vacancy rates were not really much different to what they are now.
Life goes on.
Business and the economy adapt to the situation and carry on.
What it does mean is that if you stick to the fundamentals, follow the rules and do detailed and comprehensive due diligence (the way I teach my commercial investing students), then your commercial portfolio will stay stable, strong and keep producing you a decent income for years.
Remember that when you buy a new commercial investment, you should have clauses in your lease that give you several safeguards.
All leases should have regular rental review periods which allow you to increase the rent to cover changes in the market.
…they should also have rental guarantees in place, and these should be updated to remain in line with rental changes.
I often find when looking for new properties, leases that have not been looked at for years. Rents below market and rental guarantees that are so dated as to make them almost useless.
Of course lease like this are opportunities if you know what to do with them.
I’ve also found rents that are over market value… and there can be opportunities there too.
I was able to negotiate with a tenant (before I bought the property) to have the rent lowered.
This meant that the value of the property went down and I was able to negotiate a better price…
There’s more to that story – more than I can talk about in this article.
The point is that when you get how to work the market, you can get the market to work for you rather than against you.
There is a big difference between what the market is doing and what the media says the market is doing.
You have to learn to watch and respond to the market and set yourself and your portfolio up in a way that protects you against market fluctuations.
…and you need to learn to tune out market sentiment as stated by “the news”.
You can only do this by understanding how to interpret opportunities through your own research.
Once you get your own facts, through your own research, then you can make your own decisions…
Decisions that will work for you.