The point of commercial property, regarding investing, is to generate cash flow.
That's the main one – but of course, if you are investing for the long term you're also going to want to consider capital growth.
When you own a commercial property, if you know what you are doing, you will have rental increases built directly into the lease.
Usually, these rental increases are in line with CPI.
Because the value of your commercial property is linked to your rental income, as rent increases over time, the value of your property will also go up…
Ok – So that's all me stating the obvious…
From the point of view of investing strategy, what does all that mean for us?
It means we can manipulate our property, the lease and the situation to manufacture growth quite quickly.
How would we go about this?
Well, it starts before you've even bought the property.
It starts when you are choosing the property to buy.
I look for properties that I can get creative with. Properties that I can strata title, or that I can split into more than one rentable doors.
I loo for properties that have say retail down stairs and residential upstairs.
I look for properties that have spare land out the back that I can develop, or rent out for storage or parking.
Every time you find a way to add more rent to your income from that property, you also add to the overall value of the property.
There are many many ways to leverage your investment using these upsides, and in some ways, it's largely dependant on the individual property, location and undeveloped land value.
The general idea, however, is that when you focus on increasing the rent, however, you do it, the more the value of your property will grow.
So that's one way…
Another way is to split properties up.
When you strata up a property, you go from saying one property, to two or three separate properties.
Aside from the actual cost of getting that paperwork done you are effectively getting two or three smaller properties (or whatever) for the price of one big one.
Assuming full tenancy you will have increased your rent, but additionally, the value of your property is then based on it being two or three properties rather than just one.
People wait 10, 15, 20 years to get decent capital growth in a residential property. People who are educated in property can manufacture growth in a residential property fairly quickly but it can be a lot of work to renovate or subdivide and build.
With commercial, it's possible to achieve substantial capital growth in a very short space of time.
One of my students bought a $3m block of shops and within 6 months was able to create capital growth bringing the property up to $4.4m in a matter of months.
…and that was just stage one…
There was more that could be done to grow the value even further, and all without lifting a finger to renovate, split or even whip around with a paintbush.
It was a couple of consultants and some paperwork.
In fairness, I don't want you to wear rose tinted glasses here. It's not always that easy.
In this case, however, much of the success of this deal came down to technical knowledge around commercial property and choosing the right property… “Right” in this case being a property that had hidden upsides that teh vendors had obviously never considered not bothered to look into.
A little knowledge can go a long way.
Obviously, I cover many examples of upsides and value adding strategies in my course but at least this will give you food for thought when looking at properties in your price range.