*Block* Thinking For Higher Commercial Returns

 

Australia’s a funny country. They reckon property is a national pastime, yet only something like 6% of the country actually invest in property.

Of that 6%, it’s only around 1% have more than 1 investment property.

So what are the other 99% of Australians doing if property is a national pastime?

My guess? Watching telly.

They are watching ‘the block’ and ‘renovation rescue’ etc

They are going down to Bunnings and buying tools so they can do little renovation jobs around the house.

Even those that are investing usually enter the market with one strategy: Renovation.

TV’s got a lot to answer for.

But it’s not all a loss. If you were to bring that national obsession with renovation into your commercial property portfolio there are some big gains you can make.

One of my students just about a property that was a couple of shops with a residential living space upstairs.

Upstairs was untenanted at the time of purchase, but the shops has leases in place.

But here’s where it gets interesting and all you renovators and ‘Block’ enthusiasts can get excited…

Return was around 10% from day 1 from the shops.

 

screen-shot-2016-11-24-at-12-01-52-pm

 

But upstairs was an untapped goldmine because there were 10 rooms which were used at some point as offices. There’s was enough space to turn those 10 rooms into 3 2 or 3 bedroom apartments.

Based on rents in the area, after converting upstairs and renting them out, his returns are going to increase to something like 15%.

That’s an awesome return in anybody’s book.

But here’s the hidden thing.

That return includes the money required to renovate… but what you don’t see here is that the value of that property is going to increase dramatically once those renovations are done and leased out.

Since commercial property’s value is based on the rental income from the leases in place, that rental income is going to cause a leap in value.

Not that’s going to want to sell once he’s getting 14%, but that value will sit in the property as equity which he can use for his next project.

While on the surface commercial property can be a bit boring: you find a property where the numbers work and you set-and-forget it…

But in the same way that you can get much more creative with commercial leases, you can also get much more creative with each investment.

Sometimes a reno will allow you to charge more in rent; sometimes it’s being creative with the hidden upsides that a property may have.


The fun thing about many commercial properties is that they are in open commercial zoning which means that there are far fewer restrictions on what you can do to your property than if you were , say, investing in residential in a general residential zone.

Depending on the type of property is is your local council will have more or less interest and say in what you want to do, but sometimes they are downright enthusiastic to have things changed.

One of my properties was a crappy little shop, and I got a change of use to turn it into a nice cafe with huge by-fold glass doors which opened out the front of the shop and spilt onto the pavement.

When you are bringing more life and colour to a shopping precinct they are often all too happy to support your ideas because it can help improve the values of the area… and then everyone’s happy.

It also means that if you do have residential upstairs you also make it more appealing for people to live there, and market rents will increase.

What’s that saying? A rising tide lifts all boats?

A good renovation, a creative change in the right place, can actually cause that tide to rise.