There are a couple of things that are my first port of call when it comes to working out if a deal is worth my looking at further.
First of all, is the deal I’m looking at, based on initial (back of napkin) calculations, going to be cash flow positive from the day of settlement?
That’s the single most important thing I want to know about any property.
When I do my calculations, I look at everything from council fees, management costs, even travel costs to inspect the property… I factor it all in.
Then if it’s still decently (8% +) cashflow positive after making loan repayments, then I’ll look into it further.
The second thing I want to know is this: Is there a possibility to increase equity quite quickly by engaging strategic upsides that perhaps haven’t been seen or engaged by the current owner.
There are all sorts of properties that perhaps could be strata titled or developed further which would quickly increase the equity in the property.
There’s much more about upsides in my weekly webinar…
The beauty of knowing about these upsides and knowing what to look for is that when you engage them, you can often get perhaps 10 years growth in just 3 years or less.
This is not a set and forget style of investing.
Of course, there are many great commercial deals out there, I see them all the time, that are purely set and forget.
You ante up the cash, you purchase the property, and you collect the cash that’s left after paying the monthly loan repayments…
There’s nothing that can be done with many of these properties other than own them and collect the cashflow.
I’ve tried owning those kind of deals, and to be honest, I do still own a couple. But they bore me.
I prefer looking for properties that have upside potential, and take an active role in growing my portfolio.
What else is important in this strategy?
Exit strategies. If you have hidden upsides in a property, they can give you exit strategies that others have not been able to see. This is massive when it comes to reducing risk in any given deal.
No matter how carefully you select a commercial property to invest in, by nature investing contains an element of risk.
… But a property with hidden upsides means you can mitigate some of that risk by giving you options.
By way of example let’s hypothetically say that you are looking at two shops on one title. Very simply it means you could strata title the two shops.
First of all, this will instantly increase the value of the two properties. Although less, each combined the total value will be worth more than the two shops on a single title.
But it also allows you other possibilities, the most obvious of which is that you sell off one of the shops, using the money to pay down most of the loan on the other shop.
When you refinance to do this, you will suddenly be paying much less in loan repayments leaving you a greater share of the income for your own cash flow.
Of course, there are many other possible upsides; this is just one, but you can instantly see that you can engage that upside straight away. You can hold both and keep that option up your sleeve for a tie when you might need the cash for another project or property but still want to retain the income you are getting.
The thing you need to know about hidden upsides is this: They are hidden.
I can’t tell you how many times I see properties that get my attention, and when I start to look into the property and ask questions I find there are things that no-one else has spotted. Not the owner, not the agent.
These are things that are often only discovered when you start doing your due diligence and asking questions that most people never think to ask.
To counter this, I also see listings where an over zealous agent puts things like “Development Potential STCA” which basically means that he’s hoping to attract the attention of developers who have more money that the average punter… but in reality he has no idea whether there really is development potential…
It’s a cheap trick that is happening more and more. I’ve seen agents that have put that, and when I ask them more about it, they confess that they haven’t even gone to the council and made a single inquiry. It’s become nothing more than a marketing trick.
So the moral of that story is that you’ve got to make your own inquiries, and you’ve got to know your own stuff.
I’m passionate about this with my mentoring students because most people are not going to show you where the exit strategies are or help you choose the right deal for your portfolio.
Most people simply don’t know how.
I’ve guestimated before that only 9% of all “investors” in Australia are investing in commercial and even less who have bothered to find out how it really works. The same can be said for most of the current owners of commercial property (the people you will be buying property from.
That means that the highest potential of most commercial property remains unrealised and unseen, making commercial property the biggest hidden goldmine in the Australian investment landscape