Like many hot button issues in real estate investing, debating whether you invest in residential or commercial is often not one that comes up.
Sadly the majority of “investors” – (Notice the inverted commas… if I was telling you this in person I'd be using “Air-Quotes”) get no education around investing at all.
They've bought a house or two and know how that works…
So when their accountant suggests, they buy an investment property… they go do what they've already done before…
Then they work out what they've got to do financially (or their accountant just tells them) to make it work.
Without a decent – informed strategy, though…
Well, what they are really doing is standing at the roulette table and tossing their chip on black. Thier basically betting on the result.
Yes, yes I get that capital growth… blah blah… and the property cycle blah…
But those calculations never tell the true story. They may show the capital growth (and remember, not all areas have experienced huge capital growth… in fact most haven't) but they never show the cost.
What has it cost them to own that house over the 10, or 15, or 20 years needed to get the most from that capital growth.
When you factor all these different numbers into the equation, you start to see a very different picture.
Commercial… You knew I'd come round to this eventually right?
Commercial paints the picture more accurately right from the get-go.
It's not perfect, but it's closer.
When you work out numbers for cash flow for a commercial deal, you are working on getting the NET cash flow.
That's what you get after all expenses…
It's not perfect because there is no standardisation when it comes to a listing by an agent. Agents – even the ones that say they are all upfront… well, they make stuff up.
Can't tell you the number of times I've seen things like “Development potential STCA”.
If you were to translate that into reality… into truthful language, it would read: “Large Block.”
The agents won't have approached the council to make any inquiries about development… they have no idea whether development would be approved or not.
They can make a guess… even an educated guess… but that's all it is.
But I digress…
My point was that because there is so standard… the won't necessarily mention management fees, they won't have looked at the lease, if there's one in place, to know whether the tenant pays the outgoings or not.
So you work out the NET numbers… and that gets you close. You know within a stones throw whether it's going to be a good deal before you've even bought it.
There’s no waiting around for 10 or 20 years hoping that the market will give you what you are wishing for.
You know before you put any money down. There’s no opportunity cost and there’s no surprises.
And you can get even closer…
If you see that it is going to be a good deal… then there are things you can do to make it even better…
And to get even closer with the numbers. That’s all part of due diligence.
You get the actual facts, not the agents guesses. You get the lease and go through it, and if you can, you renegotiate with the tenant.
Then you can make sure you get the clauses you need in the lease to keep you safe.
This details are the difference between standing at the roulette table and gabling, and making a sound, informed, educated business decision.
If you get investing in commercial property the right way, your investing wont be buying property in the hope that it will go up in value, it will be buying an guaranteed income stream.
And if you really get it right, the way I teach it, you’ll be buying a guaranteed income stream with massive manufactured growth potential…
Properties that you know for a fact will grow in value as soon as you engage the hidden upsides locked away in that property.
This is science VS art. This is fact vs fiction. This is cold hard cash vs the possibility of someday getting some money back (and hoping that it’s more than inflation and the 20 years of holding costs you’ve suffered to keep that property.)
I dunno about you but I love art. I love fiction… but I don’t love it when it comes to my finances.