[Podcast] Is now the right time to invest in commercial property? With Brett Warren

Are you thinking of getting involved in commercial property investment?

It seems with rising interest rates, investors looking for strong cash flow, and more and more investors are thinking about commercial real estate.

While it might look like the exclusive preserve of the rich and famous from afar, as you edge a little bit closer, you'll see that commercial property investments are well within the domain of many current residential investors.

Unfortunately, I've seen many investors go wrong with commercial real estate because they don't really realize that the rules for commercial property are very different from residential investing, and they are given a false sense of security from some of the podcasts and blogs encouraging this type of investment.

I bought my first commercial property in the 1970s, and I’ve made all the mistakes, but today I'd like to give you some clarity and direction regarding this.

So, I've dedicated the entire episode of this show to shops and warehouses and offices as I discuss commercial real estate with Brett Warren, national director of Metropole Property Strategists.

Should you invest in commercial property?

If you’ve thought about investing in commercial property you’re not alone — faced with the prospect of more moderate returns from their residential property investments, many investors are considering this as an alternative.

By this, I mean offices, shops, or warehouses.

Some investors are looking for diversification in their investment portfolios; others are looking for positive cash flow.

Some investors have noticed that most of the institutional property investors, as well as many of the investors you read about in the Financial Review Rich 200 List, own mainly commercial properties.

The benefits of investing in commercial property:

• Strong returns — Over the years, commercial property has provided strong returns as a combination of capital gain and income.
• Stability of income — One of the important features of commercial property is returns are generally high and more secure. Returns for property fluctuate considerably less than returns on shares.
• Low risk — There is less volatility in the values of commercial property than in shares — if you own the right property.
• Exposure to different sectors of the economy — Retail and industrial properties have a direct relationship to the general state of the economy. Retail property depends upon consumer spending.
• Tax benefits — Commercial properties provide generous tax benefits with substantial depreciation allowances. Some buildings also attract building allowances, where a portion of the structural cost can be offset against the assessable income.
• Investment control — As the owner of commercial property, you have a significant degree of control over your investment.
• Leverage — Just as with residential properties, it is possible to leverage your returns by borrowing up to 70% of the value of the commercial property.
• Adding value — Just as investors in residential property are able to add value by buying a run-down property and renovating or redeveloping it, there are opportunities in commercial property to add value. In particular, if you can increase the rental income from your property, this will directly reflect on the valuation of the property.

Ways you can add value to your commercial property investment include:

• Renovating
• Upgrading
• Subdividing or enlarging the block
• Improving the appearance of the property
• Obtaining permission for the redevelopment
• Renegotiating the lease
• Changing its use, for example, to residential

The negatives of commercial property:

Some of the disadvantages of investing in commercial properties include:

• Lack of liquidity — Selling a commercial property can take several months — often longer than it takes to sell a well-located residential property.
• Lack of pricing information — Compared to residential property, there is little pricing information available for investors in commercial property. It is, therefore, more difficult to know the value of your particular property.
• Scarcity of other information —There are very few information resources for people interested in commercial real estate. You will find some articles in the Australian Financial Review and in the reports produced by some of the larger commercial property agencies.
• Higher costs — The entry level to purchase a commercial property is usually higher than that for residential.

Links and Resources:

Michael Yardney

Brett Warren – National Director Metropole Property Strategists

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Some of our favourite quotes from the show:

“Who wouldn’t like to have a tenant who’d commit themselves for three, five, even ten years and pay all your costs for you?” – Michael Yardney

“For commercial property, if you understand what you’re doing and it’s vacant, you can actually renovate it or upgrade it or improve it so you can then lease it for a higher yield.” – Michael Yardney

“Schedule at least one hour this week to do something that increases how you value yourself.” – Michael Yardney

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