When most people think of property investing, residential is still by far the first thing that comes to mind. However, this isn’t necessarily the best wealth creation and cash flow strategy, Rethink Investing founders Scott and Mina O’Neill write.
Seasoned investors have long been privy to the sheer benefits commercial property has to offer. In my experience helping over 1,800 clients purchase well over $1 billion in Australian real estate, more and more clients are only interested in commercial investing. Let’s take a look at the five key reasons why:
1) The returns – In short, commercial property currently offers the highest cash flow you will find in Australian real estate. We’re currently seeing 6-9 per cent net yields on the commercial properties we buy for our clients. However, when you look at the returns on your initial cash investment, the numbers are even better. We’re talking 25% to 40% cash-on-cash returns – something we’ve not seen since, 2012. NB: Cash-on-cash returns are how investors measure the success of their investments. In short, the super high rental yields found in commercial property mixed with leverage and growth on the assets produce returns that just cannot be matched elsewhere.
2) Protecting your wealth – For individuals and fund managers, protecting their wealth is as important as generating a superior return. When a client comes to me with any sum of money to invest, the last thing they want to think about is taking an unnecessary risk that could lose them money. And this is where commercial property really comes into its own. Unlike shares, cryptocurrency or other volatile asset classes, commercial property is a physical object, with a notable tenant running a reputable business. The extra security in commercial property is actually the tenant itself and that’s why it’s imperative to get a strong one. A secure tenant who’s been at the premises for a lengthy amount of time and/or who’s built up a certain amount of goodwill with a returning client base is priceless.
3) Neutralising the risks – Not all commercial asset classes are created equal. For instance, office space in Melbourne’s CBD would not be viewed as secure as a Medical Centre in the suburbs of Melbourne. Luckily, COVID-19 has shined a light on exactly which asset types are performing the best and this allows us to maneuver around the risks in the economy (like CBD office space), and target the opportunities, (like freehold medical assets). Knowing the rules and operating out of the dark, in conjunction with a positively geared strategy, means even more security for investors, and more reasons for them to invest in the lucrative world of commercial property.
4) Reap the rewards – When you get it right a high-quality asset with a strong, secure tenant – it’s likely this recipe will far exceed anything you would have known in the residential world. And savvy investors understand this; that your reward will be a secure, long term investment that produces a high-cash-flow and after you’ve paid your loan in full (some high-quality commercial assets can be paid off in as little as ten years time), a passive income straight into your pocket.
5) Commercial is the new residential – The main reason why investors are turning to commercial over residential is that yields are incredibly poor in residential property, especially for the higher-value properties. If you purchase a $5 million property in a suburb like Double Bay, Sydney, you’d be lucky to secure rent over $1,800 per week. This represents a 1.87 per cent gross yield! Out of that you then have to pay rates, water charges, maintenance, possibly strata, land tax, rental management and there might also be potential vacancies. In summary, the cash flow return is not good enough to look at twice. A $5 million commercial property, on the other hand, would return you a 7 per cent net yield (or a $6,730.77 per week net income). There are no maintenance, strata, rental management, council rates or any other costs because the tenant pays them for you.
If you’re looking at ramping up your investment strategy, it’d pay to include commercial in your portfolio. The numbers speak for themselves. If done right, investing in a high-quality commercial asset can mean taking advantage of all of the pros without the cons. This can be an absolute game-changer when it comes to wealth creation.
