You can only plan so much before analysis paralysis sets in. Time in the market is essential for capital growth, so the time has come to get moving and actually start building that portfolio you’ve been dreaming about, whether it’s composed of residential assets or commercial property.
With your strategy in hand, it’s time to go shopping. The good thing about investing today is that you don’t need to pound the pavements for the perfect property – you can browse Australia-wide property listings from the comfort of your own home. Websites like RealEstate.com.au and Domain for comprehensive listings of dwellings on the market all over the country. You can sort them based on how you’ve set your criteria, whether that’s price point or location. You may also want to engage a buyer’s agent who specialises in working with investors to assist you in finding the right properties for the right price, in the right place. Many people think that owning an investment property is only the domain of the wealthy, and that much of your personal time and effort needs to be plowed into the pursuit, but this doesn’t have to be the case, especially when there are experts out there who can help you. “I like to choose the most hands-off strategy: buy new from a reputable builder and be guided by a much more experienced investor. Then choose service providers with care, and let them get on with their job. Don’t try to self-manage your investment property, particularly when you are already paying someone else to do it,” says Rocket Property CEO Ian Hosking Richards.
When you’re buying a property for the purpose of renting it out, it’s also important to consider what your desired tenant would want. “I spend a lot of time building up a profile of my target tenant: where they want to live, what type of property, what level of specification they will pay top dollar for,” Hosking Richards adds. “Once you know what they want, you then go out and purchase a property that will attract them; this helps to minimise vacancies.”
When it comes to putting together a property portfolio, many investors stick to residential property. It’s considered the safe, comfortable and less intimidating choice, and the risks are easier to grasp than those of commercial investment, despite its cash flow potential. But there’s more and more reason to get into commercial investment. There has been a misconception that commercial investments are not good for long-term gains; however, Rethink Investing’s director, Scott O’Neill – who has seen tremendous success with this type of investment – says this is not the case at all.
Many investors fail to understand the overall wealth benefits of this asset class – namely, the income equity growth side of things over an extended period of time. High-yielding commercial property has the ability to pay itself off in 10–12 years, as well as also benefiting from capital growth,” he says.
In general, the value of a commercial property is generated from three main areas: rental income, the interest rate environment and the strength of the lease. Once you understand these basic areas, you will see capital growth as a major wealth creator for commercial investors.”
Commercial properties typically attract tenants who are looking for extended leases, as they would rather not uproot their businesses. Moreover, as with residential property, location is key to maintaining a commercial property over the long term. So investors should look out not just for yield but also for where the tenants will be coming from. A strong location means you will worry less about a tenant leaving, as you’ll easily be able to find the next one.
Cities are often ideal locations for commercial investment, as their larger populations and the convenience is that they keep vacancies low, while landlords can earn yields of around 7–8%.
Nonetheless, regional investments can work to your advantage, as long as you’re in the right area. “You’ve just got to be in the most convenient spot you know. If you’re going to go into a retail format, maybe you want a corner block that always has a real estate tenant in there, for instance,” O’Neill advises.
“Commercial interest rates typically start from 3.6%, depending on the lender and whether they are fixed or variable. In our property example (see table below) we assumed 5% interest-only rates for the numbers, considering we are using the income from theasset to pay it down as soon as possible,” explains O’Neill.
“In Year 10, this property would only have $89,438 of debt left and a value of approximately $1.1m. Incredibly, at the end of Year 11 the property will be completely debt-free, producing an income of $80,869 and growing each year after that.” This one property would do more for many investors than owning half a dozen quality residential properties.
“As with residential property, finding the right commercial property is the key,” O’Neill adds. “There is much more due diligence required compared with residential properties, but when you get it right, the returns can be far greater.”
