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Residential market downturns can create paranoia among investors against purchasing new investments. However it might be a good idea to diversify your property portfolio by expanding into the commercial investment space, one property expert has said.
Many investors are currently considering other asset classes – including commercial property investment – during residential market downturns, but are unsure whether commercial markets are a good move while house prices are heading south, founder and director of Rethink Investing, Scott O'Neill, said on the Smart Property Investment Show.
“This is a common question I get with my clients almost daily,” Mr O’Neill said.
The Sydney-based property investor said that recent residential market downturns have led some investors to believe that guaranteed growth in the residential market may not be an inevitability or eternality.
“So naturally you look for alternatives,” Mr O’Neill said.
“The share market was going up and down at the time, and the yields people were buying into for so long into Sydney and Melbourne were at record lows.”
He continued: “So if they’ve made equity, even if it’s coming down, they’re going to naturally look to use that equity to create more cash flow”.
The Sydney-based buyer’s agent reported that commercial property investment is becoming “extremely popular” in the current property market climate.
“Particularly the sub-million dollar range, and even when you go up into the twos and threes, if there’s a good lease in it, national tenant, those things, a good quality property doesn’t last more than 30 days on the market,” Mr O’Neill said.
“You compare that to most residential markets at the moment [and] it’s twice as fast.”
According to Mr O’Neill, sub-million-dollar commercial property investments can include “large warehouses” or “multiple shops”.
“You can [also] get medical for that price [and] you’re normally working with three to five-year leases,” he said.
“We personally only buy stuff with seven per cent net returns or better. So, the tenant pays all the outgoing. The risers are built into the lease of roundabout three to four per cent per annum.”
According to Mr O’Neill, these sorts of commercial market conditions can produce equity of “three to four per cent growth” on a property investment annually, which the buyer’s agent suggested is “lovely at the moment”.
“If you can make good cash flow and some growth just through rent rises, you’re looking pretty good. So, a lot of people are turning to it,” he said.
“I personally love property. I plan to buy around $2 million myself in the next 12 months in commercial, I’m not buying any residential. I’ve got enough. The cashflow, the maintenance, it’s just not exactly what I need at this stage in my personal journey.
“But residential was the reason I got here in the first place. You can never forget that side, but diversify into it later is a good option for cashflow.”
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.