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Property investing‘s best-kept secret

By Scott O'Neill 05 March 2021 | 1 minute read

One word: commercial.

Property investing‘s best-kept secret

Sophisticated investors have long been privy to the sheer benefits of investing in commercial property. Here’s what they understand and what we’d like to share so that you, too, can reap the rewards.

You can have your high-yield AND your capital growth, too

There’s a myth out there that commercial property, in general, won’t grow as fast in value as residential. One thing we can say with absolute confidence after many years of purchasing over $1 billion worth of commercial property is, this couldn't be further from the truth. Some of the fastest and largest capital gains we’ve ever seen in property have all been from commercial real-estate. The Rethink Investing strategy combines a good mix of high yields and lower risk. These are usually undervalued commercial properties in high growth markets, in both regional and capital cities. When you get this combination right, you will be giving yourself the best chance of strong capital growth as the markets will tighten under you.  

25-40% cash-on-cash returns

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One of the many great things commercial property has to offer is that you can maximise your serviceability, stretch your lending and scale. For example, if you have $500,000 cash, you can get a 70% loan from the bank and lend this up into a property worth approximately $1.65 million. This leverage benefit helps you purchase a higher quality asset with less money. This property at a 7% yield would produce you an income of $115,500 per annum after outgoings. On your original deposit and with some modest capital growth, this can result in 25-40% cash-on-cash returns. See the income and return on equity below:

Commercial Purchase Price

 $1,650,000.00 

Deposit (assuming 30%)

 $495,000.00 

Stamp Duty

 $80,000.00 

Building Report*

 $800.00 

Valuation*

 $3,500.00 

Solicitor Costs* 

 $4,000.00 

MISC*

 $5,000.00 

Total

 $588,300.00 

 

 

Purchase Price + Purchasing Costs

 $1,743,300.00 

Net Annual Cash flow Return 

 $115,500.00 

Net Yield on property

7.00%

Net Yield on Property Accounting
for the Purchasing Costs

6.63%

 

Now - Let's Look at the Cash on Cash Return

 

Deposit Needed = 30% + costs

 $588,300.00 

Cost of loan (Assume 3% pa on 70% debt)

 $34,650.00 

Return on Equity (pure cash flow return) 

13.74%

 

 

Return on Equity with a 5% Capital Growth Rate

27.77%

Return on Equity with a 7% Capital Growth Rate

33.38%

Return on Equity with a 10% Capital Growth Rate

41.79%

*approximate numbers

 

With the right loan terms, interest rates and lender, the opportunity to go large is more likely than in residential lending. 

High-quality commercial has the ability to pay itself off in 10-12 years

You heard correctly. Take the example of a $700K purchase with a 70% debt, an initial deposit of $235K, a 5% loan rate and an 8% yield. After ten years you would have paid the property off and the passive income of $65K (increasing each year with a 1.5% rent increase) would start making its way directly to your pockets. This calculator on our website shows the power of growth and reducing debt on a commercial property relevant to the above: https://www.rethinkinvesting.com.au/property-investment/calculator/

You can find yields between 6 – 9%

The best way to fast track your passive income and to plan for retirement (the true reason we're all really investing in property) is by purchasing only the highest cash-flow properties and these are currently in the commercial sector. Always remember commercial properties are calculated from a net income basis compared with residential where it is a gross income guide. 

Commercial puts more money in your pocket

It is standard for commercial tenants to pay the majority of outgoings. These might typically include: council rates, water rates, land tax, insurance, strata levies and property management fees. This is a huge advantage of commercial as with residential these can all add up and eat into your profits, especially if you have more that one residential property. Furthermore, most commercial property contracts have annual rent increases built in which are fixed, often of around 3-4%, or linked to CPI.

Lending is easier

No, this is not a typo. For most investors, securing a commercial loan is proving to be easier compared with securing residential loans in the current lending environment. This is because many of the APRA enforced restrictions don't apply to commercial finance.

Scott and Mina O’Neill are co-authors of Rethink Property Investing (Wiley $29.95) and founders of Rethink Investing, Australia’s number one buyer’s agency for commercial property investors. After retiring at the age of 28, they now live off the passive income generated by their personal $20 million property portfolio and have helped over 1,800 clients purchase around well over $1 billion in Australian real estate. Find out how to do the same at www.rethinkinvesting.com

About the author

Scott O'Neill

Scott O'Neill

Scott O’Neill is a professional property investor with a current portfolio of 32 properties worth over $20 million, and the Director of Rethink Investing. Rethink Investing is a BRW Fast 100 company (2017 & 2018) and Australia’s number one buyer’s agency for commercial property investors. They also help clients find high returning residential properties with the same expert due-diligence process. Rethink Investing has helped their clients purchase over half a billion dollars of real-estate to... Read more

Property investing‘s best-kept secret
Property investing‘s best-kept secret
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