By Stephen McClatchie

Before we get too excited and make a break for that commercial property for sale down the street or in the city, let’s not be too hasty. Every upside has a downside – we’ll take a look now at how your commercial investment strategy looks from the other side of the fence. When we reviewed residential property, we discussed that there is the possibility of purchasing the right property in the right circumstances using only a small amount or NONE OF YOUR OWN MONEY. When it comes to commercial property – this is generally not possible. It’s simply a case of lenders not wanting to lend as much against the security.

Lenders will assess each loan on its individual merits. The more you want to borrow against the property, the higher the interest rates and fees you will be charged. If you have captured a tenant with a long lease and high rent – this will be viewed very favourably by the lender. In addition, lenders set interest rates differently for commercial property compared to residential property. The interest rate is often based on a ‘rate for risk’ scenario – if you are perceived as a higher risk you will be charged a higher interest rate.

Be sure you understand how the interest rate is calculated on your loan. Some lenders will link your interest rate to the bank bill rate which moves every 30 to 90 days.

 As per residential property, you need to understand the market dynamics of commercial property. However commercial property information can sometimes be a little more difficult to obtain. Generally commercial and retail properties are highly sought after and vacancy rates are quite low. But buy in an area that has poor pedestrian traffic and you may have trouble finding your next tenant. Alternatively, if you buy in a shopping strip and the local bank or supermarket closes down – this could drive a lot of potential businesses away from the area and you are left with a commercial building in an unattractive strip.

If you have decided to purchase a property to house your business, such as a warehouse and then you move or sell the business, you may be stuck with a property that is hard to lease. As an inducement to your prospective tenant you may need to offer a rent free period in order to rent the premise out and make it attractive to the new tenant moving in. However if it is a long term lease, and regular rental increases have been built into the tenancy contract – it’s still a solid overall investment.

The commercial property market is subject to economic events such as interest rate rises, poor economic conditions or poor economic outlook. If retailers think the outlook for their business does not look good they will be inclined not to re-sign their lease. You will need to research very closely the capital growth potential in your commercial property as it may not be as great as residential property. Of course this all comes down to the individual property itself.

About Stephen McClatchie….

Cons of Investing in Commercial Property

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Below is an exclusive video interview we conducted with Andrew Allan,  CEO of MyUSAProperty.  For our facebook fans, due to technical restrictions from Facebook on importing embedded vids, I will send a second post with the video!

In this video we ask Andrew about the investment opportunity in the USA:

To start your own USA property portfolio, go to:

http://www.keystosuccessclub.com/property/usa-property

About Mark Taylor….

The USA property market – The opportunity

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By Stephen McClatchie

There are many benefits that Commercial Real Estate can create within a property portfolio; the first of these is that higher rental yields can be achieved with commercial property over residential property at the current time. In fact, as a minimum the rent will increase with inflation every year and often it will increase at a rate higher than inflation. Essentially it’s up to you as to what you insert into your lease terms. You will need to be willing to negotiate over these terms and arrive at an agreement that suits both you and the prospective tenant. Tenants will EXPECT rental increases as part of the contract – this is not the case with residential property tenants.

Whilst a residential property lease generally last 6 to 12 months, commercial leases will be significantly longer. Standard commercial leases can be 3, 5 or even 10 years with the option to sign on for an additional 3, 5 or 10 year term. At the end of the first lease term you can review the rent up to the current market rental and increase it accordingly (most tenants will want to stay where they are as it is simply too costly to move).

If you purchase a commercial property which already has a secure tenant such as a government agency or bank, you are virtually guaranteed of many years with an excellent tenant. Although we all know nothing is for certain. However, here is a fantastic benefit when it comes to commercial real estate. Your tenant will pay most, if not all of your ongoing expenses such as council rates, water rates, a portion of your land tax and body corporate fees. All of these costs are included in the lease agreement.

Not only that, many commercial and retail leases often include a ‘make good’ clause. What this means is that at the end of the tenancy period the tenant must return the property to its original condition. That’s right, so you won’t be stuck with a hair dressing salon when your potential new tenants are likely to be restaurateurs. AND when your new tenant moves in THEY will pay for the cost of their fitout if they want to make any changes – so all onuses of paying the expense is on the tenant – not on you. At the end of the day everything is negotiable. You might want to pay some expenses in order to get a tenant to agree to a longer lease. From a cashflow perspective, things look great with commercial real estate. You simply negotiate the lease and cover the interest on your mortgage. Everything else is virtually up to the tenant. 

For most Real Estate investors, residential is the natural place to begin investing.

There are many benefits that Commercial Real Estate can create within a property portfolio; the first of these is that higher rental yields can be achieved with commercial property over residential property at the current time. In fact, as a minimum the rent will increase with inflation every year and often it will increase at a rate higher than inflation. Essentially it’s up to you as to what you insert into your lease terms. You will need to be willing to negotiate over these terms and arrive at an agreement that suits both you and the prospective tenant. Tenants will EXPECT rental increases as part of the contract – this is not the case with residential property tenants.

Whilst a residential property lease generally last 6 to 12 months, commercial leases will be significantly longer. Standard commercial leases can be 3, 5 or even 10 years with the option to sign on for an additional 3, 5 or 10 year term. At the end of the first lease term you can review the rent up to the current market rental and increase it accordingly (most tenants will want to stay where they are as it is simply too costly to move).

If you purchase a commercial property which already has a secure tenant such as a government agency or bank, you are virtually guaranteed of many years with an excellent tenant. Although we all know nothing is for certain. However, here is a fantastic benefit when it comes to commercial real estate. Your tenant will pay most, if not all of your ongoing expenses such as council rates, water rates, a portion of your land tax and body corporate fees. All of these costs are included in the lease agreement.

Not only that, many commercial and retail leases often include a ‘make good’ clause. What this means is that at the end of the tenancy period the tenant must return the property to its original condition. That’s right, so you won’t be stuck with a hair dressing salon when your potential new tenants are likely to be restaurateurs. AND when your new tenant moves in THEY will pay for the cost of their fitout if they want to make any changes – so all onuses of paying the expense is on the tenant – not on you. At the end of the day everything is negotiable. You might want to pay some expenses in order to get a tenant to agree to a longer lease. From a cashflow perspective, things look great with commercial real estate. You simply negotiate the lease and cover the interest on your mortgage. Everything else is virtually up to the tenant.

About Stephen McClatchie….

 Pros of Investing in Commercial Property

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By Stephen McClatchie

At times during the economic cycle there is pressure on rental yields especially during times of tightening rental markets. Rental yields may be as low as 2 or 3% and you may end up with a serious cashflow deficit. It may take some time (sometimes many years) for the rent to increase.

In some instances, where minimal equity is available the residential property is illiquid. This means that if you need cash fast, you cannot sell off a bedroom or two. A house or a unit may be slow to sell if the market is sluggish.

The turnover of tenants in your residential property may be higher than you desire 

About Stephen McClatchie….

 The Cons of Investing in Residential Property

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The USA property market has some other additional benefits compared to Australia.  One of these is the simplicity and low cost of transacting.  In Australia, we have some pretty brutal transaction costs, particular in reference to stamp duty.  Even legal fees can mount up.

In Australia up to 5% of the value of the property can be taken up with transaction fees; a big hit that you don’t get back.  This also applies when you sell; one of the reasons why refinancing has historically been a popular way of extracting capital growth, although since the tightening of bank lending policies this has become much harder, meaning alot of property investors can’t get their hands on the value of the money

The USA on the hand you could expect transaction costs to be minimal due to NO stamp duty and a simple legal process 

About Mark Taylor….

The USA property market – Low transaction costs

Technorati Tags: Investing in USA property, USA Property Course, USA Property transaction costs

The USA property market represents a unique opportunity due to a combination of factors:

• The collapsing of the value of the USA property market and a large amount of foreclosures resulting in very low capital requirements.  Property in the range of USD30,000 to USD100,000.
• Properties can now be bought significantly below replacement value
• Exceptionally low entry transaction costs (no stamp duty!)
• Rental demand and rate remaining strong leading to high yields of  20%+
• Best AUD/USD exchange rates since the AUD floated in 1983
• Low interest rates and the ability to secure US loans as an overseas investor further improve cash on cash returns

About Mark Taylor….

The USA property market – The opportunity

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By Chris Gray

The cost of buying and selling is too high. A commonly-made mistake by many property owners is getting excited about immediate profits and selling too hastily. A majority of these people eventually regret selling, rather than waiting it out for its worth to increase in value. It is far more beneficial when buying property to consider the possible growth in the long term.

Selling property incurs many unforeseen costs and taxes. Chances are, if you’re selling, you will be using the money to buy another property anyway. If you’ve bought the right investment in the first place, it doesn’t make much sense to sell.

I’ll put this into perspective: if you bought a property for $500k which eventually rose to $1m, what would occur if you sold it to buy another one?

With this property in mind, real estate agents fees would be about 2% which would equal $20,000. Then there are re-buying fees, which would equal $50,000 and then there’s capital gains tax too. Yes, having more debt is risky to start with, but as soon as the properties grow in value you can release equity. This gives you a buffer zone to guard against interest rate rises and other expenses and helps you grow your wealth.

Buy property, don’t sell: How to grow wealth

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By Stephen McClatchie

Capital gains are achieved when the value of your property increases over time compared to the original purchase price plus costs. If you were a smart property investor, one of the things that you would be doing is checking out the growth of property in your city of choice, then focus on buying in those areas that you believe will be rising faster than the national or city average. You will be looking to maximise your capital growth in the shortest possible timeframe. But these properties may not provide the highest yield – it can be a catch 22 of sorts. That’s why you need to have a strategy in place.

The return on your investment incorporates the capital growth along with the income derived from the rent. Generally – but not always if you go for a property with higher rent you are likely to get lower capital growth out of the property. It all depends what you will be looking for from your property. Do you have a couple of negatively geared properties? Would a property providing great cash-flow be the best next step? As you can see, knowing the numbers is an essential step to SMART investing, particularly as your cash flow and equity increases. They will tell you WHEN you will want to invest, and in WHAT. And as your potential for investing increases, you will start expanding your possibilities. In such cases, knowing the numbers becomes ever more essential. 

About Stephen McClatchie….

Capital Growth Strategy

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Thought I would share my USA property journey with you…  It ITHere are certainly a few nuances to buying in the USA!

So first of all the buy strategy:

1) 1st property; Take advantage of the ”1st home” loan (4.5%) for a property in Florida.  My logic is that we can get some capital growth potential whilst taking advantage of the low interest rates which should still ensure positive cash flow.  LVR 60%.  Looking for something in the $100k+range which should get us a solid house with a good standard of tenants

2) 2nd/3rd property in Memphis.  Minimum property value of $40k + which means properties > 1950s and in good condition, fully renovated. Positive cashflow properties on P&I loans which will mean pay off in 3 to 5 years depending if we can top up repayments.

About Mark Taylor….

My USA Property Journey – Buy Strategy

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The new issue of Success Insight is now out.

 http://www.keystosuccessclub.com/newsletter/2010/December2010

Let’s find out what’s in store in the Property section of Success Insight, December edition…

• The secrets of successful investment in “Off the Plan property” by Munro Cohen, MD of Whiterock Capital Partners
• Free Info pack outlining how you can successfully invest in the
  US property market as well as the opportunity to speak one on one with someone who has recently bought 8 properties in the US
• “How to avoid the 5 most common risks when buying real estate”  from our newest expert panel member, Michael Poynter from MCP Group
• Australian Property Market Forecast 2011 from our expert panel

http://www.keystosuccessclub.com/newsletter/2010/December2010

Enjoy!

About Mark Taylor….

Success Insight December 2010 is now out!

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