Both commercial and residential property have a place in a wealth creation portfolio. Residential is popular for high-income earners eager to use negative gearing to reduce their tax bill and utilise this higher growth asset to generate equity for more acquisitions or manufacture gains via renovation or development. Buyers can borrow to higher ‘loan to value’ ratios which is also helpful when deposit capacity is low. However, at a gross yield of around 3% it usually takes between 8 and 12 years before the investment becomes cashflow positive, when rental income starts to exceed the borrowing and direct property costs (depending on interest rates )
Commercial property can be purchased on a cashflow positive basis, and if the investor buys it through a tax-effective structure such as a Self-Managed Super Fund or a Family Trust, it can super-charge their wealth creation journey*
Wealth creation through property is all about adding quality properties to an existing portfolio as quickly as affordability, prudence and opportunity allows. Commercial property enhances affordability and may simultaneously reduce portfolio risk. It can help investors build a larger property portfolio quicker. In other words, it can supercharge your wealth creation journey.
In this note we offer three real life case studies at different price points for your consideration:
Case Study (Medium Price Point circa $3m):
It is no wonder that industrial properties are such popular investments. They tend to be versatile buildings suitable for a multitude of uses, and if freestanding, are often on comparatively large blocks of land. This offers investors an opportunity for good rental income as well as future strong capital gains, particularly when the industrial area matures and rezones. This is a case study of such an opportunity.
Our client was looking to invest up to $4 million for an industrial site with future development opportunity in a strategic location within a capital city. We assisted them to identify and purchase a site in Osbourne Park, a gentrifying industrial suburb only 7km from the Perth CBD, which lies midway between the City and the prestigious Scarborough Beach suburb.
The Stirling City Council intends for the area to eventually become high density residential and has drafted plans that incrementally demarcate portions of Osbourne Park for rezoning and redevelopment. In this case the intent is to encourage existing warehouses to become retail/ artisan hubs, and this site is ideal for subdivision into 5 boutique warehouse/ shop units once the lease expires four years after acquisition.
The purchase price was negotiated down to slightly less than $3 million on an initial yield of 5.7%, which with the 35% equity invested, ensures a positive cashflow. The intention is to put surplus rent into a redraw account which will reduce the cost of debt, enhance cashflow and ensure funds are available for redevelopment in 4 years, at which time we anticipate the refurbished units will deliver rent of at least $240,000 against the $1 million original investment. This would provide a very strong yield in addition to substantial capital growth from rental growth and redevelopment.
Case Study (Low Price Point sub $1m):
Our client was looking to purchase their first investment property. Their goal was to enhance their income whilst retaining the prospects of capital growth. Most others in a similar position would be drawn to a high-yielding residential investment, and there is nothing inherently wrong with this, but they had the courage to opt for a commercial investment.
We identified a well-designed, strata unit, only 1 of 4, in a complex in Bowen Hills, a city-fringe suburb of Brisbane ( 6km), and again a gentrifying industrial pocket rapidly converting to retail and high density residential.
The unit was presented for offers between $950,000 to $1 million and after negotiations our offer of $950,000 was accepted. This was $70,000 below our in-house assessment of value and deemed a reasonable price on a 5.6% yield. It is standard practice in 1Group to implement a 25-point,
comprehensive due diligence process for commercial investments, and during this process we discovered the lease provided for long-term tenant incentives and used this to renegotiate the price down to $778,000, enhancing the yield to 7.1%. Moreover, when the incentives expire in 3.5 years, rent will increase to fair market of at least $80,000 net p.a.
This means that our clients will be able to purchase their next investment in only 4 years after their first, utilizing the strong surplus cashflow and capital gain to secure a higher value second investment property. This would be harder to achieve with a residential property only strategy which would necessarily be producing a much lower yield, not to mention all the associated taxes and direct property costs.
By taking the road less travelled they are super-charging their wealth creation journey, and this will make all the difference to their quality of life and family prosperity.
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* please see independent advice on the best structure for you
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