Commercial or Resi: A question for Davo

[Paul34]

Hi Guys

I'm just starting to look at getting back into buying after a long absence. In 2005 I made the shift to commercial which has been successful. However, as I'm your average investor I was buying at the low end $500k to 1mil. The tenancies have been good with small rises in rent. So no complaints.

However, I do wonder if I had invested this in resi say in Auckland would I have been better off. I did well in resi in 2002-2005 and still have all my holds, which was the equity for my commercial purchases.

My understanding is that some of you also made the shift to commercial, some selling resi to do so. My question, as I look forward, 'do you think it is best to stay with commercial or go back to resi', given I'm buying now and this stage in the cycle and amounts to invest. While the commercial is great at the higher levels, my budget for commercial, and experience to date would indicate that resi may be better.

Interested in others thoughts, especially those who have had a similar journey.

Regards
Paul

[Davo36]

Hi Paul, just saw your question.

I prefer commercial because there's less hassles with tenants, the lease agreement (ADLSI) is generally more favourable to landlords than tenants. And also the outgoings are paid by the tenants, so for instance, if the rates go up (as they always do) then the tenant pays, not the landlord. I'm sure you know all this.

So if I was buying now, I'd be buying commercial.

Having said that, I have 3 residentials (apartments in my building) and what I like about that is the fact that you can raise the rent every 6 months. When with commercial, as you will know, it's every 2-3 years. Which is a "Long time between drinks"

I think the cycle is too high just now for buying. But I may well be wrong. What makes you think it's a good time? Perhaps I need to get off my arse and get out there looking

I think over the last say 7 years, there has been a lot of capital growth in both property sectors. The drop in interest rates and demand from overseas (as well as locally) means yields have firmed a lot. Will be interesting to see what happens if interest rates go up.

[Paul34]

Thanks Davo- Much appreciated.

IR will have a large impact on the commercial market. My issue with Comm is that good stock is hard to find and unless it is good, and exceptionally good at that, it is simply not worth the risk IMO.

I agree with your thoughts and the mix use is certainly an attractive option. Aside from that I think I will go back to resi in the next cycle. My appetite for risk having decreased.

[Beano]

Thanks Davo- Much appreciated.

IR will have a large impact on the commercial market. My issue with Comm is that good stock is hard to find and unless it is good, and exceptionally good at that, it is simply not worth the risk IMO.

I agree with your thoughts and the mix use is certainly an attractive option. Aside from that I think I will go back to resi in the next cycle. My appetite for risk having decreased.

Is your commercial in auckland ?
What do you consider good stock?
Commercial can have less risk than residential!

[JBM]

Problem I've found having yet to purchase a commercial is getting a higher yield with a Good NBS

As many two story early I like need major earthquake work >>>so nil insurance... do you take the risk ? sub 500k bracket 10%+ nett yeild

[Davo36]

Problem I've found having yet to purchase a commercial is getting a higher yield with a Good NBS

As many two story early I like need major earthquake work >>>so nil insurance... do you take the risk ? sub 500k bracket 10%+ nett yeild

JBM, what city?

Auckland might be OK but I'd stay away from Wellington or Christchurch!

[JBM]

No deep deep south Invercargill

[Davo36]

No deep deep south Invercargill

I don't think I know enough to comment really.

But I will anyway

There doesn't seem to be too many earthquakes in Invercargill (http://www.teara.govt.nz/en/map/4416...ground-shaking), but it's the perceived risk that is important, and also what the government has decided needs to be done in that area. What I mean is how much strengthening work has to be done. It's a lot in places like Wellington, but not nearly as much in Auckland for instance.

I imagine with all of these smaller cities though, that growth would be very slow. Bob Jones, in usual candor, says these sorts of investments are for 'hobbyists'.

[Nick G]

Speak with an insurance broker. They are usually very up with the play on what local councils and main insurers are requiring and will know the trends in other cities that will likely be applicable there in the future.

General rule - red tape/costs/rules tend to spread and increase.