Is Commercial Investing now more attractive than Residential property investing?

[donna]

Hi All,

I know the grass is always greener adage but is Commercial property investing now more attractive than the traditional buy and hold residential investing? I know there will always be deals out there but with all the law changes etc maybe a switch to commercial is the way to go. Less Gov't focus on this sector and the variable costs are just passed onto the leasee - all very transparent.

What do you all think? I know the single tenancy commercial properties are higher risk but what about multi tenancy so it's unlikely you're stuck without some rent coming in?

cheers,

Donna

[Nick G]

The commercial risk profile hasn't changed:

Higher buy in
Higher vacancy risk
Higher interest rates
Insurance risks

Most commercial investors swear by it however.

[Davo36]

Sigh, the returns in residential are so low everyone is talking about commercial.

Well the returns are pretty low now too. Which means they are pricey to buy.

Shares pricey too.

It's a low return world!

[Don't believe the Hype]

It's a low return world!

I’m not sure this is the case. I think the easy returns are not there anymore as the market is crowded but with some work the returns are bigger. I’m still achieving far greater than 10% p.a. on every dollar invested at the moment.

[learner]

Hi Donna

I have mostly commercial properties, but I do have a few residentials (5), and what I have found is this:

1. In residential, even holding out for better tenants, I find that the vacancy periods are relatively short. By decreasing rents a little, a good tenant can still be found. In commercial, the vacancy periods can be long - I currently have one which has been empty for nearly two years. There has been no interest - the tenants are not there. Every one needs a house to live in, but not many people need to run a business, so the demand is a lot less. You therefore need to be prepared for a lengthy period of no income, but still have outgoings to be paid (insurance, rates, interest etc).

2. In commercial, there is a need to be wary of seismic strengthening of buildings. I've just spent about $250,000 on seismic strengthening to 100% of NBS. This was voluntary, as there is no need for it at this stage. There was no guarantee that the building would be leased at the end of this. Fortunately, it was leased quickly, but at no higher rental than before the strengthening. I could have spent the money, and have had no income, so it can be risky.

3. The tenants do pay all the outgoings in a commercial lease, but there could be quite hefty other costs too. I've paid nearly $15,000 in new carpets etc in the above-mentioned vacant property (an office) since the tenant left, and the property has been empty for nearly 2 years. Other costs could include contributions to fit outs for new tenants, or refurbishment after the old tenant leaves. These depend on the type of properties. I've found offices cost more than retail shops, and warehouses cost the least.

4. In residential, the letting agent usually charges 1 week's rent+GST. In commercial, the leasing agent charges 2 months' rent + GST, and also the new tenant may ask for a rent-free period of a month or two in order to do a fit out. This means that if a new tenant moves in, it could well be at least 3 or 4 months (or more) before any rent is received - so, in the first year, you are not getting any income for at least 3 or 4 months.

5. In commercial property, the valuation of the property is strongly related to its the income. In the above-mentioned empty property, its valuation was about $1 million when rented. It's now worth a lot, lot less! Related to this, is that if the empty property had a mortgage on it, the bank would want its money back pretty smartly! This is therefore a risk for the borrower - the bank would want its money back sooner than for a residential investor when the property is untenanted. An empty house can still maintain its value, or even increase!

These are some of the things to consider when contemplating a move to commercial.

[eri]

^

thanks

educational

[Lovethiscountry]

I prefer factories as they are easier to maintain than residentials. Started with a stand alone Auckland factory with four separate tenants to reduce the risk of no cash flow.

Important to buy a versatile buildings where it will be easy to get a tenant if one leaves. As Learner mentioned a lengthy period of no income is undesirable.

From time to time small units come on the local market with values below 500k.

Currently have four residentials but not looking to buy more and considering replacing these with another tenanted factory.

[Beano]

I prefer factories as they are easier to maintain than residentials. Started with a stand alone Auckland factory with four separate tenants to reduce the risk of no cash flow.

Important to buy a versatile buildings where it will be easy to get a tenant if one leaves. As Learner mentioned a lengthy period of no income is undesirable.

From time to time small units come on the local market with values below 500k.

Currently have four residentials but not looking to buy more and considering replacing these with another tenanted factory.

What area in Auckland are your commercial buildings ?

[Lovethiscountry]

Glenfield, Albany, Henderson, Penrose (2), Onehunga, Otahuhu (3), St John, East Tamaki.

[Beano]

Glenfield, Albany, Henderson, Penrose (2), Onehunga, Otahuhu (3), St John, East Tamaki.

Are any sprinklered ?
Keen to know how often they need to be removed and tested ?

[Lovethiscountry]

Are any sprinklered ?
Keen to know how often they need to be removed and tested ?

None have sprinklers and only one has a WOF requirement

[donna]

Thanks for your replies. Would it be fair to say most residential investors wouldn't have deep enough pockets for commercial investing given the initial investment requirements and reality of lengthy vacant periods?

cheers,

Donna

[Davo36]

None have sprinklers and only one has a WOF requirement

OMG I am so over WOF stuff. I have a compliance schedule as long as my arm in my place.

Just having an argument now, quote to replace 2 emergency lights: $490, invoice sent $735. For 2 f**king lights. Spent $5k on door controllers recently too.

Hard to find decent industrial property with any sort of return though. Seems to me the owner occupiers pay more for them than investors?

[Scouser]

Hard to find decent industrial property with any sort of return though. Seems to me the owner occupiers pay more for them than investors?

Got similar feedback anecdotally - End of tenancy recently - while looking for new tenants was asked if would sell - mentioned quite a high price and the real estate guys seemed to think that was achievable. Very little vacant stuff (of the type/location of property I had) and the sums looked better then leasing for owner operators. Multiple companies mentioned owner operators.

In terms of the original question I think it's a piece of string question as a lot depends on what one is looking for in terms of risk, yield, capital gain, willingness to deal with crap tenants (residential) etc. I wish I did commercial years ago as only been at it a couple of years and no regrets so far. Much prefer to residential even if capital gain is less

[Bluecoat]

https://www.landlords.co.nz/article/976513789/is-commercial-the-answer?utm_source=LL&utm_medium=email&utm_campaign=Today%27s+news%3A+Time+to+ease+LVRs&fbclid=IwAR3YojUtsuo0UESsb48pjGQS3N7tzP8MOf0J6zPsmuAdET0lgFx7tBW5KSU

Dreaming allright...