Commercial property investing by Scott and Mina O’Neill

As with any investment, there is a risk of tracking the return on a commercial property investment.

But through experience, many of these commercial risks can be blown out of proportion, mostly exaggerated by those with little to no experience in the commercial asset class, said Scott and Mina O’Neill, founders of Rethink Investing, Australia’s number one commercial buying agency Real estate investors.

Scott and Mina retired at age 28 and are living on passive income from their personal real estate portfolio of $ 15.5 million ($ 20 million). You have helped over 1,800 clients purchase well over $ 773 million ($ 1 billion) in Australian real estate.

They cited three common reasons why people avoid commercial property purchases compared to residential buildings and why they are wrong.

Long vacancies are inevitable

“This is probably the number one reason people don’t invest in commercial real estate and one of the biggest myths we hear,” Scott O’Neill told CEO Magazine. “The truth is that job vacancies can be long for poor quality assets, but are generally shorter for high quality, well located properties. Hence, investors need to carefully weigh all relevant factors such as the quality of the building, the location, the rental level and the state of the general market in the area. Proper due diligence ensures that the property does not stay empty for long. “

Properties in areas of high demand and low supply are always bought by tenants, he said. Likewise a commercial property in a bad location with the building in a bad condition, then of course the vacancy times will be longer.

“It’s about buying good quality real estate with high relativity potential,” said Scott.

Mina O’Neill said that many rental agreements have a minimum notice period in the contract.

“These state that the tenant must notify the landlord between 3 and 12 months before leaving the property. If you get notified by your tenant after six months, you have six months of rent while looking for a new tenant, ”she said. “In my experience, tenants often give more than a year in advance because their company needs more time to plan and execute their move. As you can see, commercial leasing is very different from residential property, where tenants can only pick up and leave with one day’s notice. “

Low capital growth

“This couldn’t be further from the truth,” said Mina. “Over a period of 10 years we have found double or even triple the value of commercial real estate. The question is, how can you improve your chances of buying a property that is growing better than others? “

The O’Neills said that like in the residential real estate market, there are many factors that can contribute to capital growth, including:

  • Good location
  • Scarcity factor
  • Infrastructure improvements
  • growth of population
  • Tightening of vacancy rates
  • Strategic renovation potential
  • Relaxation of lending guidelines
  • Gentrification
  • Falling interest rates
  • Falling unemployment

“Now guess what is causing commercial property growth. Everything above! Because as in the residential sector, the commercial market is also reacting to these economic improvements. The only big difference is that commercial properties have more of their growth related to their rental income. An increase or improvement in the quality of the lease therefore has a greater overall impact on the value of the commercial asset. And just like any investment, if you choose the property carefully, you will see growth, ”said Scott O’Neill, who co-authored Rethink Property Investing with Mina.

Less value creation opportunities

“It is entirely possible to add lasting value to a commercial property if you know what to do. Unlike residential real estate, which is all about improving the quality of life in a property, in the commercial realm, the numbers speak the tide, ”said Scott.

“Since much of a commercial property’s value is tied to its rental income, finding sublet properties can be the route to simple equity gains.

For example, a 500-square-foot property rented for $ 77,315 (A $ 100,000) per year is valued at $ 155 per square meter (A $ 200 per square meter). If the market rent is $ 186 per square meter (A $ 240 / square meter), the property is 20 percent sublet. In this case, if you have a plan and the means to bring the rent back to market levels, your income will be 20 percent higher. And that could add 20 percent to the value of the commercial property, assuming you’ve bought it with the right return, of course, from day one. “

Another added value is the title or division of the layers, Mina said.

“This adds value as you can sell or rent smaller sections at a higher price per square meter.

“For example, a 1,000-square-foot warehouse could be rented for $ 77 per square meter ($ 100 per square meter). However, five 200-square-meter warehouses could potentially be rented for $ 101 per square meter (A $ 130 per square meter). Essentially, you are reversing the “economies of scale” in your favor and your value could increase by 30 percent due to the higher rent per square meter.

“There are other added value as well, including renovation, lease renewals, rededication, and development. Just like with residential real estate, there are many ways to add value. You just need to be aware of the basic principles that are at play.

“When you buy a good quality commercial asset, do your due diligence, and have a solid, positive strategy, your commercial investment will far exceed anything you would have known in the residential world. Your reward will be a safe, long-term investment that brings high cash flow and residual income straight into your pocket after you pay off your loan in full, ”she added.