Commercial Property Dangers

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I’ve actually been a massive advocate and continue to be an advocate of having commercial property in your real estate portfolio.

When you consider commercial property it play such an important part, especially with regards to cash flows and even capital growth to some extent from a more predictable sense of rental increases and things like that. But how about we use today’s session to basically go play Devil’s Advocate and say what are the dangers of commercial property so you can look at it from that angle not to scare you off but for you to start to learn more and be present around what the contour what the dangers are, right.

So with regards to commercial property, let’s go through some of those things that can sometimes hold people back one example, they can see so you might have someone that can really easily come into your residential property roof above their head and basically go. ”Yeah, I’m here to live, like, this is my home – need a roof above my head, somewhere to sleep” – fairly common right? Now in the commercial front not everyone might need that medical center. Not everyone might need that warehouse not everyone might need that, you know retail shop – businesses are different, their requirements are different and sure in the residential that’s different as well house, unit, townhouse. But, from their perspective in commercial property, what you’re really doing is you’re closing it down to a less amount of people.

Now in Australia another thing as well is there’s a one trillion dollar cap on commercial property, over all values was close to seven trillion on residential property. So again that reduces the size and the pool as well when you consider in that direction. The other part is Lease Incentives, you could go into a property, buy commercial looks great on the rental yield, but then all of a sudden there’s a small short print clause in the lease that says one year rent-free was provided. Now, imagine what the tenants expectations are. If they have to re sign a lease. They go into a thinking. ”Oh well, hey landlord, the other person provided me a year free and that’s why it’s okay to pay this net yield of that rental amount. What are you going to do for me?” So if that comes up imagine how you know scary it is for you to go – I didn’t know that like I now need to give someone some similar offer or I need to drop my income right down because you know, that way of tricked the lease over there making it look like an 8 or a 9 percent net. But really there was a three-year lease pending coming two years and if you spread it out it was less because they got to rent free.

Maybe there’s other little conditions in the lease that say, you know landlords need to be responsible for some fit out and paying a certain funding towards that – I’ve seen some pretty intense stuff. So when you think about it that least due diligence is a very important part as well as the first part I mentioned around vacancy.

Now, what else is the dangers and commercial property – Specialist Assets. So there are some places where Specialists assets had performed amazingly. I’ll take you through car washes in the example largely who they available for who’s the tenant? You guessed it a car wash but a car wash business is probably likely the only business that could fit in the environment unless major shakeups are done, changes are made and it’s leased out to someone else – which can happen. But with a specialist asset what’s happening then is you might go and buy something you’re on your way to finance approvals. And as you look through it the bank goes. “Yeah, We’re only going to give you 50%”- Wait what I saw your website say It’s at 70 or 80? “Oh no because the place that you chose to specialized – your tenant pool that was here is now coming to here” and that actually is very common. It has happened to a lot of people. So imagine just by getting to “Specialized” – A, you have reduced your tenant pool and B, you reduced your lending availability. So things change, the banks can stronghold you to the margins they want and the interest rates they want, Because if they increase interest rates, who you’re going to go to – if only two or three banks are covering you for that property.

The next part is with regards to your Income Verification. So with Income Verification, you might have a loan in the commercial front that considered everything but then when you started to look at it and you then had a change in your income or you wanted to get a better rate and when you start moving it to the banks that you know constantly change the way they measure the income you’re stuck with the options that you have.

Then from that perspective instead of having more of a similar blanket approach where residential lending has very similar sort of borrowing structures with some Bank slightly better some not so much. Imagine. If you have something completely shut off under you. An example could be this, You take out a leased out loan, you have lending based off your “lease only” and then all of a sudden they change their policy and now you need to take it somewhere else and you realize no one’s doing that product anymore. Then when you do your full verification and full review of it all what if you cannot service the loan now based on their full assessment. Where do you take this loan? Where do you take the property? What happens in that scenario – things get pretty sticky. Other things could be around, you know, the tenant right, the tenants business may shut down. They may end the lease before. Sure you might have a three-month Bank guarantee or maybe something’s there. But if you’re in an area where industry- wise it’s so ripe for disruption or there’s so much disruption happening – margins are getting tighter. For some it’s the retail, but there’s still many retail places performing quite well, but in those retail environments if that shock happens over the next 10 20 30 years. How does that place your tenants business if they don’t adapt, how does it place the actual shape in the dwelling side of who does it fit in this new business environment?

So these are some of the many but I wanted to really throw the danger at you so when you are making a decision to invest in commercial property and whilst it’s a fantastic investment vehicle, something that I own personally, have helped many clients with, and have helped with significant amounts of lending as well, just imagine you know what the dangers could be so, you know, that knowing them is the best side and the decision for the best side of it is much more prepared and something that you’re willing to take.

That’s it from us here at InvestorKit, the Experts in Wealth Creation – helping you take action.