This transcript was generated automatically and may contain small errors.
It's another episode of the InvestorKit podcast and with popular demand, we're going into our commercial divisions here at InvestorKit, running through what's behind the scenes, running through what we go through every single day, analyzing deals. And to do that, got the best in the game with me, our head of commercial, Chris. Chris, mate, welcome back again. Thank you, Arjun. I love doing these, mate.
These are being great. These are so cool. Honestly, like, and the messages from everyone on commercial content and them just going, hey, I'm at that phase. And I mentioned this in an episode before, like, I'm so grateful to be at that six year mark now, where I get to look back at the six years of clients we've helped and we see this huge wave of compounding wealth, over a billion dollars in purchases, right? Over 1200 assets that we've purchased.
And looking at that, it's just like, it's special because everyone's growing so well. And it's now like commercial time and we get to supercharge their portfolios. Right? Supercharge. Yes.
And in supercharging it though, comes with risks, right? And we are in the game of avoiding those risks. Correct. Today, we've got two examples. So when you're tuning into this podcast, please do stay until the end because that second example that we're going through is something that's commonly out there, but often many people forget checking this.
So make sure you stay for that. Now, this first one, Chris, tell me about this deal. Again, I'm looking at it and you keep finding these sexy deals. They're amazing deals. And then all of a sudden you get, nah, but this is why.
All right. What's good on this one? Let's talk about another property deal that looked promising at first glance, but some underlying concerns led us to pass on it. And here's what we're looking at. So location and asset type, just 15 minutes east of Brisbane, Queensland, in a prime industrial precinct.
So 15 minutes east, very, very, very sought out location, an industrial unit, existing industrial unit. It's probably 20 years old. The asking price is 1. 75 million. The net rent is 120K.
So a decent 5. 84% net yield. So that being that close to Brisbane CBD, being industrial, 5. 84% net yield, very attractive. The outgoings all recoverable by the tenant, insurance, management, land tax, rates, maintenance, the works.
Okay. So triple net lease, lease term, three years remaining, three and a half percent annual increases. And there's a lot of security in the lease as well. Bank guarantee and director's guarantee. So if you're listening to this and you're new to commercial and you're hearing all these terms come in, what Chris has said in the sentence here is like, the tenants here in the east of Brisbane paying a decent amount of rent for a property that's not all that expensive.
They pay all the bills to own or rent this property. And whilst they're paying all the bills, they're going to hang around for three years. Every year, they're going to pay you more rent. And whilst they're paying you more rent, in case anything happens, they're going to have a deposit that you can take care of. And if director personally liable for this.
So again, I'm looking at this and this is going again, top line. I'm loving this deal. Why are we not loving this deal? Tell me. Yeah.
So as always, when something seems too good to be true, it's worth digging a little deeper. Now, first red flag that we found was the tenant profile. The tenant here is a mortgage broker, which is a bit unusual for an industrial unit, right? I would say like, we know a lot of mortgage brokers now. And there's a few with offices, don't get me wrong.
But almost, and this is just anecdotal figure, 80% are sitting in their homes. They're rocking, you know, suits up top for the Zoom meetings. And then the pajamas or sliders, like your famous investigative sliders you've got underneath this table. But there's sliders, there's, you know, very much casual work from home, embracing the life, right? So this strikes me as a surprise that someone's an industrial sitting there with a brokering firm.
It's interesting. Yeah, that's right. So this mismatch raises concerns about the tenant's long-term commitment to the space. So there's a strong likelihood to us that they may not renew their lease once it expires, meaning the landlord could be left with vacancy that needs filling. Now, they're a service-based business.
We're a service-based business. We don't need to be in an office. We can just work from home. Well, you raise a good point because we are an example of this. Our landlord at the InvestorKit Buyers Agency here in the northwest of Sydney, we were a tenant there for three years.
We signed on. Everything seemed great. But then COVID and everything that's happened afterwards, as soon as the three years came up, we said, hmm, we're not going to stay. Now there's, what, 40 of us all across the nation working from home. And that's been brilliant.
Like the amount of time people are getting with their families, the lifestyle they're having, the focus slots as well that they're having, the lack of travel that they need to do, this whole, you know, coming from multiple cities and just recruit here. Now we recruit all across the nation. That's like a blessing for everyone. Correct. So you can imagine if we're sitting here in that position, unless they're like, you know, one of those trendy mortgage brokers with the basketball hoop in their industrial office and they're, you know, let's do it for the culture, man.
It's all about culture, right? Your pizza coming to your offices. Yeah, yeah. You know, like get the manager pizza there on Friday. This is not the case though.
Top culture, right? I think you're onto something, mate. Maybe we should do that. Pizza nights? Yeah.
Hey, well done team. You bought amazing properties for all your clients. Here's a slice of pizza. Yeah. So enough about pizza.
The thing here is when we look at properties, Arjun, we're thinking, we're forward thinking. We're not thinking short term here. We're not thinking, oh great, three year lease. Awesome. You know, our clients, good for three years.
We'll come back to them after the three years and find them a new tenant. No, we're always looking for assets that we're always asking the question, will this be leased for the very long term? So our client doesn't have to take on any downtime, take on any vacancy, because that's going to leave pockets in their cashflow in the long run. And that's going to affect their ROI on the asset itself in the long term as well. So we're always long term thinkers.
Yeah. And so when you look into that as well, I mean, I want to break that down a little bit. We aren't here to say that this is a bad deal. This is just not ideal deal, right? And because everything that you've said, who are we sometimes to also judge that the tenant and how they want to run their business.
They might be like, I'm going to be in this office. This is my vibe. This is my thing. We're not here to say that it's not a bad deal. We're here to say it's an okay deal.
But if you're here to buy great stuff, wouldn't you want someone who's been there for maybe five or six years already, signed on another three year lease, the type of business they run requires them to be there, whether it be proximity based, local brand based, or the type of industry they run that requires heavy machinery, lots of setup expenses. This person might not need more than a table and a chair. That's right. And so as a result, we want that ability to see that this three can turn into six, can turn to nine years. Maybe the vacancy rates, which might not be very tight, it might not be very loose.
They could be tight here and it could be easy to get someone because Brisbane is also a popular market for industrial property. And so even if they leave, they could be fine. That's right. But why not go for the best, right? Remember in commercial, it's a $1 trillion cap, one and a half trillion now probably, in comparison to the $9 trillion of residential assets.
Therefore, it's already going to take you some time to find the right one. That's right. So if you're looking for three, six months for the right one, why not just wait for the next deal where you can be that much more certain? Like there isn't any rush. We've never had any situation in commercial where a client's gone, I need to buy this now.
It's a rush. It's urgent. Or we've gone to them, you must buy. This is a great deal. Don't let this one go.
It's a rush. You have that time in commercial only because when you're sourcing the best, you already know it's going to take a while. So take that while to get the right one. And this is an example of that. Yeah, absolutely.
It's all about mitigating risk. Like you said before, it's all about certainty. Keyword certainty. So that's what we're here to do. We're here to mitigate any risk associated with the uncertainty of vacancy, of downtime.
Yeah. And so in this deal, the tenant mismatch was one. Yes. The limited rental growth as well. Could you talk about that?
Because this limited rental growth I found was interesting. This is a common thing coming up as well. Yeah. So at InvestorKit, we do a lot of deals, particularly in this pocket of Brisbane. We're very popular here.
We acquire a lot of assets here. So we have a database of rents.
