Why commercial is the new residential
Gone are the golden days where you could purchase residential properties with yields of 6, 7 or 8 per cent or build a self-sustaining property portfolio based solely on residential.
You simply cannot find these yields anymore. For a high-net-worth individual whose main objective is to get the strongest returns on their investment, adding a commercial property to their portfolio or shifting their portfolio purely to commercial is the only way to go.
Highest cash-on-cash returns seen in almost a decade
It is a fact that commercial property currently offers the highest cash flow you will find in Australian real estate. At Rethink Investing, we are currently securing 6-9 per cent net yields on the high-quality commercial properties we’re buying for our clients. However, when you look at the returns on your initial cash investment, the numbers are even better. We’re talking 25 per cent to 40 per cent cash-on-cash returns – something we’ve not seen in Australia since 2012. These numbers are the reason commercial property has caught the eye of sophisticated investors, not only in our own backyard but internationally, and has become a luring incentive for new entrants to the commercial property scene.
The perfect storm
The post-COVID climate in Australia has supercharged commercial property. Interest rates are low so cash is cheap. High-quality commercial assets are now scarce due to increased demand (people have more savings because they’ve been forced to stay home and are now looking to put their money to work). All of these factors have contributed to a tightening of the market and have resulted in yield compression for commercial property (capital growth), and is the reason that commercial property is far outweighing the ROI that residential property can deliver.
Leading benefits of commercial property investing
- Strongest ROI currently found in Australian real estate. We’re finding yields of 6-9 per cent and cash-on-cash returns of 25 per cent to 40 per cent on the high-quality commercial assets we’re buying for our clients.
- Commercial properties have the potential to pay themselves off in just 10 years. After that, you are generating a passive income, investing back into your portfolio or using the equity from your property to expand your portfolio.
- Tenant pays 100 per cent of outgoings. Most commercial tenants sign what are called ‘net’ leases. This incredible set-up means that they pay for everything from water usage, to council rates to repairs and maintenance to the premises.
- Longer leases. Commercial leases can span anywhere from three years (it’s usually the minimum) to as long as 15. This is an incredibly appealing investment for many as it means you can invest, sit back and watch as your investment literally pays itself off and increases in value.
- Annual rent increases. Most commercial property contracts have annual rent increases built in which are fixed, often of around 3-4 per cent, or linked to CPI, which again, means more money back in your pocket.
- Depreciation and variety of ownership structures. Commercial investors have the opportunity to claim thousands of dollars in depreciation. You can also purchase commercial property via a variety of entities including self-managed super funds, discretionary trusts, a company or individuals in a partnership.
Helping our clients take advantage of the ‘opportunity of a lifetime’
Adding a commercial property to your portfolio is the best way to diversify, lock down solid capital growth and improve your cash flow in 2021. Many are not experienced in commercial investing, however, and that’s where we come in. Our specialty is working with investors to purchase high-grade sub $10 million tenanted commercial assets across the country. This is our favourite price point as it’s below the institutional investor levels, where some of the best yields still exist in 2021. The Rethink Investing strategy involves purchasing high-quality commercial assets (found off-market if possible), which are always positively geared, boast superior cash-on-cash returns and most prominently already have a secure and robust tenant.
“We’re seeing net yields of 7 per cent plus, with interest rates under 3 per cent. That’s a 4 per cent gap,” says Scott O’Neill, founder and director of Rethink Investing.
“Historically we expect to see a gap of 2 per cent. And this means, right now, there’s the opportunity of a lifetime to get the best cash flow returns you’ll ever see out of commercial property. As commercial investment property specialists, we help our clients harness the power of commercial property investing, allowing them to grow their wealth and gain financial freedom, easier and faster.”
Scott and Mina O’Neill are co-authors of Rethink Property Investing (Wiley $29.95) and founders of Rethink Investing, Australia’s number one buyer’s agency for commercial property investors. After retiring at the age of 28, they now live off the passive income generated by their personal $20 million property portfolio and have helped over 1,800 clients purchase around well over $1 billion in Australian real estate. Find out how to do the same at www.rethinkinvesting.com
