Leading Commercial Property Expert, James Dawson, shares his knowledge, experiences and insights into why commercial property investing has greater advantages to residential, and how this investment strategy is something everyone should be looking at in 2020 and beyond.
James: Yes that’s right Terry, basically my background started like most people who are property investors, by buying residential property when I was 18… so I’ve been banging away at it for a long time, I’m 62 now…
James: But eventually I started buying commercial properties and I quickly found a number of advantages buying commercial when compared to residential, so stuck with it eventually wrote a course on it… you get asked so many questions about it that I thought, ok lets write it all down… and I developed a system to help people figure out how to buy, how to find, analyse, negotiate and buy a good deal essentially… and I’ve been running that course for about 6 or 7 years.
Terry: And you call yourself the Commercial Property Investing Academy… did you find that there are more investors starting to turn their attention to commercial for various reasons?
James: Yes I’ve always found that generally speaking only around 10% of investors are looking at commercial, for whatever reason, probably through lack of knowledge or a bit of fear… and to be that’s always been a big advantage because you’re not so much running against so many people… but I do find now that with returns of residential property being say around 2% or 3% net at best, that a lot of people – with interest rates being so low around the 3 and 4’s – that a lot of people are connecting the dots and saying ‘well why don’t I buy commercial property with 7% or 8%+ net return, that’s going to be positive cashflow.
James: I guess in answer to your question, there are more people looking at it, probably because of people like me who are promoting it and buyers agents are promoting some of the advantages for commercial property… but there’s still a very small section of investors that are actually out there looking, so that’s a big advantage.
Terry: I suppose a lot of people when they think about commercial property, they’re thinking about major office buildings and they would assume that that kind of investing is ‘way beyond my reach so I’ll stick to residential’… what are the sort of attainable forms of commercial property investment that are available to the mum and dad type investors?
James: Yeah, and that’s a great point Terry because I think most people generally speaking think that you have to be a multi millionaire to buy a commercial property… you know that starting point is a million dollars… something like that… but honestly, if you get onto realcommercial.com.au, you can find a small office in Melbourne for $160,000… or maybe a car space for $50,000… all these prices are well below what most people would pay for an average home…
James: In fact I just looked at a property today in Byron Bay, of course having the highest median price in Australia for residential, and I found a nice little retail premises for about $450,000, returning on the asking price about 5.5% net… so it’s still quite attractive for something who was looking for an apartment investment that could have this investment instead… in fact probably for a lot less, especially as you can’t buy an apartment in Byron for $450,000!
James: So that is a big misconception and people just need to have their eyes open a little bit and I think the other reason people stick to residential I guess initially is that’s what is promoted all the time in the mainstream press, so that’s a big thing that people aim their eyes onto that first.
Terry: Is it correct that one of the main factors that would convince somebody would want to go commercial rather than residential is that the rental returns do tend to be much better in commercial?
James: Look, there’s a number of reasons and definitely for me being a cashflow investor, I’m looking at the cashflow first then areas that I am able to manufacture growth… and I know a lot of people do say there’s not that much capital growth with commercial property, but if you are getting something that is high cashflow, you’re actually getting cash that you can use or pay down the loan therefore getting that compounding effect… so essentially it’s about finding the right deal that you can build in to manufacture some growth as well.
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Terry: So I guess the other main issues for people is how easy is it to get finance to buy commercial property, are the LVRs different from residential for example?
James: You know typically speaking they are a little different, but in the last 3 or 4 years it has changed dramatically. Usually the average was a 70% LVR and now actually there’s so many products around in the commercial space that quite often for deals under a million dollars you can easily get 80% LVR… and there’s also some low-doc products available as well… and some commercial loans at the moment are almost on pair with interest rates for residential… recently I got quoted 3.6% on a 75% lend… so it’s vastly different than what it was say 5 or 6 years ago when it was slightly harder to get funds for commercial property.
Terry: I’m guessing that one of the other advantages is that you tend to get much longer leases than you do in residential so you’ve got that security of tenure…
James: Absolutely, and the other big thing is that the property deal is generally driven by the lease because your evaluation is generally based on the rental income and you’ve got tenants that are producing their livelihood from that premises.
James: Lets say you’ve got a hair salon or something like that… they are earning their income from their business in that premises, so they’ve got a big incentive to stay there for a long time because it also gives them the benefit of being able to sell the business to someone else… so you can often get leases that are 3 + 3 + 3 years (so that’s 3 years with two 3 year options)… I’ve got a couple of leases that are running out to 2040, so very very long lease and one of the advantages of that as well is that it’s quite easy with the fixed increases according to CPI, that you can predict pretty much accurately the value of your property into the future and so you could virtually spreadsheet it out and know that the property is going to be worth X amount in 5 years time, because of the valuation is based on the rental income.
Terry: Got a question from one of our viewers, how long does it take to find a good commercial property? – I suppose relative to finding a residential investment.
James: The thing is, one of the beauties of investing commercial is that you can be totally free of emotion when you are looking and also negotiating / purchasing… so of course with the internet you can find a number of deals (once you’ve worked out what your price buy range is), within a few hours… but then the fun starts to really hone down on those deals to make sure that a particular deal is going to be worth looking deeper into. I personally don’t have to leave my office to sort through the duds… there might be 5 deals and 4 of them will be duds within a day… so it can actually be much easier to find the deal when compared to looking for one in residential property… especially once you take the emotion out of it, which is a very important thing to do… invest with no emotion.
Terry: Another question that’s come through is I guess the flip side to what we talked about a little earlier about the length of leases being a positive… but vacancy periods can be a negative as well.
James: Yes absolutely, and that’s certainly a good point to raise. So when I’m looking at a commercial property deal that is one of the major points to look at… what are the major uses that property might have… what are the statistics like in that location for re-leasing… obviously if you go down the street and there’s 10 vacant shops out of 20, that’s probably not a good area to look at… but then if you go down the street and there’s 1 vacant shop out of 20, and it’s been pretty well leased with most of the shops for a long time (anything over 5 years), then it’s likely a safe bet that if you’re buying that property based on a correct rental amount, that you’ll be able to re-lease that property. But in saying that, you should probably allow for 3 months to re-lease. But if you’re buying with positive cashflow as I always suggest in the first place, you should have a buffer there to enable you to get that 3 months, then look forward to another 3, 5 or 10 year period with no issues.
Terry: With the broad brush term ‘commercial property’ are we also including under that banner, retail units, light industrial, is that all encompassed with the term?
James: Yes, so the three main types are retail shops, industrial units, and offices, and also there’s the hospitality side of it as well… but that’s a more specialised area, for specialist investors. But yes, it generally encompasses those three major types.
Terry: What we do with residential is very much about location… and people typically want to talk more about location than anything else… is it the same with commercial property, or is it more the intrinsic nature of the property itself and the body of the tenant?
James: Look, location is absolutely important… I mean that’s one of the reasons why I like following your stuff Terry, because you get this overview of an area that’s its generally good, stable and growing for residential, and it naturally follows that the commercial is probably less risky than another area. But in saying that, you can go to some areas where you think, ‘this town doesn’t look the best’, but its not to say that within that area there isn’t a little micro area that has always been commercially leased…
Terry: Are there any particular hotspot locations that you are interested in at the moment for commercial property?
James: You know, I wouldn’t say I look for properties where there is almost instant growth… I look for the basics all the time when I’m buying a property… I’ve got property up the north of Brisbane… Newcastle… Sydney… and those areas are generally strong… I really like the area along this Brisbane growth corridor… north I think there’s lots of opportunities there… but some are opportunities that may take a little bit of work in getting, so it depends on the deal in the first place… I like most areas on the east coast… and quite a number of region areas inland… but I don’t really focus that much on Western Australia at the moment, although it seems to be coming out of the doldrums, I think you guys have probably picked the up… but most of the people I talk to about investing are probably on the east coast.