Commercial Property Investing Explained Simply: How to plan, find, analyse and build a profitable commercial property portfolio

‘Commercial Property Investing Explained Simply fills a gap in the market; with so many books for residential investors, at last a comprehensive guide to commercial property by an undisputed expert in this area’.

Adrian Butera – MD, Compton Green Real Estate and winner of the Real Estate of Victoria Auctioneering Championships 1999, 2001, 2004 and 2010.

‘As somebody whose family has been around commercial property in Australia since 1956, Steve beautifully articulates the journey, but more importantly the OPPORTUNITY in diversifying your property portfolio, going commercial and elevating yourself to the next level.’

Andrew Morello – Winner of the first Australian Apprentice and Head of Business Development at The Entourage.

‘After researching many industry professionals, I found Steve to be the most knowledgeable, sensible and sincere. He has now purchased over $3.2 million worth of commercial property for me across multiple states of Australia – and we are looking for our next one!’

Cameron Rowe – Sailor for Royal Australian Navy (age 30).

‘Steve has helped many investors successfully invest in commercial property. Now he shares his expertise in this very readable, practical book.’

Grant Simpson – Founder of The Commercial Guys real estate agency.

First published in 2021 by Major Street Publishing Pty Ltd

E: [email protected] W: majorstreet.com.au M: +61 421 707 983

© Steve Palise 2021

The moral rights of the author have been asserted.

ISBN: 978-0-6487964-2-8

All rights reserved. Except as permitted under The Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher.

Cover design by Tess McCabe

Internal design by Production Works

Printed in Australia by Ovato, an Accredited ISO AS/NZS 14001:2004 Environmental Management System Printer.

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Disclaimer: This publication contains the opinions and ideas of the author. It is intended as an educational tool and to provide information on the subject matter. If the reader requires advice, it is recommended that a competent professional be consulted before any financial decisions are made.

The author specifically disclaims any responsibility for any liability, loss or risk that is incurred as a consequence, directly or indirectly, from the use and application of the publication.

The publication provides general information that is intended but not guaranteed to be up to date. The information is not to be used as a source for tax or legal advice. The publication should not rely on statements or representations made. It is recommended that tax and legal advice be obtained from a competent professional.

The publication should not be taken as financial advice. It does not take responsibility for inaccuracies, omissions or errors. The reader should consult a registered and qualified financial adviser before making any investment decision.

The author does not assume any responsibility for actions or non-actions taken by people who have read this publication. No-one should be entitled to a claim for detrimental reliance based on information provided or expressed herein. The use of any information provided does not constitute any type of contractual relationship between the reader and the provider of this information.

The author hereby disclaims all responsibility and liability for any use of information provided in this publication.

Contents

Why commercial property?

PART I: Residential versus commercial property

PART II: Types of commercial property

Industrial property

Retail property

Office property

Other property types

PART III: The numbers

Purchasing costs

Yields

Leases

Outgoings

Depreciation

Capitalisation rate and property value

Cash flow

Capital growth

Growing the portfolio

PART IV: Buying and selling properties

Preparation

Searching for properties

The acquisition process

Selling properties

PART V: Due diligence

Initial due diligence

Area research

Tenant and business analysis

Building and pest inspections

Due diligence checklist

PART VI: Conveyancing, finance and buying structures

Conveyancing

Finance

Types of lenders and loans

The loan process

Buying structures and syndicates

PART VII: Post-purchase

Property management

Value-adding

Surviving a downturn

Epilogue

About the author

Consultation services

Acknowledgements

Why commercial property?

‘Commitment unlocks the doors of imagination, allows vision, and gives us the right stuff to turn our dreams into reality.’

— James Womack

In my work as a buyer’s agent, whenever a client says they want to achieve a particular amount of passive income per year, I cheekily respond, ‘And then what?’

A common first goal is to have $100,000 in passive income per year – and with commercial property, that’s actually very achievable in a short period of time. But I find that people’s answer to my question reveals the real driver behind their wealth creation. They usually want to spend more time with their children, to travel, to quit their job and work on something they’re passionate about, or a combination of these.

So before you consider whether commercial property investing is right for you, it’s important to decide what goals will make you happy. What motivates you? Assess your short-term, medium-term and long-term goals. I’ve spoken to thousands of people from different walks of life; some are over the moon when they can afford a new fishing reel, others when they can purchase a $250,000 sports car. Everyone’s compass for happiness is different. Most people, however, overestimate what they need to achieve their happiness goals, and this means they take on unnecessary risk.

Be realistic with your goals, and don’t just come up with a portfolio size or passive-income amount. Sacrificing time today for a specific number tomorrow may not be consistent with your personal values.

My own happiness comes from travelling, socialising, climbing mountains, feeling appreciated and working on passion projects. Property investing has enabled me to pursue these goals – I travelled, for example, to 30 countries by 30 years of age without sacrificing my professional career or my relationships. I’ll never be someone with hundreds of properties in my portfolio, but I don’t need to be, because my happiness doesn’t depend on my numeric wealth – it’s purely about choice and freedom.

My story

I’m now one of the most successful commercial buyer’s agents in Australia, but I had humble beginnings in a gentrifying suburb of western Sydney. My father was a television repair technician, my mother was a stay-at-home mum and I have two older brothers (and even at 6 foot 3 inches tall, I’m by far the smallest of the bunch). We never felt poor, and were always cared for and looked after.

At high school, I finished in the top 1 per cent of the state, and at the time, thought academic excellence would equate to wealth – and that wealth would bring happiness. I had a natural affinity for mathematics and theoretical concepts that led me to study engineering at university, and I finished first in the course.

After university, life progressed well. I began to earn good money and became one of the youngest engineers in Australia to become chartered in both mechanical and structural engineering. My focal point has always been design, as in engineering it offers little room for subjectivity. It all comes down to the numbers! I had a vast array of design jobs, from designing medical equipment to designing mine sites.

Like many, though, I got caught up in the rat race. I was working long hours, earning a good salary and creating wealth, but I saw unqualified employees being promoted and earning high incomes while some of the most qualified employees were working hard but going unrewarded. My belief that academic excellence and hard work would be enough was shattered.

I decided that I didn’t want my life as a professional to limit me, nor did I want to leave my financial future in the hands of a faceless corporate machine. So, I chose residential property as my path to financial independence. I spent countless hours reading every property-investing book I could get my hands on and speaking in depth with (and probably annoying) people in the industry who had ‘made it’.

After three years of research, in 2012 I bought my first investment property in western Sydney for $230,000 – and saw it increase in value by $80,000 in one year. This was $20,000 more than my yearly salary at the time, and it was my light-bulb moment. I was hooked! Every year I purchased more properties, and my portfolio grew exponentially. Eventually, I bit the bullet, left my engineering career and went full-time into property. I became a buyer’s agent and helped grow a buyer’s agency into one of the largest in Australia.

Within a few years, I’d helped clients purchase more than 500 properties in the residential space. I was always fearful of commercial property though. Like everyone else, I’d heard that it was risky. I was told commercial properties did not achieve capital growth, had a high chance of vacancy and that, basically, commercial property investing was only for the wealthy. As I began to research, however, I quickly saw that it was all a misconception!

The returns on commercial property can be spectacular compared to residential property. And, as you’ll see, you can mitigate almost all of the risk with thorough due diligence. For me, commercial property was the game changer, providing instant passive income and financial freedom.

The benefits of commercial property

Unless you plan to work your way up the corporate ladder to a very well-paid position, or to start a successful business or invent something, chances are you’ll need to invest well to become wealthy.

I’m not trying to convince you that investing in commercial property is the best option for you, as investing in shares or residential property also has huge advantages if you know what you’re doing. Still, in my view, commercial real estate can give you a financial freedom that other investments cannot.

However, if you’re interested in shares or residential property, there are many blogs, magazines, newspapers and websites to keep you informed and make you a better-educated investor. There are very few resources for people interested in commercial real estate. I’ve now purchased hundreds of commercial properties for my clients, and have spoken with many accountants and mortgage brokers, and I constantly have to explain the benefits of commercial property and the misconceptions about it. This was what inspired me to write a summary of the key points to commercial investing, which after some intense labour, evolved into this book.

‘Commercial property’ can include any property that is held for the purpose of generating a return on investment. It comes in many forms, including industrial, retail and office, and some combination commercial and residential properties. All forms can be profitable investments, as you’ll see. Long considered a more niche alternative to traditional investments, in recent years commercial real estate has started moving to the mainstream as a highly sought-after asset.

Some of the benefits of commercial property investing include:

high cash flow returns

stability of income

low long-term risk

exposure to different sectors of the economy

tax benefits

hedging against inflation

investment control

ability to add value

leverage or financial gearing.

‘Leveraging’ is using debt rather than equity in one asset to buy another asset. This can allow you to make greater returns, but you can also lose more and end up in a negative position. People are scared of debt, yet even those who aren’t wealthy take it on – for instance, in buying the family home. Leveraging to invest can seem scary, and there are lower-risk assets available, but commercial property offers a means to achieve big returns both in capital growth and cash flow, with minimal risk – if you know what you’re doing.

It’s imperative never to invest in something you don’t understand – it’s too risky, unless you seek reputable investment guidance. In this book, I’ll educate you on the issues in commercial property investing and how to do it in a low-risk manner. I’ll explain step by step how to analyse, select and buy commercial property, ensuring that the value of your investments will continually increase – so you end up making as much money as possible with as little risk as possible.

Note that I’ve written the book primarily for the Australian commercial property market, although many of the principles will apply worldwide.

Also, note that the strategies I outline here are designed for effective long-term investment. If you’re looking for a get-rich-quick book on investing in commercial property, then this book probably isn’t for you. However, if you want to understand how commercial property investing works and learn a tremendous amount of information you can apply, then read on! Commercial Property Investing Explained Simply will show you how to plan, find, analyse and build a profitable commercial property portfolio and avoid incorrect financial decisions. I hope you enjoy reading it and it opens your eyes!

PART I

Residential versus commercial property

Property investors often debate whether to go residential or commercial. There are far more residential buyers than commercial, however, partly because those who favour residential property typically have little experience in commercial property. As everyone lives in some form of residential property, they feel they have a grasp of it, and it’s considered a human necessity – although commercial properties do provide the resources and services necessary for our survival. There’s also much more media coverage about people making money in the residential market, whereas commercial property is seldom spoken about.

About 70 per cent of residential property in Australia is owner-occupied, and so the owners have an emotional attachment to it. By comparison, commercial property is typically bought as an investment and purchased based on the numbers and return, even if it’s going to be owner-occupied.

Most commercial purchases are valued based on their rental return. In the residential market, a property must increase in value for the buyer to make a profit, but commercial property can create wealth even without capital growth. A commercial property’s rent is often also indexed to inflation, which means the market will rarely move away from you. In general, commercial net returns are much higher if you get it right, but can be riskier if you buy a bad property, as it could be vacant longer. If you buy a bad residential property in a good suburb, though, you’ll generally be okay in the long term.

So, how can you decide whether commercial property investing is right for you? Let’s look at some of the key differences between the two, in the table following. (Note that the figures given are indicative only – the exact numbers for a particular property will depend on factors like its location, type and versatility, and demand.)

I’ll go into detail about these differences in the relevant chapters later in this book, but