S2E24 - Should You Buy Commercial Property? : The 3 L's You Need to Stress-Test First

[00:00:00] Imti: No matter where you are on your property journey, you've probably seen a lot around commercial property, and the reason for that is it's being sold as the solution to anyone who wants lots of cash flow and passive income. Guarantee you at the moment, if you open up socials and start scrolling through, if you're interested in this space at all, within 30 seconds you'll see a reel or a carousel going through why you should buy commercial property instead of residential property and why it's so much better.

And even though we think that it's a more advanced security type, property type, whatever you wanna call it, a lot of first time investors are asking the question of the both of us: Should I buy commercial property because I want passive income? And the answer isn't as simple as social media would lead you to believe. What we wanna do today is go through why it's appealing in the first place, what is making everyone look at commercial property? And three things that you may want to stress test before thinking about even going down that path. And what you might find is by the time you work through these three things, you'll just realise commercial property isn't for you. That'll save you tons of time, but also a lot of money, because doing it wrong can be extremely expensive. And those three things we're gonna cover are lease, lending, and location, which we think are the three key pillars that basically give you a first screen on whether you should do this or not So let's jump right into it.

Pete, from someone who's been looking at buying commercial property themselves, why is it appealing, and what was appealing about it to you?

[00:01:41] Pete: It's the cashflow. I'm at a different phase of my investing journey. To me, I'm transitioning to cashflow. Naturally it's a more advanced strategy. It makes sense.

[00:01:49] Imti: Mm-hmm.

[00:01:49] Pete: But that's really the only thing. I can leverage something at a million, a million and a half, $2 million-

[00:01:54] Imti: Mm-hmm ...

[00:01:54] Pete: and get pretty good cashflow on it. When we're looking at commercial properties, we're looking at net yields as well-

[00:01:59] Imti: Mm-hmm

[00:01:59] Pete: A lot of people get confused between gross yields and net yields-

[00:02:03] Imti: Mm-hmm

[00:02:03] Pete: ... which I'll talk everyone through now. So gross yields they're normally what you get on, your resi property.

[00:02:08] Imti: Mm-hmm.

[00:02:08] Pete: And that's pretty much looking at what your rent is compared to the purchase price.

[00:02:13] Imti: Yep.

[00:02:13] Pete: It doesn't factor in all the holding costs.

[00:02:15] Imti: Yep.

[00:02:16] Pete: So if you got a 5% gross yield on a residential property, and you got a 5% net yield on a commercial property, it's drastically different.

[00:02:25] Imti: Hmm.

[00:02:25] Pete: Because the net yield on the commercial property, the tenant pays for everything. So it pays for the council rates, it pays for the strata fees, it pays for insurances. Pretty much everything to do with holding that asset, property management fees-

[00:02:37] Imti: Mm-hmm

[00:02:38] Pete: ... the tenant pays for.

[00:02:39] Imti: Yep.

[00:02:39] Pete: The cashflow is a lot more, in the commercial space-

[00:02:41] Imti: Mm-hmm

[00:02:42] Pete: ... but it does come with a high risk.

[00:02:43] Imti: Yeah. To put that simply in terms of the net versus gross and why commercial might be more appealing, is that the tenant covers a lot more of the holding costs minus the loan, right?

[00:02:54] Pete: Yeah.

[00:02:54] Imti: So for someone looking to buy a commercial property, their biggest expense would be the loan repayments, whereas if you're buying a residential property, it's the loan repayments plus strata, insurance, all of the extra little bits and bobs, and also the rent's probably lower-

[00:03:10] Pete: Yeah

[00:03:10] Imti: ... comparatively, right?

[00:03:11] Pete: Yeah. But if we just put two numbers up and say we buy, an $800,000 commercial versus an $800,000 resi, and both of them are returning $30,000 in rent-

[00:03:21] Imti: Mm-hmm ...

[00:03:21] Pete: from a commercial point of view, you will get a majority of that-

[00:03:24] Imti: Yep ...

[00:03:24] Pete: if not all of it.

[00:03:25] Imti: Yes.

[00:03:26] Pete: From the resi point of view, you're gonna have about 10 grand in holding costs, and this doesn't even include the loan, so there's a 10 grand gap for the exact same value of property-

[00:03:34] Imti: Mm-hmm

[00:03:34] Pete: ... and the same rent just between the two. Now, it's never that simple, but it's just a way to compare it.

[00:03:39] Imti: Yeah, no, that's a great way for anyone listening to visualise it. You touched on something earlier. You said transitioning in your strategy to cashflow. For a first-time investor, they haven't transitioned, right? They haven't started the journey, but they might be looking at commercial property as the answer because they do want cash flow. Talk us through the transition piece, because journey-wise, someone listening to this might be like, "Why can't I just buy a commercial property straight away?"

[00:04:06] Pete: Well, commercial historically, people will say it grows at the same rate, but I don't believe it does. A lot of the growth on a commercial property is dependent on the rent.

[00:04:14] Imti: Mm-hmm.

[00:04:15] Pete: So pretty much the value of the commercial property is the rent. As opposed to the resi it's, it's a lot more to it. So it has the capacity to grow a lot quicker, outperform, allow you to take out equity on that growth to purchase the next investment property. And what a lot of people don't realise is as you build up your property portfolio from a resi point of view, you're constantly taking out equity, constantly topping up the loan, constantly paying more interest.

On good quality residential property, you're not going to see a cashflow benefit in the first five to 10 years.

[00:04:44] Imti: Yeah. Unless you're aggressively paying down the debt as well.

[00:04:46] Pete: Yeah, yeah. Unless that's your strategy, which-

[00:04:48] Imti: Mm-hmm

[00:04:48] Pete: ... is not a very popular strategy. It's certainly one I know you're looking at with clients-

[00:04:53] Imti: Oh, yeah

[00:04:53] Pete: and with our clients as well.

[00:04:53] Imti: Big, big fan of paying down debt at the moment,

[00:04:54] Pete: but- It makes sense when you put it all up and you explain it, but it's not something that people are doing.

[00:04:59] Imti: No.

[00:04:59] Pete: So what people are doing is they continue to strip equity and, continue to purchase their investment properties, and that's how they build a portfolio. But there has to come a time where your capacity gets capped because you have to keep earning more of an income. And it then impacts your lifestyle so you do need to naturally start to transition to a cashflow strategy.

[00:05:16] Imti: Yeah. to put it simply, it's the other barrier that most people overlook when it comes down to commercial, and we'll cover it when we go into the lending section but the amount of cash that you need upfront is quite significant-

[00:05:27] Pete: Yeah

[00:05:27] Imti: to get into a good commercial property, and that's why that transition piece is there, Because you need to actually build up the asset base to build up the deposit to then go into commercial. That's a really good place to actually transition us into the three things that you would wanna stress test if you're looking at doing commercial and that you would need to be across.

Let's start with the first one being the lease. In the commercial space, a lot of the value of the property, but a lot of your cashflow result actually hinges on this one piece of paper, right?

[00:06:01] Pete: Yeah. It does. That is the value of the property. I've actually got a really good example. I was looking at a property yesterday, commercial property. It's got a very, very long-term dental tenant.

[00:06:11] Imti: Mm-hmm.

[00:06:11] Pete: And way too cheap for the location in terms of what they're selling it for. So when I rang up and called the agent, turns out that tenant is actually moving on. They're pretty much closing up in the next six to eight months.

[00:06:22] Imti: Yep.

[00:06:23] Pete: The rent on paper is really strong though.

[00:06:25] Imti: Yeah.

[00:06:25] Pete: And I don't know how complex this is gonna come across, but let's say there's four units on the title.

[00:06:29] Imti: Mm-hmm.

[00:06:29] Pete: And that particular tenant has actually taken three of the titles, so three of the spaces, and they've knocked down walls to have it all open. That's the rent that they're quoting.

[00:06:38] Imti: Yeah. Is the three units, right?

[00:06:40] Pete: But they're only selling one of the units.

[00:06:42] Imti: Mm.

[00:06:42] Pete: So the owner's like, "Right, I gotta get out of this now."

[00:06:44] Imti: Yeah.

[00:06:45] Pete: This long-term tenant, who's a very, very well-known ... they've been there for years. know the spot. I was like, "Wow. If I could own that, these guys are going nowhere." But that's what's happening. So on paper it looked fantastic.

[00:06:55] Imti: Mm-hmm.

[00:06:55] Pete: But when you dig into it, the tenant's leaving in six to eight months. Actually, that covers three of the commercial properties on the title when they're only selling one of 'em.

[00:07:05] Imti: Mm-hmm.

[00:07:05] Pete: So I think it was 60 or 70 grand or something like that a year, is really only 30 or 40. But people get very excited by seeing that, and they see the lease and they don't know what they're looking at and then they just, yeah, fall into a trap.

[00:07:15] Imti: Well, that's the thing, when it comes down to leases in the commercial space, you're probably paying a good lawyer, $3000 to $5000 to review the lease before-

[00:07:22] Pete: Yeah

[00:07:22] Imti: ... you even go into a purchase, right?

[00:07:23] Pete: Yeah, you should be. Yeah.

[00:07:24] Imti: Whereas for a conveyancer or a property solicitor looking at a resi lease, they barely have to look at a resi lease, right? They're worried about the contract of sale.

[00:07:31] Pete: Yeah.

That's exactly right.

[00:07:32] Imti: But the lease is so critical, and bringing it to the tenant, and your point there, If you looked at the listing, you would be like, "Oh, all this amazing rent is coming in. It's cashflow positive, it's super cheap. We're making money hand over fist But the risk that gets overlooked is how long is the tenant staying there?

Is the lease about to end? Has the lease been extended? And if it hasn't, and there's not a strong lease in place, that's when the property's gonna... In our eyes, it's gonna be cheap, but to a first-time investor who doesn't understand valuing commercial property, they're gonna pull up the listing and go, " Oh, it's selling for $700,000 and I'm gonna have $50,000 worth of net rent hit me every single week.

Why wouldn't I buy commercial property?" These are the posts that are being shared on social media, "Bought this commercial property. This was the rent. The client's making this after their loan repayments," and they're sailing off into the sunset. But you don't hear the other side of it where that lease is six months away from ending?

[00:08:34] Pete: Yeah, there's like six months left.

The tenant's shit. Cause tenant quality is something you have to look at the lease as well.

[00:08:39] Imti: Mm-hmm.

[00:08:40] Pete: You got to make sure they're a good tenant.

[00:08:42] Imti: Yeah. that's where the price of commercial property also can be really misleading. Personally, I'm a big believer that unless you can afford to buy a commercial property that's

And this will be unpopular, and that's fine. I'm a little bit more conservative risk-wise than most people. If you're not spending over one and a half mil on a commercial property, for my risk appetite, generally the quality of tenant that you get isn't worth the risk to me. And I'll talk you through a conversation that I had with a client around this exact thing. Two young guys, really ambitious, wanting to build big portfolios and wanting to get into commercial long term. And they were starting their journey, so in their mind, they studied all the things, and it was, "We'll buy residential." Do exactly what you did, Pete, right? Transition into commercial and have this cash flow bomb and life will be happy. And the thing that a lot of people underestimate when it comes down to commercial property is actually how's the broader economy doing? In residential, if we hit a recession, everyone still needs a house, In a cheaper commercial property, and if you're listening to this, I guarantee you, you'll think of something that comes up straight away. Think of the daggy shop front that has four units on it, and it has the beauty clinic that someone has just started up and a costume store and these businesses that when the economy turns and there's a recession, generally those are the buildings that are left vacant pretty quickly.

[00:10:08] Pete: Yeah, they're the first to get hit.

[00:10:09] Imti: Yeah.

[00:10:09] Pete: Mm.

[00:10:10] Imti: They're the first to get hit. The small business owner who's just starting out that's in a property like that. And to me, that's most of the sub one mil mark, if you're looking at retail commercial-

[00:10:20] Pete: Yeah

[00:10:20] Imti: ... for example, or even warehouse and storage. But then because you're putting all your eggs in the commercial basket, which is the strategy that's being spruiked at the moment, build up a resi portfolio and then sell down and buy a commercial property that's gonna give you $70,000 worth of net rent a year, and you'll buy it in cash because you'll have no debt, or you'll buy it with very minimal debt. If the tenant isn't resilient, if it's not a GP, for example, that's not gonna go out of business it'll work until it doesn't.

And when the economy turns and you think that the lease is the thing that's gonna protect you, if that business owner's going bankrupt, nothing's protecting you.

[00:11:00] Pete: Yeah.

[00:11:01] Imti: And you're also not getting anyone into your property anytime soon because the type of tenant who can afford to lease something like that is a startup business, and the more established business is going into the more expensive commercial property.

Would you agree or disagree?

[00:11:15] Pete: Yeah, no, I agree. It comes down to location as well in terms of that $1.5 million figure. But yeah I tend to agree. Yeah.

[00:11:21] Imti: Mm-hmm. Well, probably a good time for us to quickly jump into location, 'cause location was, one of the three Ls we were gonna cover, lease, lending, and location.

Talk to us more about that.

[00:11:29] Pete: Well, it's very similar to buying on the outer fringes in house and land packages.

[00:11:34] Imti: Mm-hmm.

[00:11:34] Pete: When it comes down to location, a lot of people buying commercial property get very excited about depreciation benefits and, buying this fancy new big warehouse, but they're often in complexes. And these complexes are more geared towards owner-occupiers.

[00:11:48] Imti: And when you say owner-occupiers, you mean people who run their own business-

[00:11:51] Pete: That's right. Yeah ...

[00:11:52] Imti: and buy it to trade out of, right?

[00:11:53] Pete: Yeah. So they'll buy it and they'll, trade out of it.

But, let's say there's 15 or 20 in this site. At the beginning, a lot of them are gonna be, not a lot, but I would say, 50% will probably be sold to investors.

[00:12:04] Imti: Mm-hmm.

[00:12:05] Pete: So you're gonna have at the same time 10 commercial warehouses.. In Port Adelaide, for example, in, we're obviously based in Adelaide.

Down there, there's all these new industrial buildings going up, and they're going for sale, at auction, but then you see another four or five for lease signs.

[00:12:18] Imti: Hmm.

[00:12:18] Pete: So they're slowly selling them off. If you're buying something like that, you are gonna run into vacancy risk.

[00:12:23] Imti: Mm-hmm.

[00:12:23] Pete: So you're going to be left with a commercial property which you probably won't tenant out for, dare I say it, a year. But then even after that, you're probably gonna get lower quality tenants, they probably won't stay the full lease term, or they might stay only two or three years, so then you got another vacancy period.

So if you're not buying in the right location, you're opening yourself up to, A, a lot more stock coming to market 'cause you're buying on these outer fringes or you're buying in large industrial sites, but, two, is the vacancy risk.

[00:12:48] Imti: Mm-hmm. For me, the only time that would make sense is you got 12 months of cash in the bank.

[00:12:54] Pete: Yeah.

[00:12:54] Imti: You could stomach being vacant for 12 months, which if you're buying commercial, you should have 12 months' worth of repayments in the bank.

[00:13:01] Pete: Minimum. Minimum.

[00:13:01] Imti: Minimum.

[00:13:01] Pete: Yeah.

But even that, though, the money you're supposed to be banking through the rent, you should be putting a portion of that away for future vacancy. Everyone talks about it as being net, net, net, 60 grand in your bank. But really you should be putting at least 25, 30% of that away for

[00:13:14] Imti: when you're vacant.

[00:13:15] Pete: Especially if you're buying it. Yeah, that's right.

[00:13:16] Imti: Yeah.

[00:13:16] Pete: And then it's not so bad 'cause you're operating it like a business.

[00:13:18] Imti: Mm.

[00:13:19] Pete: So you can sustain it, but a lot of people don't do that.

[00:13:20] Imti: Yeah.

[00:13:21] Pete: But you can't do that if you've leveraged it too.

[00:13:23] Imti: Exactly. Which we will touch on soon.

[00:13:24] Pete: Yeah, yeah,

[00:13:24] Imti: with the location piece-

[00:13:25] Pete: Yes

[00:13:26] Imti: ... the, only time where you would go into it and be able to stomach a longer vacancy, and if you're listening to this and you're early on in your journey, or even you're just interested in transitioning to commercial property and it's sounding overwhelming and difficult and complicated, it's because it is.

[00:13:42] Pete: Yeah.

[00:13:42] Imti: it's not as easy as the seven-slide carousel and the 45-second reel makes it out to be that, you just make money hand over fist. The only time that vacancy risk is worth stomaching or buying into a new complex where you could potentially make a good value purchase, is if there's infrastructure spend happening around that property.

[00:14:06] Pete: Yeah.

[00:14:06] Imti: And what I mean by that is, submarine project, for example, that's gonna be down in Adelaide, right? There's gonna be so many additional infrastructure things that are required around that where warehousing is gonna be needed. They're gonna need places to put things. There is gonna be independent contractors who are gonna come out and work out of the space for the next five or 10 years.

And so then you've got to be able to take a calculated gamble and not predict the future, but at least read the tea leaves a little bit where you're going, "Well, there's this big infrastructure spend. Yes, when my property is built and open, I might be vacant, but I could potentially secure a long-term tenant relatively quickly."

[00:14:47] Pete: Mm-hmm. "

[00:14:48] Imti: And then because I've got a really strong lease in place, the value of my property's gone up 30%."

[00:14:52] Pete: Yeah.

[00:14:52] Imti: And that is hard

[00:14:53] Pete: It is, yeah. It's hard to nav

[00:14:54] Imti: It's not easy

[00:14:54] Pete: Yeah

[00:14:55] Imti: And it's not something that anyone, I feel, should be doing by themselves. And even more than that, it's probably something that most people just shouldn't be doing.

[00:15:02] Pete: Yeah, agreed.

[00:15:03] Imti: Is there anything else that you would wanna add around location? Does it still work fundamentally the same way that residential property works location-wise? Or is there anything different?

[00:15:12] Pete: Oh, look, I think it does. Like, if we stick to the outer fringes just quickly, again, if you've got that long-term hold period in your mind, well, if they're building tens of thousands of new homes around this particular pocket, well, there's gonna be businesses in there that are gonna wanna not be too far away from home, people who own businesses that are moving to these new places, that are gonna want the industrial-

[00:15:32] Imti: Mm-hmm

[00:15:32] Pete: complex or something like that, or they're gonna want the retail strip or whatever. If you look at it from that lens, long term as well makes sense if you're buying in those kinda new hubs, yeah. But it's gonna be a struggle. in terms of location, yeah, it does. If you're buying inner city, so within that 20km radius to the city, in the established pockets where there's not a lot of land supply, and you're buying in there and you're treating it like a residential property or residential investment purchase- ... you can do very well.

[00:15:54] Imti: 100%.

[00:15:55] Pete: But it costs money, and the net yields are not as good as what everyone keeps talking about. You're not gonna get your 6% net yields.

[00:16:01] Imti: No.

[00:16:02] Pete: You have to compromise, but you're compromising on lower yield, but the quality of the property's going to be a lot better. You're gonna have a higher quality tenant, lower vacancy risk, and the value is only gonna...

Look, it will move similar- not as much, but it will move in line with the resi.

[00:16:16] Imti: Mm-hmm.

[00:16:16] Pete: Because you're still buying land in that pocket.

[00:16:19] Imti: Yeah. The thing a lot of people would discount, they'll get put off by the fact that you said that the yield isn't as good.

[00:16:25] Pete: Yeah.

[00:16:25] Imti: Right? 'Cause they'll be like, "Well, I'm investing in commercial because the yield is gonna be strong." The other side of that to consider is there's yield, and then there's cash that you actually have that hits your bank account. And yes, a property might have a 7% yield, but unlike residential, where you can get a tenant in within, let's say, six weeks, worst case scenario, in most markets- If you're vacant for 18 months because you're like, "Oh, I want a better rental return," but you went to a worse area or a cheaper price point where no tenant wants to be, yes, you'll have a strong yield while you're tenanted, but then if you're vacant for 12 months, guess what? Buying the property that was inner city that had the lower yield in the first place gets you more actual cash in the bank and not just this fancy percentage on a spreadsheet that someone will put in front of you.

[00:17:16] Pete: It's the same stuff that we talk about from a resi point of view. If you're chasing your 7% yields, you're often compromising on location and quality of the property. So there'll be a high vacancy period in these properties 'cause they're not in the best location, and a much, much higher maintenance cost too.

Yeah. So your gross yield of 7%- ... on a resi is probably 5% when you factor all that stuff in. Same thing as commercial.

[00:17:37] Imti: Yeah. It's just the consequences in commercial are much higher.

[00:17:40] Pete: Much higher.

[00:17:41] Imti: Right?

[00:17:41] Pete: Huge. Yeah, yeah. But the principles are the same, right?

[00:17:43] Imti: Yeah.

[00:17:44] Pete: you compromise on location and quality, you're gonna pay the price somewhere.

[00:17:47] Imti: If you're just chasing yield and cashflow, whether it's residential or commercial, there's risks involved. Just with commercial, the risks are so much higher.

[00:17:54] Pete: Yeah. '

[00:17:55] Imti: Cause of lease, right? First thing that we touched on. And location is a way to manage that, you may need to compromise on the sexy cashflow target. And that brings us to lending, which is the third L that we wanted to quickly cover. And what a lot of people don't realise is how different the commercial lending space is compared to residential. and this is where the whole percentages on paper versus cash in the bank thing is really, really important.

Because... And to put Pete on the spot here, I ran Pete through a cost benefits analysis breakdown when he was really keen-

[00:18:27] Pete: Hmm

[00:18:27] Imti: ... on buying commercial probably six months ago at least.

[00:18:31] Pete: Yeah.

[00:18:32] Imti: And not to say that he may not still end up buying commercial property, but I'd definitely say that the lending and the fees and the costs side of it probably made you take a second to actually think about things, right?

[00:18:44] Pete: Yeah. It just made it so clear that I have to make sure that if I do go down the commercial path, I get the right asset.

[00:18:50] Imti: Mm-hmm.

[00:18:51] Pete: Because all these consequential costs and fees up front-

[00:18:54] Imti: Yep ...

[00:18:54] Pete: and then if you stuff it up too, and you got the vacancy periods, it's huge. So-

[00:18:58] Imti: Mm-hmm

[00:18:59] Pete: ... it will set you back.

there's a massive opportunity cost to getting it wrong.

[00:19:02] Imti: Yeah. And for context, you've bought and sold, what, seven properties?

[00:19:06] Pete: Personal properties? Yeah. Uh, eight. Yeah.

[00:19:08] Imti: Yeah. So- If it scares you-

[00:19:10] Pete: Yeah ...

[00:19:11] Imti: it should scare most people.

[00:19:12] Pete: Should.

[00:19:12] Imti: Right?

[00:19:13] Pete: But people don't get scared when they see what-

[00:19:15] Imti: Passive income.

[00:19:15] Pete: Yeah, yeah, all the headlines are.

[00:19:17] Imti: Yeah. The key things that stood out were, loan-to-value ratio.

[00:19:21] Pete: Yeah.

[00:19:21] Imti: So if you're buying a resi property, you can get in with a 12% deposit. If you're buying investments-

[00:19:26] Pete: Even less these days ...

[00:19:27] Imti: e- even less. You may not wanna pay that much LMI, but even less. If you're a, doctor or something, 5%-

[00:19:32] Pete: Yeah

[00:19:32] Imti: ... and you're in, no lenders mortgage insurance. But in the commercial space, if you want to be positively geared, meaning you get cash in your bank account from day one, you are looking at a 30 to 35% deposit.

[00:19:45] Pete: Yeah. Which on a million bucks is 350 grand.

[00:19:47] Imti: Yeah.

[00:19:48] Pete: Plus stamp duty.

[00:19:49] Imti: Plus stamp duty.

[00:19:49] Pete: Depending on the state.

[00:19:50] Imti: Yeah. And then if you're looking at a $1.5 million price point, there you go. Scales up even more. And that's why Pete's transition point earlier was so important, right? For most people looking at their first investment property, commercial isn't achievable, and the commercial that is achievable, you probably don't wanna buy.

The other component is rates. Rates are generally higher in the commercial space ' cause there's more risk to the lender, and they'll audit the quality of the lease. Compared to residential, there's no, "Oh, we put your figures in a calculator, and so long as you've got payslips and you meet the lender's policy, we can get you approved."

It's a lot more detailed and nuanced than that. It might stack up on paper, and then you put it in front of a lender, and the lender goes, "You know what? We're not happy with the tenant." All bets are off.

[00:20:33] Pete: cause they look at all the financials, right?

[00:20:35] Imti: Depending.

[00:20:35] Pete: Or do they they might dig into the financial side of stuff? I mean ...

[00:20:38] Imti: They'll do due diligence on the tenants. They can't request the tenant's financials.

[00:20:43] Pete: Mm.

[00:20:44] Imti: But if you were gonna occupy it as an owner, or if you were buying it with your business, they would potentially wanna review your business financials every single year. Which, yeah, another story for another day.

[00:20:58] Pete: Mm.

[00:20:58] Imti: But long story short, the bank's more involved in your business no matter what. Or the other side of the fence, you go for a second or third tier lender where the rate's 1 or 2% higher. So maybe we're talking 8%, 9%, but they leave you alone.

[00:21:12] Pete: Yep.

[00:21:12] Imti: And for peace of mind, most people might lean that way, but then you've gotta go, " Well, how do I positively cashflow on 9%?"

[00:21:19] Pete: Yeah.

[00:21:19] Imti: And so then your 30 to 35%-

[00:21:21] Pete: Yeah

[00:21:21] Imti: ... deposit becomes 50. And then you go, "Well, shit, where do I get $500,000 from?"

[00:21:26] Pete: Mm.

[00:21:27] Imti: Those tie into each other, and then you've just got the costs associated broadly with the loan and securing the land and the due diligence, right? Overall, what did we map out the costs to?

Minus the buyer's agent

[00:21:37] Pete: It was about 10 grand, wasn't it?

[00:21:39] Imti: Yeah. And-

[00:21:40] Pete: That didn't include the risk fee, though.

[00:21:41] Imti: Yeah, and the establishment fee of the loan itself.

[00:21:44] Pete: Yeah.

[00:21:44] Imti: So you're probably looking at, I'd say ballpark of your loan balance-

[00:21:49] Pete: Yep

[00:21:49] Imti: ... give or take, when you factor in brokerage, establishment, the solicitor's fees-

[00:21:55] Pete: Mm

[00:21:55] Imti: and drawing up contracts and stuff like that. If you're borrowing 500 grand, it's a decent amount of coin. On top of-

[00:22:01] Pete: Yep ...

[00:22:01] Imti: all the other things that you're paying for in terms of contract reviews and if you get a buyer's agent as well. And then if you end up with stamp duty, one of the purchases we modeled with you, Pete, the acquisition cost was 85 grand.

[00:22:12] Pete: Yeah. Just for stamp duty.

[00:22:14] Imti: Just for stamp duty. And then when we bundled everything together, it was the early hundreds.

[00:22:19] Pete: Yeah.

And that's opportunity cost on that money too.

[00:22:21] Imti: And that's just opportunity co- yeah.

Yeah. It's And that's what probably made you stop and think about it, right?

[00:22:23] Pete: It made me think about alternatives.

[00:22:25] Imti: Yeah.

[00:22:25] Pete: Like-

[00:22:25] Imti: It's like where else could you put that $100,000-

[00:22:28] Pete: Yeah

[00:22:28] Imti: ... that you need to spend just to own it.

[00:22:30] Pete: Yeah, just to do that. Yep.

[00:22:31] Imti: Gives you no return. It's sunk cost from day one.

[00:22:34] Pete: Yeah.

[00:22:34] Imti: Where else could you put that 100, to get a better return? Yeah,

[00:22:39] Pete: that's right.

[00:22:39] Imti: That's where the lending component and the overall cost component is something that also gets overlooked when it comes down to commercial.

[00:22:46] Pete: Just on the lending side of stuff, any time it's easier to get money, you gotta pay a price for it.

[00:22:52] Imti: Yeah.

[00:22:52] Pete: So in the commercial space, and I think I told you, I can't believe how easy it is to get access to money in the commercial space, If you've got the capital.

[00:22:58] Imti: If you've got the capital, the right broker.

[00:23:00] Pete: It's not hard. And it's dangerous at the same time.

[00:23:02] Imti: Yeah.

[00:23:02] Pete: But you pay a premium for that.

[00:23:04] Imti: Mm-hmm.

[00:23:04] Pete: So there's a much higher risk. as you should.

[00:23:06] Imti: Yeah.

[00:23:06] Pete: 'Cause it's a high risk scenario, you need to pay a premium for that. But if you have the capital, and if you can do the right thing, which, I would argue only a couple percent of people do get commercial properties right it can be game changing, but for most people it's not.

[00:23:17] Imti: Well, here's the thing, right? In residential lending, there's best interest duty.

[00:23:21] Pete: Mm.

[00:23:21] Imti: We have to act in the client's best interest. In commercial, that doesn't exist. If you've listened along and you have listened to the two-parter around our investor gone wrong study, the commercial world does that at a whole different level ' cause the commercial BA will charge you maybe 2% of the purchase price, then the broker, legal teams, all that sort of stuff, probably another 2%.

And no one in that transaction, really needs to act in your best interest from a legal perspective. And so in that situation where the access to money is easier, like you just said, Pete, and it is scary, how easy it can get when you have the capital.

There's no incentive for anyone to talk you through the risks. It's just, "Yeah, you can get the money."

[00:24:05] Pete: Yeah, 'cause it's a payday, yeah.

[00:24:07] Imti: But then you've borrowed at 9%, you're 100 grand out of pocket for fees, you've bought in the wrong area at the wrong price point, and the lease doesn't stack up, and then you're vacant in nine months' time.

[00:24:17] Pete: Yep. But it comes back to getting the right team, though.

[00:24:20] Imti: Yeah. '

[00:24:20] Pete: Cause it could be a completely different scenario. Yeah, you gotta pay 'em.

[00:24:23] Imti: Mm-hmm.

[00:24:24] Pete: But unfortunately, in this space, there's not a lot of people who are acting in the best interests of people.

[00:24:28] Imti: No. And that's so important to emphasise, is that, bringing us to a close, if you are thinking of doing commercial property, and you have been asking yourself, "Is commercial property the answer to passive income?"

The answer is yes, but, and it's a but in huge capital letters. And the only way that you overcome that as someone who isn't in the industry is actually to have the right team around you, and look at alternatives ' cause the right team around you will get it done. Looking at alternatives is about having the broader team.

It's having a financial planner. It's about looking at residential property instead. It's about looking at doing nothing. Pete, one of the conversations we had-

[00:25:11] Pete: Mm

[00:25:11] Imti: ... was do you just do nothing and maintain for the next five or six years?

[00:25:14] Pete: Sit pretty.

[00:25:15] Imti: Yeah.

[00:25:15] Pete: Yeah.

[00:25:16] Imti: Because what was the upside of you just staying with your current residential portfolio structure versus concentrating into commercial?

[00:25:23] Pete: Oh, yeah

[00:25:23] Imti: Or buying, another residential and then just being like, "Okay, we'll stick for seven years," right?

[00:25:28] Pete: Yeah.

[00:25:28] Imti: But unless you understand all of those alternate routes, and commercial still makes the most sense, then you're diving into commercial and really trying to look out for lease, lending, location as your screen

[00:25:43] Pete: Yeah

[00:25:43] Imti: to get it done. Before we wrap up, was there anything that you wanted to leave us on, Pete?

[00:25:47] Pete: Probably just be more in the BA space at the moment, which is kinda annoying me a little bit. A lot of resi BAs or even just brand new BAs are just jumping into the commercial space.

[00:25:56] Imti: Mm-hmm.

[00:25:57] Pete: And, yeah, look, I'm sure some of them do a good job, but I think a lot of them are very inexperienced. Like, I don't offer commercial.

[00:26:02] Imti: Yep.

[00:26:03] Pete: There's no way I would ever do a commercial deal for a client.

[00:26:05] Imti: Mm-hmm.

[00:26:06] Pete: Not saying it won't be something I'll do in the future, but it's just haven't done it.

[00:26:10] Imti: Yeah.

[00:26:10] Pete: So-

[00:26:11] Imti: We've talked about it off-air.

[00:26:12] Pete: Yeah

[00:26:12] Imti: Like, you wouldn't do commercial unless you'd bought commercial yourself-

[00:26:16] Pete: Yep

[00:26:16] Imti: and could demonstrate that you'd done it end to end and done it well.

[00:26:19] Pete: 100%, yeah, and that's why before I started the business, it was building the portfolio, it was buying in all the different states-

[00:26:24] Imti: Mm

[00:26:24] Pete: ... as well so I could offer that service and say, "Hand on heart, I've done it. It makes sense."

[00:26:27] Imti: Mm.

[00:26:27] Pete: "This is what I've done." Just be careful who you're trusting, particularly in the BA space.

[00:26:31] Imti: 100%.

[00:26:31] Pete: That would be my big takeaway.

[00:26:33] Imti: To just double down on that, the fact that someone who's an experienced residential property investor and a buyer's agent, we were running their numbers, and we were factoring in them paying a buyer's agent.

[00:26:43] Pete: Yep.

[00:26:44] Imti: That should probably tell everyone how complicated commercial is. On that note, Pete, thank you for helping us break that down and being open about your story around commercial. If you've made it this far, thank you again for coming on the journey. If you're a first timer, welcome aboard. If you're a regular, welcome back, and we'll catch you all next week