Helen Tarrant on the Rules, Risks and Rewards of Commercial Property

In this episode, we speak with Helen Tarrant, one of a growing number of buyers agents who specialise in commercial property. Today, we'll be delving into the fundamentals of commercial property investing, what sets it apart from residential and why it remains misunderstood by so many.

We'll be discussing lease structures, tenant risk and how finance works differently in this space and what investors need to look out for when assessing a deal. We'll also explore how the commercial market is evolving in response to broader economic and social shifts and how buyers can stay ahead of the curve.

welcome to the elephant in the room this is the podcast where we love to talk about the big things in property that never usually get talked about i'm veronica morgan real estate agent buyer's agent and buyer's agent mentor co-host of foxtel's location location location australia author of auction ready and co-host of your first home buyer guide

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Our guest today is Helen Turand, founder of Unicorn Commercial Property.

With a background in commerce and law and firsthand experience as both an investor and an advisor, Helen has carved out a reputation for helping everyday Aussies understand and access the commercial property market, an area that's often seen as too complex or risky for the average buyer.

So we're going to discuss whether it is or isn't and what's involved there. We've only covered commercial property investment a handful of times really over the last seven years. So we're looking forward to learning about this as an asset class. So welcome, Helen. Thank you so much for joining us.

Lovely to be here. I want to delve deep into those issues.

Let's start there, right? Veronica's right. We haven't done too many on commercial and I think we do a lot of residential investing ourselves and our listeners, et cetera. But I do think there's a little bit of a proliferation, hype and excitement around commercial property investments.

I've seen a massive shift in our client base, et cetera. But just in that shift, what's from a mindset when you're going from a residential property investor to a commercial, what do you think is the big things investors need to think about?

I was the original commercial property educator, like 2016 when I started educating every day Australian how to invest in commercial. We're the only people, still today, the only people who does free webinars and lots of free content on commercial property investing.

And I think the fundamental thing that everyone keeps forgetting when they shift from residential to commercial is that they speak a different language and it plays by different rules.

And I have so many, and this is probably one of the bugbears, so many people come in from the residential spaces and say, oh, I'm a really seasoned investor. Yeah. residential. I have 12 properties. I've accumulated massive wealth. I have this much equity.

And I just want you to go and buy me a property. Here's some money. And I'm like, do you know what a yield is? No idea. Still thinking gross yield versus net. What's an option? I've had high net. What's an option? And I said, okay, so stop.

I need to know your big picture, how much income you want to replace, what's your timeline, what's your big picture goals, and you're going to need to understand some fundamentals of commercial property before you start. And they're like, not interested, don't have time for education. And it's like, okay.

So you want to have financial freedom. And you're banking on this one strategy to get your financial freedom, but you don't want to invest three to five hours even to learn to speak a different language.

Because I said to them, look, imagine residential speaks English and commercial speaks Mandarin and that you've played chess all your life and now you're playing checkers. How the hell are you going to win at this game?

And so I think that's the biggest mindset shift that people have to make is that commercial speaks a different language. The rules of engagement is different. So... Do yourself a favor. It doesn't have to be me.

Just learn the fundamentals of how this game is played and the fundamentals of that you don't sound like an idiot when you talk to an agent on the phone so they don't give you bullshit when they talk to you, right? And that's really it.

I like that because it is, I often talk about in residential, it's the rules of the game. And quite often people play in this space and they think they know and they actually don't know. It's like they've run on a soccer field and they're playing to AFL rules.

So I get your metaphor there. One of the things that we've observed, though, is that it's become... much more mainstream. You know, we were talking off air and Chris is saying that he's becoming, you're seeing, oh, she might've said this on air.

You're seeing more and more of your clients wanting to invest in commercial. And people do come to me too. They say, well, now, you know, I'm sorted with Resi. Now I need to diversify and I like property. So therefore I'm not going to diversify to other assets.

I'm going to go stick with property. I'm going to go commercial. And I agree. And in my business, we don't do commercial unless it's for an owner occupier because the rules are different. And because we haven't tooled up on that and schooled up on that,

What are some of those rule changes though, so we can get a bit more of an understanding of the difference?

One of the big things I think in residential fundamentally is that people want to know as a bias agent from a residential point of view, when you start out, they want you to show them an area report.

It doesn't matter where you buy, wherever you buy, they want to see an area report, they want to see your vacancy rate, they want to see historic data, historic growth, they want to see a vacancy rate. They want to see all of that and they want to see what they might be in

five, 10 years time. And they expect that same thing when they come to commercial. Well, actually, that doesn't work that way. I can show you a suburb profile, but what is 20 warehouses in a suburb going to do for you? It doesn't show anything, right?

And the one warehouse that you buy, I'm just using warehouse, but it can be office or retail. But out of a row of three, the middle one could have BHP as a tenant and could be worth twice as much as the other two.

So the fundamentals, you've got to know what are the levers that affects the value of the property.

And it comes back to education. If you don't know your fundamentals, you don't know and you can't deem it. But the things like the lease term, the area, the tenant itself and the type of property. These are four fundamentals that affect the value of the property.

Anytime those values change, the value of the property changes. And underneath that, there sits another about 10 or 12 sub-factors that can influence valuations. But let's just take a really good example. Let's say, which is the most popular, it's like, I want a medical tenant.

Everyone goes, I want a medical tenant because after COVID, everyone wants a medical tenant. So You want a medical tenant in a freestanding building in a metro area. So a freestanding building, a medical tenant, long lease. When I say long lease, let's say five, seven year lease in a metro area.

Now that property, if it's Sydney, is going to trade somewhere around that four, mid four percent yield. And that's net. That's net after outgoings before mortgage. It's going to trade at that, right?

So any average of that kind of property is going to be sitting somewhere probably around that five mil range at least. But you take that same property and you say, okay, I want the same thing. I just want a higher yield.

So you go, okay, well, I'm going to take this property and move it to, let's say, Brisbane Fringe, like Ipswich or areas like that. Now, all of a sudden, that property is now maybe 5%, 5.25%. Same profile, but now it's a little bit higher. Maybe that's not enough. Let's want a higher yield.

Okay, well, let's go. We might go to a Townsville or a Cairns or somewhere like that. And all of a sudden, that property is like a 6%. But then let's say let's go to an Emerald, right? We're in the middle of a mining town.

And that same tenant is now a 7% or 7.5% yield. Is it the highest yielding in that market? Absolutely not because there's still a medical tenant in a freestanding building. But your yields are shifted purely by location base, right?

And so if you change the other lever, let's say you're in Sydney and all of a sudden you're in Sydney, you've got a medical tenant, it's a freestanding building, but you've lost your lease. The lease is not a five or seven-year lease. It's now a one-year lease to go.

It's no longer a 4.5% yield. It may go up to as much as a 6% yield because it's now deemed unsafe by the market because there's a risk element that gets priced in.

But what you're talking about there is that the value of the property has to go down in order for the yield to go up, right? That's what you're saying there?

Yeah. So the value of the property goes down as the yield goes up and it's a vice versa. So it's an inverse relationship. So as the value goes up, the yield goes down. Yes.

So a longer lease with a blue-chip tenant, for argument's sake, is going to have a lower yield and thereby a higher purchase price compared to a more risky tenant with a shorter lease, similar type of asset.

Yes, yes. And this is where first-time investors get tripped up because they want big, shining, bright objects of they want to buy a childcare centre, they want to buy the next McDonald's. And they go to me and go, can I buy a McDonald's? It's like, well, yeah, if you have $10 million, but...

It's not really going to give you much return. This is more people parking money.

Generational world people have a lot of money and they're buying that as part of a portfolio play and they're buying something else along with it because a 3% yielding McDonald's on a 20-year lease is still not going to give you much income.

When you're looking at understanding people's goals, you said at the sort of start and their longer term plan, et cetera, like when do you say commercial is not a good idea? Is it a price point? Is it a stage of life? Is it they want growth versus just income?

Where does it really fall down and say, you know what, just what you want to achieve just isn't the right fit for commercial?

And I've had that conversation with clients. So one of the big things that I look at here at Unicorn, which is different from the other bias edges in the commercial market, is that I'm very big about building the long-term portfolio because true wealth is building portfolios, not transactional property deals.

And one of the things that comes in is I've got clients who said, and we just had that on a webinar literally yesterday. I was in Perth. I've been invested in Perth last two or three years, had a 15% to 17% growth in

At the same time, we've had cash flow by it means 50 bucks a week. Cash flow. Why should I be switching to commercial? I don't know if that's the right next step for me. And so for me, that is already a sign that that person is probably not right for commercial right now.

Of course, he's chasing that little bit of greed that the next big boom somewhere. rather thinking, all right, I want to replace a $250,000 or $500,000 income. How can I strategically go there in the next five, seven, nine years? And he's thinking, where's my short-term gain?

He's asking me to pick that horse, right? And I'm not prepared to pick that horse because I could gamble that with my money.

I can gamble that with my business partner, people that I know have a certain risk level, but not for someone new walking into the door saying, I just want to duplicate what I did over in Perth. And so at that point, they're not ready for commercial.

They're actually canvassing the market for different strategies because all they did was got so sucked into that greed of getting that 15% to 17% and hoping to be the next right horse. So they're not ready. That's one client, one type.

The other type is they're probably more suited to potentially co-living or boarding houses over commercial. In that situation, they sort of have had residential for a long time and they may have been a residential investor, but maybe been out of the market for five or seven years.

They're coming back in the market and it's very much, oh, you know, I want this income, but I want to buy in this area. It is very... fixed. It's very narrowed down to where they want, right?

So, I only want to buy in Melbourne in this area and I'm really focused on growth and I don't care about cashflow.

If you really want to buy in Melbourne or Sydney in this area, then you're better off doing residential, potentially turning that into a boarding house or a rooming house over doing commercial, right? So, because commercial is here's your big picture, here's your strategy, here's your property profile.

So, where do we go to max to meet this property profile?

You need to be a bit broader. You can't just be a pigeonhole. So then the growth, which is a lot of investors are in this camp at the moment. I think the speculation is probably investing is turned to property speculation, I feel, in the last couple of years, right?

It's all about hunting the next growth spot and the proliferation of buyers' agency in that space. And then also the social channels, for example, have all been in this. This is

positive feedback loop and everyone's pumping everyone else up so those investors don't sound it sounds like the investor that is a real growth hunter and he wants to buy something just like a buy and hold is sort of sounds like that's not right if the perfect person for commercial walked in the door is it someone a little bit older you sort of highlighted that there's someone who's trying to transition into a into an income stream in the next 5 10 15 years versus a say an earlier sort of 30 30 year old trying to build growth like where do you see it really fitting well

So most of our clients are professionals and they're professionals trying to get out of the rat race or they're in their own business knowing that the business might fail and they're making money now, but they may not make money next year.

They want to be able to put it into an asset that is not dependent on them. This is one key thing about commercial is it's not dependent on you. You could be sick. You could take a year off. You could be sacked from your job. You could do whatever.

The commercial property will continue to go. It will self-sustain in terms of repaying its debts. It will have growth and sometimes more growth than residential in the background. And we have younger people chosen now. And this is really interesting.

In the last 12 months, we've had more people who've chosen strategically not to do residential and go straight into the commercial space, which we haven't had. In 2016, when I started, accountants and wealth planners were saying, don't go to commercial. It's too risky.

The same people are now saying to the client, just go and see Helen. Find a property. Buy it into your super, do it in something else, and you're going to sell half your portfolio and do this, right? So it's a bit of a change.

But also young people now have said, well, I don't want to be shackled with potential negative gear. I want to go and live my life.

I had a client who was young in probably late 20s, knowing that he's going to move to London for a year, potentially be there for a couple of years for work, maybe travel around, don't know. Have worked a few years and go, look, I've got some money. I made some maybe potential risk.

I won't be here. I don't know if I'll be here. So I want that money to be invested in commercial. I want it to tick along in the back end, and I don't want to worry, and I'm going to go and live my life. And that's the fundamentals that commercial has served him.

You make it sound very easy, but I suspect it's not, and I suspect that not everybody has those outcomes. Obviously, they come to you, so they do have those outcomes, but there'll be a lot of dangers. For example, a lot of people starting off in residential are

A very common price point is $600,000. Or you've got buyer's agents that specialize up to $750,000 for argument's sake. They go and buy a particular type of asset and they've got a formula. It's like they're just punching out cookies. Whereas with commercial, it's commonly accepted that you get a high yield.

Risk and yield are sort of inversely proportionate, right? So in order to get the income, there's usually a sacrifice of capital growth. And unicorn, like the name of your business, the unicorn is high yield and high capital growth.

But then the very fact that would provide that would mean lots of buyers would pile into it, pushing the price up, which means that it would no longer have both of those things, right? That's how the market works itself out.

So for people who were thinking about investing in commercial and sort of, I guess, instead of... residential or now that they've got a portfolio in residential and it's part of their strategy, what is the sort of price point where below which there's just too much risk? Is it they need two million?

Is it one? Is it five? I mean, where do you see that you're amongst the rats and mice and really bad type of tenants and Small businesses, we're very at huge risk as tenants, all that sort of stuff.

Where does that kick in? So I named my company Unicorn for a reason because I used to ask clients, I say, coming through the door, what are the optimal characteristics of the property? And everything was always the same, right? It's always the same.

I want a long-term tenant with a property under a million dollars with development potential with high yield in Sydney.

Yeah, that's a unicorn.

It's a unicorn. So let's just call the company Unicorn. Let's call it Unicorn because it doesn't exist. And we were in a modern day where people spelt their name with different letters. So we spelt Unicorn with a K. So I was like, why not? So that's how Unicorn came about.

But the idea is always getting them to build the Unicorn portfolio. which has three fundamental strategies, which is cashflow, growth, and uplift. Now, one of the mistakes that a lot of residential buyers get into the commercial space is tell their clients to buy something middle of the road, right?

Get something that gives you a little bit of growth, little bit of cashflow, potential uplift in three or five years. That does absolutely nothing for your portfolio, right? And here we go, buy a property. If you just wanted to do cashflow, just focus on it producing cashflow.

If it gives you growth, like all properties gives you growth, it's a bonus. If you're doing growth, then chase the growth hard. You're doing an uplift, then focus on the uplift. Don't mix your strategies. You mix your strategies and you end up with Frankenstein. That's what happens. You don't have a unicorn anymore.

This is where the price point comes in because there is a pyramid, a biased pyramid like what we like to talk about because here at the sub $2 million level and really sub $1.5 million level, if you look at it, almost everybody in Sydney or in Melbourne have been given the gift of equity, not like Brisbane hasn't, but more in Sydney and Melbourne, can pull out money and buy a million-dollar property any day of the week if it's the right property.

They're enticed in it. They'll do it up to $1.5 million. So that space is really, really crowded, really, really busy, and it's also filled with unrealistic expectations. You're not getting a three-standing property in Metro, one and a half million in commercial. It's not going to happen.

And if you do buy it, it happens to be 3% yield. So what's the point? So you're not getting that. You're paying for a premium for a freestanding. That's really competitive. But the worst of that competition is where it's in that $500,000 level. A lot of people can buy.

And because they bring their resi mindset in here, they go, I can buy one and a half. But just to be safe, I'll buy two at $750,000. It's like, no, that is the worst thing you could do. It's not a good idea in resi either. Yeah.

Do you think EHP is going to rent a $750,000 property or a $7.5 million property? And so they're like, oh, okay. Do you think the dentist company is going to rent a $750,000 unless it's really regional? They're not going to rent a $750,000 because that's a 50 square meter, 60 square meter

retail space, right? And it's the limited of tenant pool for it makes it high risk, right? It's not that the tenant is going to go bust. It's the supply of tenants that fits that premise. And also the ability for that property to be versatile just gets taken out.

It's very unlikely unless you're at Eastwood. When you're dividing a 60-square-meter property into a 30-square-meter property and so on. But most of the time, you can't divide it in half. You have to rent it out as it is. You're constrained by all the other tenancies in that building and the tenant hub.

So your limited pool of tenants is constrained. And that makes it more, I guess, more risky.

Because, of course, and this is one of the big risks of commercial, isn't it? If you lose your tenant, then what happens? Right. You see commercial sites sitting vacant for months and months, sometimes years. And then that obviously impacts the value as well.

So there's a real catastrophe, I guess, around making sure that you do have the ability to appeal to many different types of small businesses.

Yeah. And that's actually, it's really interesting you talk about this point because everybody thinks vacancies is the highest risk in commercial property. It actually isn't. It actually isn't.

And because this was demonstrated at the height of the commercial market, which is after COVID, is that buying at the wrong yield, a cap rate wrong yield, it's the worst mistake in the market.

And we have seen buyer's agents, this is why we stayed in the buyer's agency space, because we're like, we at least brought, we're going to tow the yield line. We're going to make sure that we fight this frontier, is that I saw them being sold 6% yielding properties in Rockhampton.

When you sit in Sydney, 6% warehouse probably on large land in Rocky is fantastic. But they don't know that Rocky has been a 9% town for the last 20 years. It's just now gone to maybe 7.5%. And it's all because of this crazy movement during the COVID period.

While in Sydney, our industrial yields are like 3.5%, 2.5%. 6% is so good. But you're not acting locally. You're just sitting here thinking, that's a great transaction. That... is firstly a really, really bad mistake.

But secondly, if that had a vacancy on top of it in an area like Rocky, which is more prevalent than some of the other regional towns, then you're stuffed on both fronts, right? And that's the fundamental mistake people make and then they go, I never wanted to do commercial, it's so high risk.

It's like, well, you didn't act as a local when you invested, you didn't make a plan and you didn't have a backup strategy, which is what we give to our clients every time we do a due diligence on a property.

So, I mean, regional buyers agents do make exactly the same mistake with residential as well, just so you know. But I mean, what would be the backup strategy? What sort of backup strategies would you be looking at?

Firstly, I mean, I would never put a client at 6% into Rossley. But if it happened to be, then I would be saying, when I look at a property like this, I always say, what else could it be? If the tenant defaulted tomorrow, What can this property be?

How much is it going to cost me to change it to something else? So if they buy a freestanding industrial, like we drove past, and this is not even Rocky, but we drove past in Lane Cove.

They went for a drive in Lane Cove just to have a look how much vacancy is in that area. And there's a massive industrial warehouse office space that never got refurbished. That's like 1,600 square meters to 3,000 square meters for let. And

But my business partner was saying, oh, look, it's probably been vacant for three years. And I'm like, yeah, because no one in the market rents 1,600 square meters. Who the hell gave the vendor or the landlord this advice, just rent it out as is? This is stupid.

I mean, you should be telling him the market is not right. The market sweet spot is between 250 to 400. You need to gut that place and turn it into mini units. and then fill it or change it into self-storage. Whatever it is, you need to give them the sound advice, right?

And you need to tell them the hard truth is that will cost you half a million dollars to do, but you will make that money and more once you've done it and put the tenant in.

Because you can also, instead of charging a $250 to $400, add some amenities, make it nice, rent it to someone who wants to be in an office space, but they don't want to be in an office space. They want to be in that retro chic place. industrial chic, give it to them.

And instead of being $250 a square meter, charge them $350 a square meter because you're now different. Now, after you've done that, your value of your property, yes, there's short-term pain, but the value of your property will double. And it will take 12 or 24 months for you to do this.

But if you don't, the reality is you're going to have vacancies for three years. Which one would you like?

Isn't this what commercial property managers are meant to be doing? Oh, no. Isn't that their job?

No, no, no. They don't have a clue. They will not be able to tell their clients that. They will not be able to have that hard conversation because they're not wheeler dealers and they're not dealmakers in the market. They can't see what the demand is.

They're managing a property to collect rent, to deal with tenant issues, and to renew leases. And they're really great at that, but they're not asset managers. Now, asset managers will have that foresight. The strategists, I'm in the field looking at properties all the time,

We'll be able to go, okay, this is the demand because this is what people are buying. This is what my clients are saying they want to buy. This is what tenants are filling up. This is where the most amount is easily to be tenant when we look at the swap over at tenants.

Property managers don't look at this stuff. They don't look at that data. They don't understand it. So people rely on the property managers. Then they're relying on the leasing people who just want to lease it because it's easy and they don't want to have the hard conversation with the landlord.

And I guess someone has to.

I'm on a personal mission to help more people make better property decisions. You know, most people don't realise that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need.

And what I do is help people with tricky real estate problems, which often masquerade as simple questions like, should I sell my investment property because the interest repayments are hurting? Or should I buy before I sell? Or the other way around.

You can connect with me and access all of the tools that I've created to help you make better property decisions at veronicamorgan.com.au. And there you will find resources for first home buyers, details about my buyer's agent mentoring program.

You can connect with my Sydney based property management and buyer's agency teams, Australia wide vendor advocacy, or ask me for introduction to the small group of buyer's agents that I would personally recommend across the country. That's veronicamorgan.com.au.

If you're considering a property move such as buying your first home, upgrading, renovating or investing, the team here at Alcove would love to help you think through your decision and get the finance right. Please go to alcove.com.au to reach out. I just want to say I'm enjoying this chat though.

You've got a lot going on here and I think you're doing a good job. So you said you're on around the price points thing. So if you sort of

reflect on the new commercial buyers agents in the market and this isn't us just knocking and saying new people can't come into the industry but when you've got more experience you start to understand that you can see the pattern right you can see the pattern mistakes that people new to the industry are making just because they haven't got the knowledge right and it's not because they try to do the wrong thing it's just they haven't got the knowledge so when you look at this people entering this commercial space which we can see that there's a lot more buyers coming into this space

You've highlighted the price point here. So, you know, I'd be curious to see where a lot of your clients are really starting at in terms of what price point. So go there first. You mentioned they're under that sort of million, 1.5 range. Like, are you really looking two mil plus?

Because I've always had the belief that It was sort of the 5, 10 mil range. Even some of the big commercial clients that we've got is they haven't had much success when they're bought pretty cheap. But when they're bought really the bigger blocks or the bigger price point, they've done really well.

And you can listen to people like Scott Keck at Charter Keck. They always say, you know, the monkeys play under the sort of 5, 10 mil range. Like how do you see where the price point where you are playing those rats and mouse prices?

There's two different questions. So we would take a client that wanted to buy $500,000 and school them and say, look, these are the things you need to look at. If this is all you've got, then we're here about helping the masses. I'm a really big believer in helping.

You've got to start somewhere, right? My first property was $360,000 when I bought it, right?

Yeah, but how long ago was that?

No, it was in 2012.

Yeah. Okay. So it wouldn't be that now, right?

No, it wouldn't be that now. Well, we sold it a few years, two years back, three years back for about a million and 50, right? So it's sort of like, this is all you have. I'm still going to help you get started into buying the best value there is in this market, right?

And the market changes all the time, but the real value at the moment on that sub 5 million level is probably between somewhere around two and a half million to three and a half, maybe 4 million. So those type of properties, firstly is a land grab. right?

So you're getting a stakeholder in an area that potentially in the future, there's very little land that's going to be developed for commercial. Secondly, you can still get decent mid-tier tenants that come into them. They're paying somewhere around $150,000 to $200,000 in terms of rent, right?

So that's a decent sized tenant that can afford it, that will have tenant established history. You would get a property that can be versatile.

So it can be two levels that you could potentially split into two tenancies, can be one big shed that you can go into halves, can have some land that later on maybe you could extend. So there is some inherent value as it is.

So if it was vacant, it won't go boom, it won't plummet, right? So it will hold its own, right? So in that sense, if you are a starter sub 5 million, that space is a good space to be in.

If you're in that higher bracket, then we're looking at that $7, $8 million is a good bracket between five to 10, because that gives you access to buying a small shopping center, gives you access to buying, say, a couple of warehouses together, a whole freestanding building that's quite decent, that has a decent tenant in there.

Those are the things that we look at is not whether the foundations hold its own, plus the tenant itself, and also, I guess, future-proofing. Future-proofing is really important. important.

So yeah. Do you find people come to you wanting to sort of get into a syndicate? If someone's got sub five, but they like to join forces with people who've got more and then potentially buy a better asset all around, do you get much involved in those?

We just did a massive syndicate here in our group in the last few months. And the reason we did a syndication was because people really struggled to find $1 million property. So our syndication's So when we're at the higher level, people who do syndication usually know the people that they do.

So a group of doctors will come together, a group of lawyers will come together. They might buy $20, $30 million. So that's a different syndicate. When we syndicate our community together, it is to buy maybe a $20, $30, $40 million asset.

But we break it down to that unit level where they would have gone if they bought a $1 million property. So it's more like the Robin Hood theory. So this is the level that the rich play at the top of the pyramid where you get Cashflow, you get growth and you get security.

You get all three things. So we secured a property in Burwood East in Melbourne, the National Archives, which is backed by the treasury. If they go broke, the country's in disarray, right? So it's backed by the treasury, was chosen for them. They've been on site for 30 years.

They've just renewed a new lease of five years and the building's pristine because they take care of everything because it's where all of our tax records are, the building of the house, all of those things that are kept, right?

No water issues in that building.

No water issues, no air con issues, it's climate controlled, security top level, like all of this stuff and no roof issues, right? And that was secured around that $32 million mark at a 7.5% yield, right? And so as an investor buying a $1 million property, you're never going to have access to that.

Like you just don't. And that has all of the effects. And that's why you go, the rich do get richer because that is one property like that paid off over a lifetime is generational wealth.

If you're involved with a syndicate like that, I mean, who runs a syndicate? What are the mechanics of shareholding? And, you know, somebody wants to sell out of the syndicate. I'm presuming they don't buy a lot of that. How does it actually work in commercial?

So it's done at a unit trust basis. So everyone buys a unit in the unit trust. And when we do it, we make sure no one has over holding. They don't have a substantial holding. So no one can buy more than two units in that unit trust. So sometimes it's only one unit.

Like you can only buy one. So if we're doing a small one and there's only 20 units, everyone just gets one unit. No one gets more. So in this case, we're slightly bigger. So at most it's two units.

And what happens in that case is like they buy the unit, they get a unit certificate. It comes in, it's managed by a property manager. We would run it on a consultancy basis. So we'll troubleshoot it. We'll consult or we'll look at the leases. We'll do that.

We'll do an audit on the property. And all of that stuff we'll do as an ongoing thing. But they'll have a property manager who will distribute the income to them, just like a property that they owned.

So they'll come in, they'll take out any additional expenses, put a buffer in place and then distribute evenly to each of the unit holders on a monthly basis.

How would they borrow? How would they fund that if they're not funding it from cash?

It's funding it at the top level, the unit trust level. So the unit trust is a corporate entity and basically everyone's putting their money. It's not leveraged money. They're putting their cash deposits or whatever.

Even if they did a hundred, they pulled it out of equity, they put it into the unit trust and that unit trust goes to the bank and have a non-recourse loan.

Helen, with this proliferation of commercial buyers agents, I sort of didn't answer, didn't finish my question before. Where are they going wrong? Like you mentioned there around buying it on the wrong cap rate, right? And the wrong yield. And like you said, resi investors come into commercial, they're not backtesting it.

They're not knowing a rocky used to be nine and now it's six. And they just still think six is good. And they don't know the risk they're taking if it goes back to nine or they can't get a tenant.

But these buyers agents are going there because that's where the demand, like what are some of the big mistakes? Someone who's a seasoned buyer, commercial property investor, what are some of the big mistakes that you're seeing them make?

I'm going to get into trouble when I say these things. I'm sure you have the backlash, but they have really the wrong benchmarking. This is one of the things that they... So you've got to benchmark things, right? So what's the yield, the cap rate? How does that compare?

As a buyer's agent, the way I see it is your job is to get your kind of best deal for for value, for money in that market based on their goals. And if you don't know your benchmarking in the commercial space, that's where you're going to get wrong.

So a lot of people tell their clients, and Perth is a classic case, I'll go to Perth because it's a better yield than the Eastern Seaboard. It's like, well, where are you benchmarking it around the Eastern Seaboard? So they benchmark it against Sydney and Melbourne.

And it's wrong because Perth has one-tenth of the population of Sydney.

So it's like, well, you can't benchmark it against Sydney because obviously it has a higher yield compared to Sydney. Everywhere it does. It's like if you're in Alice Springs, you can buy anywhere in Australia and you'll be less risk. It's like you can't benchmark it against it.

You've got to benchmark it against Brisbane at the top here and you've got to benchmark against Adelaide at the bottom. So you've got to look at that as the range. What can you get in Adelaide? What can you get in Brisbane?

If it's a yield to yield comparison, your clients are going to be better off in a Brisbane or potentially in an Adelaide because there is more demand in a Brisbane.

There's more supply of tenants in there and there's more potential capital growth with the Olympics and all of the drivers that's coming into that market versus a mining driven economy.

Obviously, the play with buying commercial, right, is you're buying an asset, cash flow is better, you get yourself a really good tenant, and then that tenant renews and potentially you get a yield uplift, et cetera.

But this strategy where you're sort of increasing the rent and you're getting people to sign new leases and you're changing maybe the usage of the property to appeal to more tenants, et cetera, like...

Wouldn't you, if you owned that property, make those changes if they were easy or before you sell it, get all your tenants on longer leases and higher rents because then you're going to be able to sell it for a higher price.

Like this strategy of sort of taking advantage of the arbitrage in the commercial property market, like someone who's been looking around, are these literally unicorns and is it really hard to pull off that strategy? It's kind of like the flip property strategy, right?

I'll buy a property, I'll do a reno and I'll sell it and I'll make money like it's the block.

Does that really happen in commercial space or is that strategy really hard to pull off unless you really, really, really know the local market, the local leasing demand, and you can find those opportunities where maybe the current owners just completely missed it?

That's a longer question. So I'm going to go back a little bit and answer that previous question. You asked me for a couple of mistakes and I'll lead into this because it kind of leads into this. So firstly is the benchmarking. The second bit they do is the tenant doesn't suit the premise.

The tenant is actually the wrong tenant for the premise. So I can listen to auction and go, Okay, that's the right thing. That will sell, that will sell, that won't sell because that's the wrong tenant mix or that tenant shouldn't be in that premise. It's a bit odd.

So it's like saying I've got all lawyers and doctors and all of a sudden I have a kebab shop, right? Well, they've got to eat. And it happens more than – they've got to eat. No, they've got to eat. Yeah, yeah, fair enough, right? And that's the argument, right? They got to eat.

And sometimes that's the anomaly that ultimately that tenant's not going to work out, right? So you sort of look at that. And so that's one of the mistakes that gets missed. So that leads into your question, this flipping, it's like, does that strategy work? Absolutely.

I do it passively every single day of my life. I want to run this business. I just have it running. I've got three different projects that I'm going on the side at the moment. So I'm doing a childcare refurbishment in Townsville.

I'm doing a vacant uplift in ACT and I'm doing a gutting and I don't know, probably sell it to an owner occupied down in Adelaide. So it's all around Australia. But can the average person do it? No.

They have to have foundation knowledge and they have to really know their commercial property stuff before they do it because the downside of this is also really huge. So it's really great gains. Can you get 40% returns? Can you double your money within 12 months? Absolutely.

But can you also be in a hole for three years and just deplete it and go broke? Absolutely. It's the opposite sides, right? And picking it is also really, but you've got to know your area, right? You've got to know the demand.

And the demand in Adelaide is different from demand in Brisbane to ACT. The demand of who is going to be the tenant, but who's also your buyer is fundamentally different. But the other thing about it, there is a lesser version. So there's like the hatchling version and then there's a full flight version.

But in your answer to your question, and this might be a bit of a long answer, is you can do it on a smaller scale.

So for example, you can buy a property, depending on your risk tolerance, you can buy a property that has a tenant that's been there for a while on a month-to-month lease or a tenant that may have a lease that's expiring in six or nine months.

So you can buy those type of tenancies, knowing that it's the wrong fit for the tenant mix in that area or that particular strip of shops and go, okay, actively, I'm going to go out and find a different tenant. And then you've bought yourself some time.

So you've de-risked it by buying yourself some time. But also on the other hand, you have to be able to service it to do that because the bank literally treats that as vacant possession because there's no lease. So you buy yourself some time. You can go and find that tenant.

And when you bring a new tenant that's on a three or five-year lease, you're going to inherently uplift the value of the property. Even if you don't change the cash flow, you at least lift the value of the property. So that's your number one. That's on the smallest sale you can do that.

The next step up would be bringing a tenant at the same time as increasing the value of the lease that they pay, the rent that they pay, and then you've got a double whammy. You've got the cash flow and you've got the growth. right? So you've got that as the second level.

And then of course, on the ultimately third level for you to do it, you would say, okay, I'll take that property. It's so messy and I love it. I love it when the agent goes, I can't move this. I always say, what's your most difficult property to move?

And they go, when you try to break into a market, I just call the agent and say, what's your most difficult property that you haven't moved? And he goes, this. And I go, The deal is wrong. Let me show you how the deal is done.

You go and educate your seller and I'll get you a client. So he goes and restructured the deal. And I love it when it's messy because no one will buy this property in the market. It will have an underperforming tenant. It will have a lease that they've defaulted on.

It will have capital works issues and it will have things that they never charged the tenant. And we'll just go through our DDT systemically and all that. go through every one of these lines and line it up to get like, okay, these are the missing pieces in the jigsaw puzzle.

This is how much the value of those missing pieces are. We will go and negotiate really hard and say, we will take that headache off your hands. Just get rid of it. You no longer want it. They just go, yes, sell. Don't worry. Just sell.

And this happens when it's a pass on. So you pass your property on. So the father in the family dies. The mother doesn't know how to deal with it. It'd been run down for two years. No one cares. Or they will it to their kids who then had infighting.

No one cared about the property or that it was bought between siblings who no one knew about. Just let it run because it always ran. And then there's a certain point in commercial property, if you don't do enough work, it tips the scale and it just cascades out. It just goes to hell.

Because it's funny, as you're talking, I think to myself, this is no sit and forget asset class. This is active investing. So where you're seeing opportunity is where owners have not actively invested in their asset. So that creates opportunities for you to go in there.

But I presume then you've got to see the opportunities. From your explanation then, I think, does that mean that there is no bad property in commercial? That everything is good if you can repurpose it or refurbish it or do something to change it to make it appropriate to market fit.

So this is really interesting because this is why I think that most people who are using a bias agent in the commercial space who aren't seasoned, who aren't traditionally commercial or who don't understand it will get burnt is that These bias agents can't rescue a deal.

They don't know how to fix a deal when it goes wrong. And literally almost no company in the market can help do that because they don't understand it from inception what the real issue is. You can't band-aid it. You have to fix the call.

So the thing with commercial, it always says is that Commercials, beautiful, beautiful, bang, earthquake. And then it recovers and then it's beautiful another 20 years, right? That earthquake, we don't know what that earthquake might be. It could be COVID. It could be a flood, right?

It could be a flood that you weren't in a flood zone, but the whole town flooded because the dams weren't released at the same time, whatever it was. And we had that happen in Brisbane, had that happen in Townsville, like non-areas of West London got all completely flooded in the last flooding.

It could have been unforeseen, a truck drove into your premises.

Or you've got a tobacco store as a tenant.

Tobacco store, texture parlor.

You'd be getting rid of them.

Yeah. Whatever it is, like you have one of those and you just go, what is likely going to be your earthquake and how are you going to fix it? How do you minimize a nine Richter scale to a three Richter scale? is the expertise.

Most of the time, we have fixed other buyer's agency problems. We have fixed so many other buyer's agency problems because they come to us and go, we don't know what to do. You guys fix it.

How did you learn that? Because clearly, you said that you're the first commercial buyer's agent. Literally. 2016. If you're the first, how did you learn?

By doing and fucking a lot of things up. So everything I teach, everything that I do is something I've done before. So I've done vacant properties where I could have negotiated harder. I've learned that whatever you don't look at, it was going to come back to you in two years' time.

I've had things where I ignored my gut feeling standing on the premise of going, it should have been this and it didn't happen and I didn't do that. I have bought the wrong property. I always say if I go into a new area, I typically would invest there first.

I'd rather I get burnt than one of my clients. So I bought in Adelaide before I put a client in there. I bought in Rocky before I put a client in there. I bought in Townsville before I bought, like all of this.

I bought in ACT before I put a client in there because there is nuances in doing business in each of the states that's different. And there's nuances in how they operate in terms of how they treat someone who is not a local there.

And also, you've got to invest across Australia, but I've got to invest like a local in that area. And you only learn that being on the ground. Commercial property is a numbers game. You don't need to go and see it. It's absolutely bullshit. It's like, how do you know

The tenant across the road isn't going to sabotage your current tenant. How do you know that there is vegan cafes that's popping up in the next two years that's going to kill your tenant? How do you know there isn't a graffiti down the road that's going to be an issue?

Like that Google Maps ain't going to tell you that. How do you not walk into a premise and go, this is mold issue that is going to come back and bite you? I can smell it. I can feel it.

The air conditioning is broken because the women are not covered up in winter or something, right? These are the things people don't tell you. An agent sure is not going to look up, look down, show you the watermarks in a Zoom inspection.

There's a lot of common issues here with residential. But how do you manage that, though? I mean, if you are buying, it's one of the challenges anybody is buying across the country.

I guess it's a bit more manageable for commercial than it is for residential because potentially the properties sit still a little bit longer. Would that be fair to say that...

They move a bit slower. So we sent one of our team in to whatever our client is by to go and inspect that property. This is the thing that we make to our clients that we go and see it. And we see it from the point of view of the investor.

Look, it's doable because if you invest in Adelaide, you just fly in two or three days, you just line up your inspection. You see the properties in Adelaide. And if you're going to ACT, that's what you do. You do a day trip and you see five properties.

And there's no point in like, sometimes I say to the client, like, you can go and see it. And they're like, well, there's no point in me seeing it. And what am I looking at? They don't know what they're looking at.

And if it's a big syndicated deal, like a big syndicated deal, we'll sit, our whole team will go. So our legals will go, our DD will go, our building, myself, asset manager will all go and we'll do our own stuff.

And we'll come back and say, what is it that you're seeing that we're not seeing? So really interesting point, I'll say this.

I had a guy on our bias agent or more bias agency team and I had a guy from our DD and I was looking to rent a residential property, a two-bedder for our operations manager. And I said, look, she's coming to Sydney. She's going to come in next couple of weeks.

Guys, go and find her a two-bedder, like just close to the office, right? So the bias agent goes in and they do a lovely view of the inside of the thing and he talks me through this. Two bedrooms, it's got lighting, blah, blah, blah, blah. He walks me through this.

And then our DD team appears and I see nothing of the inside. And he goes, look, so is this a crack here? And look at this ceiling. I just opened the cupboard and I'm seeing this thing here. So I don't even know what the place looks like. Oh, I saw all the defects.

So it's really interesting how different people in your team, because they train differently to see different things. Like a solicitor walking through A commercial property will not know anything, but to look at, okay, this is probably not compliant. It's going to be a future issue.

That may be an issue that will come up. A building person will probably miss all of the compliance stuff and say, you know what? That's not a fireproof wall. There's a leak in the building and all of those things.

I reckon you're going to have a good property Dumbo for us, Helen. I've enjoyed the chat. Can you give us a property Dumbo?

This is one of the ones that we fix for a client. So this client came to us and she's been a really good client. She's bought since then two or three properties with us. She came to us originally. She was with another buyer's day and she came in.

She was a Brisbane client and she came in and they put her in a property in Waterloo in Sydney. This was a Sydney buyer's day and they never cited the property. And I said, well, they're in Sydney.

There's no excuse. There's no excuse for this, right, firstly.

Secondly, it's the thing is like Brisbane people don't buy Sydney because they don't understand Sydney property.

They don't understand the value of Sydney property. I thought it was more about that they can't believe how expensive it is.

Yeah, that's as well, right? So, you know, she's bought a $1.5 million property and she bought a strata property with a tenant that ends up defaulting within the first month. And she's like, oh, what do I do? And so I went out and saw the property.

So I said, look, you know, no one's sighted this. Has anyone sighted this property? No one's. Okay, I'm going to go out and see this property. So, go and see this property. The fit-out's been left as it is. Like, the fit-out's been left as it is. Realize, like, there's a Chinese restaurant there.

There's a couple of things. And then there's a huge, like, they're doing road work. So, obviously, this is the reason why the tenant defolded because there's no traffic. Like, all of that's been, what? Obviously, through Didi, no one's told her this.

And she's been on the other side of the, you know, not the other side of the world, the other side of the water. Didn't see this. So, I'm like, this is your first issue.

Second issue is, like, what is of value here is you still have your commercial kitchen and you need to keep this, right? So, she's been giving them, I thought, you know, you bring her back to bare shell. I'm like, no. Don't bring a bear shell because you're walking along the street.

You've just ripped out a hundred grand fit out. So don't do that because next door is a Chinese restaurant. There's another restaurant next door and then you've got a grocer, right? Yes, look, you've got the scaffolding in the front.

But the thing is, if you rip out that, then the Heron Valley is lost. So just don't take that advice. Firstly, don't take that advice. Secondly, in a situation like this, instead of sitting, everyone sits passively. You could do this. You could do this. It's like, no. Tackle it front on.

You've got to tackle it front. This is a tendency. You've got to come in. You've got to clean it. The number one thing is you can't go to an inspection. No foodie is going to come in there and be in a grotty kitchen.

I know this is common sense stuff, but your leasing agent should have told you this. Go and pay for a really great clean and really great photos and make sure you don't shut off the electricity. And because they always do this. So it's impossible to lease, right?

So you go, okay, so this is the three things you've got to do. Because if you don't lease that premise, it's going to eat away your cash flow every single day.

And then what you need to do is instead of going to try to save, like everybody has this mindset where you're trying to, oh, how much is my leasing cost? How much is in my market? How much? It's like, no, what you do is you incentivize the agent. You incentivize the agent.

You've got to incentivize. So you tell them, if you can lease it out within the first four months, I'm going to double your commission. I'm going to double your comms. This is what I tell people. I'm going to double your comms. I want it to be on the front page.

I want to be the first property you recommend to every single person. So that was the rescue bit. And look, it was all, look, could this have happened to anybody? It could have happened to anybody.

But the thing is, it was just, indeed, you could have realized that the tenant was going to go bust because there's telltale signs.

Like if they don't pay their rent, every month they start paying instead of the first of the month, they pay like seventh and then they pay on the 14th and they pay on the 30th. These are telltale signs, number one thing.

And secondly, I have this rule in the company, it's really funny, eat where you're buying. You've got to eat and buy where you're buying.

So you go to a property inspection, if it's a gift shop, you buy something, you experience it, you talk to the owners, you sit there and you have a conversation.

You go to a cafe, you sit there and you have a cup of coffee before you do the inspection or after or before, and you just watch the people. This is what you do. And so one time we were in Rocky for an inspection and then there was two fish and chip shops.

We ended up with the first one at 9 a.m. And the boys goes, what do we eat? I'm like, you know the rule. Fish and chips.

And then at lunchtime, they went to another one.

They go, oh, freaking hell. That's what you do. And this happens more often than people think. This is where the stuff that's happened all the time is these are the dumbest. This is like, okay, these things weren't checked and then incorrect advice for how to release it.

So ultimately we help that client release the property. We also wrote the lease for them without any extra charge to just make sure because they were up so much and because they didn't understand they were like on the market there.

And so we help them write a lease and then we'd help them chase after the other tenant as well. So these are just common pitfalls. That's one classic one that happens.

Oh, so much gold in there.

Yeah, there's a huge amount of gold in there. But what does worry me is that there are people playing in this space that shouldn't be in this space. It's bad enough in the residential side of things, but in commercial, because you do have to have business smarts as well, don't you?

I mean, you're talking about going and experiencing the shop or the cafe or whatever, because in a way what you're trying to do is think, well, How good is his business from a customer's point of view? And how likely is it going to be round any longer?

I mean, that's not looking into their financials, but it's one part of DD. But you're doing DD on the tenant, not the building, but it's all part and parcel, isn't it?

Yeah, yeah.

And it's much more holistic in that regard. And obviously when we're buying an investment property for a client, we're thinking about what type of person is going to buy it in the future. We're also thinking what type of person is going to rent it in the meantime. Totally. But it's easier.

You know what I mean? Because you sort of, it's all known. We all live in properties.

It's harder when you have a tattoo parlor as a tenant because I always talk to the boys, well, which one's going to take one for the team? Yeah. Yeah.

I hadn't thought about coming up with that one. Helen, this has been a spirited chat. And I have to say that when I've looked at your YouTube videos, I've thought, oh my God, she's very salesy. She's just going to come on and, you know, rah, rah, rah about commercial.

But you have spoken about risks as well as the upside. And you're obviously very passionate, enthusiastic about it as an asset class. So we've appreciated the conversation.

Thanks for coming along. No, thank you for having me. I love commercial property. I'd do it even if I wasn't paid for it. And you have to do it with purity of heart. That's the belief of it.

Thank you, Helen. That was actually a really good chat. I learned a lot. And if any kids are listening, unicorns do exist. So I hope you haven't busted any dreams there. You said it earlier. But thanks so much, Helen. Thank you. Thank you.

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