Chris BatesIf you are buying residential or commercial cash, commercial outperforms. You get literally three times the cash flow and the same capital growth. It's a bit of a myth that they don't have the same capital growth. Our motto is buy without regrets.
If you can buy a property that will serve you for 10 years as opposed to three years, that will serve you well. Buying a great property today, that's not just what it's about.
It's also getting something that could be ripe for improvement when the time is right for that investor or for the next buyer. You think about, right, lifestyle, what's important to you? How do you get to work? What do you need for your family? What amenities like parks and shops?
Then you look at the budget.
Welcome to Street Secrets. I'm Chris Bates and my mortgage broadcast is 2013.
And in this podcast, we're going to be interviewing Australia's leading buyer's agents, ones with decades of experience, have the local insider knowledge on the street, and can really help you with your buying process, no matter whether you're a first home buyer, upgrade or investor.
In this podcast, you'll get access to Australia's leading buyer's agents' minds every week on a Thursday. What's the word on the street?
Welcome to Street Secrets. I'm Chris Bates. In the studio today with Steve Polisi from Polisi Property at different tact today. I think, obviously, 30-odd episodes in, just to be the FYI. We're doing this one week after the budget, so we'll try to keep it evergreen. But I do think that...
is a good timing for this episode because we're going to be covering commercial. We haven't done it yet. And it's a whole other minefield compared to residential. Obviously it's been growing over the last five years as a sort of an alternative to sort of buying resi.
So yeah, it's going to be a good chat. Thanks for joining us today, Steve.
No, thank you so much for having me, mate. This is going to be fun.
Yeah, let's crack into it. I mean, obviously we know each other. You've been on The Elephant a long time ago and you've been around the tracks for a long time and, you know, you've got to produce a lot of content.
So a lot of people might know you, but you know, for people who haven't, let's just talk through your sort of experience coming into being a BA, what you're doing prior, what got you into it, particularly around the sort of the shift into commercial as well.
All right, so I'll give you the elevator version. So qualified structural mechanical design engineer, studied robotics university, went into designing like robotic limbs and stuff like that, which was cool, but sitting at a desk doing coding for 10 hours a day, I got a bit bored of that. Also didn't pay as well.
So then went into mining. So designed mine sites, big crushers, grinders, mixers, all that type of stuff. And then in the background was growing my resi portfolio. And I got lucky, bought my first house in Western Sydney for 230 grand in 2012.
And that was literally the timing was right. Grew 100 grand, was like, I just made 100 grand. That's like five years worth of savings. Let's just do this again and again. And then just went from there, got up to 12 properties.
Actually, I got up to seven or eight properties when I left and then joined another buyer's agency, a startup. Helped grow that to 25, 30 staff and then went out on my own. Since then, we're what, 1,200 plus residentials under my belt and around 800, 900 commercials. So quite a few.
And now I'm known as the commercial guy, probably because of the online content stuff. I give everything away for free.
Yeah. So let's just go on that. The commercial versus the resi. How do you sort of think about it? Why you prefer one to the other and who much better suits going down resi or commercial? I mean, obviously, a lot's changed over the last couple of weeks with the budget and resi.
But prior to that, how did you think about it?
Because I'm an engineer, it's just numbers based. It's like buying a business. You look at like return on investment and on paper, like for like, if you were buying residential or commercial cash, commercial outperforms. You get literally three times the cash flow, so three times the cash and the same capital growth.
It's a bit of a myth that they don't have the same capital growth. The way I squash that pretty quickly is, do you think commercial is expensive? If they answer yes, how do they get more expensive without more capital growth?
Different jobs grow at different rates. Office space is obviously not going to have the same fun time as a warehouse at the moment. Same as like an off the plant high density apartment won't have the same as a house. So there's nuances there.
But on paper, same capital growth, three times the cash flow, better performer. The negative, and to answer your question, is you need a bigger deposit. So you typically need a 30% deposit.
So all of a sudden, if you're weighing up and you've got the servicing for three residential properties on a 90% loan and pay lenders mortgage insurance, that's a better outcome long term if you get the same capital growth, because we make three times the capital growth, which will put us in a better net position to then buy more assets and things like that.
So I always bring it down to three things. What the client's actually trying to achieve, What timeframe do we actually want to do it in? And what do we have to work with with lending? So that's your world of like, what can we actually borrow? Is there a limit in servicing?
Is there a limit in capital? And then tie all those three together.
Yeah, right. So let's go down the commercial route. Obviously, it's become a bit of a cool thing to do. I mean, you're part of it. Obviously, there's some other bigger buyers agencies as well that have been in there, but it's still very much untapped.
The deals you sort of get, I mean, there was a lot of also money flying that way, you know, when rates are a bit lower, right? And people were searching yield as well. Like, How do you find the market now? Is it harder and harder to find opportunities under a certain price point?
And is there much better bang for buck at certain price points in the commercial space? Because you can go a bit borderless. You're not tied to where you live. So I guess it's trying to understand how's the market sitting from a value for money point of view.
That's a big question. The first point you touched on has become like a bit of a flavor of the last five years. Prior to that, no one was really looking at it. I've got a commercial book. I wrote the first commercial book on the market.
There was one retail one on there, but like just the generic, this is the ins and outs of commercial. Like I said, no one had anything before that. There was no podcast. I've given away 50,000 of my books. And then there's other buyers engines that are bigger than me.
And then there's other ones. So like all of a sudden we've gone from a pool of just high net worth investors and And the other buyers were typically business owners. They were doing really well out of the warehouse and they go, I'll buy another warehouse around the corner.
And now I'm making up numbers. We might have went from a pool of 50,000 investors in Australia to now there's probably half a mil of investors looking, which is why cap rates have compressed. I wouldn't say it's got harder because the hardness comes from different facets.
You asked me five years ago, I'd say it was hard to get a 7% net yield. I was getting them, but it was hard to get. Now I'm saying it's hard to get a 5% net yield for a quality asset. So the cap rates are compressing.
Outside of that, there's other growth factors with like COVID and that's increased warehousing and things like that. But one of the numbers that we can't actually collate is there's just more investors. And then we touched on the government legislation potentially changing with negative gearing, getting removed.
That's going to further bring people to positively geared assets.
Yeah, I actually think that's going to be one of the trends coming out of this budget is people double down on their homes, people leveraging, upgrading, renovating. not selling down, you know, their home in retirement, et cetera.
People are potentially, but also you see a lot of new investors just not be able to either borrow or even be able to afford the negative cashflow or want to go near resi. And commercials sort of steps up together with putting more money into super and, you know, shares, et cetera.
So, I mean, you're on a good space there, but I mean, I just, I guess, look at, you know, quite naively, I look at the commercial space and it's just, It feels like a minefield, you know, and it feels like there's just so much complexity there.
When you talk about all the different locations and you've got all the different, the job markets and the employment markets and the different types of commercial, because it's not just offices or industrial. So how do you sort of break it down?
And, you know, in order of like preference of often when you're thinking about commercial of, how you break down the different types and different cities and regions and put a risk weighting and a sort of a return on it.
Yeah, so with commercial, there is just way more work you have to do. You don't get to be an armchair investor. You don't sit on the couch with Netflix on on realestate.com being like, oh, that looks like a nice house in Darwin, like some buyers agents.
Like there's so much, there's about three or four hours work just before you can even present the client to the deal. Then under contract, we do around 20 to 40 hours of due diligence. So to answer your question, You're generally looking for these things through commercial. Good tenant, long lease, a versatile asset.
So that way, if you lose the tenant, you can fill it. Tight vacancy rates. They're the kind of whole at the moment we're buying a lot of industrial and suburban retail and things like that.
But that's also what makes it hard is you also don't get the luxury like residential where you pick a suburb being like, I like this suburb. The data backs it. I'm going to browse realestate.com for a month and get something. a property might not come up for three or four months there.
So you have to cast a wider net. So that's why there's much more work involved, which puts off a lot of investors. Obviously good for buyers agents like me, for instance, because I'll pay for someone to do work. But that's the scary part of a commercial.
Then doing the actual work like due diligence, you got to do lease review, contract review, tenant interviews, road and traffic analysis, vacancy study, occupancy study. We pay for a credit history check on the tenant and the seller competition analysis. You review the service contracts.
We give like an 80 page report on the thing.
way more moving parts the way i kind of explain it so i'm going a bit of a rant here is residential as long as you don't do something silly like it's like a staircase like you be three steps up the staircase as long as you don't buy in a flood zone and off the plan what's gonna below value you can kind of hold it long term and be all right as long as you don't do a few silly things
then the next up you've got commercial 20 steps up because you've got to check those 20 things and that's 20 things you can trip up on so before down that staircase you can hurt yourself a lot more and then on top of that it's probably development where things can go real nasty real quick and you can be in negative equity positions massively yeah i think you're um that's right is obviously around commercial right like it's yeah you get the capital growth right you get the rental increases you know you get if you get if you get those things right um but
But if you sort of buy a bit of a dud, right, and you didn't understand the risk you were taking on, you can basically get an asset that you can't sell or you can't get a tenant, right? And it can go quite bad.
I mean, that's what you're trying to protect your clients from. But can you sort of give people an understanding of when it goes wrong, what they've often done? And a lot of DOI, obviously, a lot of investors are coming to this commercial space and a lot of people just
think they can just sort of rose-coloured glasses. I've pulled it off in resi. I'll just kind of have a crack in commercial. But where do they often sort of misunderstand? You obviously mentioned around due diligence, but like what's some of the other big mistakes people make in commercial?
That's actually a really good question. The first thing that kind of prompts them is people chase yield. And it's no different to residential. You know, people just go out and they go, oh, I want to get a 5% gross yield. And they buy something where the fundamentals are terrible.
So they'll go chase a yield. The biggest one of part of all the due diligence, which most people don't do, is just they don't understand vacancy. So they'll go chase a 6.5% net yield for an asset in like Makai, where vacancy rates for warehouses are like one to three years.
Who cares that you got a six and a half percent when potentially if your tenant goes bust or the lease finishes, you've got three years vacancy. That becomes a zero percent one. So I'm a bit more measured. I'm kind of considered the low risk commercial investor.
I want tight area because you'll end up with a better ROI. You'll get more capital growth, better rental increases, lower periods of vacancy. You'll end up just with a better result. You can sleep a night. The commercial is a bit misunderstood as well because I use this sometimes when I talk on podcasts.
People go, oh, I don't want like most of the stuff we buy is sub three months vacancy. And they go, oh, I don't want vacancy. The way I explain it is if you go buy a commercial and let's say I get a three year lease.
So I buy your warehouse with a three year lease. Remember, I'm getting three times the cash flow. So theoretically, if I'm comparing it with a residential, that could go vacant at the end of three years.
And I've got six years of it being vacant before I'm in a worse cash flow position compared to residential.
reason that's a problem for most people is most resi and most investors can only think week to week and year to year so they go i'll budget for two weeks vacancy they can't let that three years of tenancy where the cash flow builds up and then budget for longer periods of vacancy everyone seems to be week to week with their cash flow and savings so when you look at it that way you go okay it is it is low risk if you get the buffers in place
But again, people just chase yield and they don't do the actual work.
Yeah, and I guess it's trying to like, okay, there is vacancy, but this one was more likely to get a tenant because it's on a better street or a better location or something that gives it a bit of an edge over other competitors in the commercial space.
Is that a bit of a fundamental thing you're trying to always get an...
No, it's, it's a good, it's a good point. So the, the main kind of takeaways, most people don't understand how to actually get the data. So like with residential, you can go on, there's numerous websites, SQM research, typing a suburb, it'll give you the vacancy rate of the suburb.
And then there's all those other data websites. Yeah. Okay. Like suburb finder, like there's all those ones. That doesn't exist for commercial because it's a private treaty effectively between a buyer and a tenant. I don't publicize my leases online.
So there's a lot of grunt work to find out the vacancy rate of an area. Yeah. Okay. Property managers who are okay, this one went vacant. How long was vacant for? And then there's extra lives. A three bedroom house is the same as another three bedroom house, just nicer or not.
Commercial, if you buy, say, a warehouse, one with 50% office space in the warehouse may have a longer or shorter leasing time for vacancy rate than one with 20% because it's in a more industrialized area than manufacturing.
If you're close to the CBD, more office space is better because they're normally white collar type technical engineers and stuff like that. So you need to understand the nuance with what you're buying. That's just for industrial. Then it gets even more complicated for like suburban retail. Cause that's like foot traffic, road traffic.
So there's all this like empirical data that you need to actually collect yourself, which people just don't understand how to do it, which is where it tends to question where people fall, fall apart. They just, they just don't do the work. They kind of buy and go, oh, that looks all right.
I always feel like with me, it's like the low end, particularly in the last four or five years, become very, you might disagree with this, I might think it's actually wrong, but the low end, there's a lot of competition, there's a lot of risk in commercial space because they're cheaper.
You have to potentially go to poor assets that aren't as valued as higher, there are smaller buy pools, or maybe there's a lot of them.
And then as you get up the spectrum, less and less buyers can afford it or have got the deposit, but they're not too big where the top end of town want to buy the supermarket or the office building in a sort of a REIT.
So I feel like there's this sweet spot where a lot of the smaller investors can't play, but then also a lot of businesses can't afford to buy. Is that sort of the case? Like you almost get lower risk and better returns if you sort of move up rather than a bit cheaper?
Yes and no. Typically, no. Most people come back to me and say, I want to buy a cheaper commercial because there's too many buyers in that price point. There's too much competition.
But if I was selling a residential property and I had 200 people turn up to my auction, probably a good sign for some capital growth. And then they'll go, oh yeah, but there's less buyers in the higher price point.
I think when they're saying that they're kind of alluding to they'll be able to have better buyers because there's less competition. But the fact that there's less competitions means there's probably less capital growth. There's less people interested in it.
General rule is that now, because there is a lot of buyers, you have a bit of a softening of the cap rate, i.e. net yield in the lower price points. But what typically happens is as you start moving up in price point, you start getting better tenants and things like that.
So that can actually reduce it as well. So like an example would be last week we bought a... Well, it settled last week. Pet barn and a super cheap, they'll combine warehouse freestanding building.
So the next week, we got a tighter cap rate, like a tighter lower yield because it's pet barn and super cheap on a seven and a 10 year lease. If I'd bought that with average Joe's electrical services, I would have got like a 6.3%. So you're paying a premium for that.
Yeah, for sure. What generally happens as you move up in price point is you just get to look at more variety. You start going freestanding, start looking at better blue chip areas with tighter vacancy rates. You start looking at multi-tenancies. You start looking more value-add. You look at more of the blue chip.
You just get to see more variety. But then arguably, you can still get cheap stuff. We're both Northern Beaches based. You know what the vacancy rate for warehouses on the Northern Beaches is?
Zero, literally zero. It's zero. So then people argue that it's the high risk and we're getting little warehouses in like Cromer and Brookvale for 1.2 million. However, I'm lucky to get a five in front of the number for a 5% net yield.
I go buy the same asset in Brisbane, I get 5.5. I go buy the same asset in Perth, I get 6%. So there's always a risk and reward you got to weigh out based on your strategy.
Yeah. So let's talk about the value add element. I don't understand it as much as I should, to be honest. And I feel like it does seem to be one of those things where with a property, what can you value add, right?
Maybe you can sort of subdivide it and build some townhouses or something. Maybe you can put it together with a bit of a super site right now, if you're in Sydney and sell it to some big developer. But It has been limited in time, right?
There's only so much you can do, but commercial, it does change, right? Like there's a real way to really increase the capital value, you know, and how do you do that? Like, I mean, that would be an interesting thing for people just to understand.
I mean, it sometimes isn't the means, not the reason you do invest, it's the potential of the value add, but, you know, you can get these sort of super stories, I guess, where, you know, yes, you've got the yield, but you've also increased the capital value a lot.
Yep. So good question. So all that stuff you just mentioned in residential, you can still do in commercial. You can still buy a lot, subdivide it, build extra warehouses or retail shops and do all that type of stuff. You can still spruce up the building and things like that.
However, you can also do kind of typically commercial is valued based on the yield that you get. So in an area, if the going rate is five and a half percent net yield and you get your rent up by 20%, that's 20% capital growth.
so a simple way is rental reversion you buy something that's under rented by 20% beef the rent up to 20% and then all of a sudden you get the 20% uplift then you can also add kind of different forms of income so if you've got a big warehouse you can divide it into smaller ones and smaller square meter rates get a larger rate so like a big warehouse might be 150 square meter a smaller one might be 200 so you increase it 25% by separating there you can do off peak you can get creative I got a
retail coffee shop that does off-peak at night time they do like kids and stuff there uh we've bought a retail uh industrial showroom uh in perth for a client and we put the big billboard on they get 200 grand a year from that uh we had one uh a building in brisbane where they put a telecommunications towers on top yeah right million dollar uh 10-year lease from vodafone so literally they got given a million dollars for like oh you can try to tell it on top
um so there's all these kind of creative ways you can do with commercial again you've got to know what you're doing um even simple saying this simple is changing the tenant you're getting a more blue chip tenant or changing it to medical or whatever it may be increases the value because more people are interested in that asset whereas like you mentioned residential bit of a reno subdivide build some townhouses even stuff simple is like buy a warehouse with some vacant lot at the back and then you can either sell it for machinery storage or build another warehouse like there's there's pretty much unlimited in commercial because it's an unregulated space effectively
Yeah. And I guess it's the, not the optimistic view when you look at these things.
It's, you know, oh, we could do all these things to it, but then just the real reality check of actually what's possible and what's actually in demand and who's, you know, I think that's, I'm sure a lot of people have bought commercial thinking they're going to, you know, subdivide it and they're going to add this rental here and they've tried it and then no one wants what they want.
And it's kind of like when someone builds a granny flat and they've kind of butchered the value of their asset, right? Like it's, You've got to be really careful, I guess, in the commercial space where you almost don't really give it enough risk rating, I guess.
You sort of go into optimistic and then you lose a tenant rather than get a new tenant. Is that an issue that sometimes people have? Is this overconfidence bias they come into commercial with?
I wouldn't say overconfident. I'd just say unrealistic buyers. Like we get, I would, I'm sorry, probably 20% of our initial inquiries are people that want like a high yield than the market rate, value add, some form of like thing, extra thing. And they just have these unrealistic expectations.
You kind of go, well, show me one that you've got. And they're like, why don't you tell me? And you're like, it's the same. You get the same thing in residential. Like if I'm once like... I can build a granny flat. And then, like you mentioned, most of them don't.
Or if they do, they chop the value down. So you get that a lot. Again, it depends on the person. If it's someone young, keen, hungry, you'll do a value add. But if you're buying it for a bit of a retirement fund, you'll typically pay a premium as well.
If I'm getting a warehouse with some spare land on it, you're paying for that. That's not cheap. Actually, I'll use a perfect example. So my recent purchase for myself, I bought a little shopping center in Regions Park in Brisbane. It's eight tenants, 3.175 mil.
Good return, gives me 100 grand a year positive cash flow return. But that's on 3,500 square meters. And that was like a 5.8%, 5.9% net yield when I got it.
Exact same two suburbs over. There was a retail strip. There was one of the ones where, you know, on the main road where it's there and the parking's perpendicular to it. Yeah, yeah. So that was only like 1,200 square meters. For that client, we got 6.5%.
So that's fine. They're chasing yield and security. It's effectively the same asset, but mine's next to a primary school. It's next to a kindergarten. It's a huge land block and I'm still young. So I'm like, well, I don't need that extra 0.3, 0.4%.
I can sit on this and this might be an exit strategy in 20 years time. But again, running a successful business, already got a big portfolio. So like me getting an extra 30 grand a year wasn't changing my life.
So this is what we spoke about this part of the podcast is matching up like what you're trying to do over what timeframe.
Is there any commercial assets you just don't go anywhere near? Like you're just not a fan of this style of commercial?
Generally one dimensional stuff. So what I mean by that is like petrol stations where if you lose a tenant, you can't replace it. Cinemas, car watches. One of the reasons you can probably attest to this is banks hate them as well because hard getting finance is difficult.
But it is too risky because if you do lose, you've got a petrol station, you lose the tenant, like you're stuffed. You've got a potential contaminated land site with nothing else you can do on it.
So again, caveat to that, if the yield is attractive enough to take on the risk, then you might. So we've bought petrol stations where there's like a Woolworths and a BWS next to it. I'm like, okay, that makes sense.
So generally that, and then CBD office space, I'm still kind of a bit against. Get a good yield. You can get like a six, six and a half percent.
But if I can get a five and a half percent in the same city for industrial vacancy rates for at the moment in like most capital cities are 15 to 20% still for office space. Um, so if it's supply and demand, why are we going to get some growth?
Yeah, and it takes a long time to fill up vacancy, right? It's a lot to slowly get the pressure cooker going.
The caveat to that is I don't mind suburban office space because you can still get tight vacancies. So we went on the beaches, you know about galleries. We bought a freestanding office buildings, two storeys. for 2.2 mil that had a 6.5% net yield. The top story was a ballet studio.
So that's what I like. I like the versatility. Downstairs was accounting firm, upstairs was the ballet studio. So I'm like, okay, it's zoned that I can make it into a gym, rehab, physio. So it's not just an office.
And I get prime land because it's land that effectively grows in a really good area. So again, there's caveats to everything I say. I hate when they take snippets of this and there's always exceptions. Oh, you know, we won't be sniffing it out.
That's all right. But on the other end of the scale, the ones that you're sort of nervous about, that's kind of what you are, right? You're not against, but you just have a different view on them. Just got to put extra DD.
On the other side, when you get excited, when you see something come up that you really want to try to explore it, and obviously you don't go ahead if the yield's too low or whatever it might be, but what are the ones that you just sort of get really excited by?
I generally like ones that have really good land components or they've got some form of versatility to them. So like something with like potential, like multiple zoning types where you can be like, I can change this asset class if need be. And it's because they've got the long term.
Yeah, or even the opposite, just changing the type into like if it's industrial, you can convert it to office space. Okay. Yeah. I'm good length. But my favorite one at the moment is industrial retail showroom.
So the ones where it's still an industrial building, but it's got a glass frontage and you can change the configuration as much as you want. So you can have like a Repco where the front half of the store is retail and the back half is where all the actual stock is.
Then you've got other ones where literally you walk in the front door and it's a front counter and the rest is industrial. And then you can also not even make it retail. It's just an industrial shop and it can be a fabricator or something.
But again, they've just got the little tiny office at the front. I love that because you've got the best of both worlds. You've got rear access, front access, retail access. It just gives you options. Same as like the homemaker centers. They can be a Anytime Fitness. They can be a furniture store.
They can be a Dick Smith's. Like there's some cool kind of versatility to that.
Yeah, a lot of sort of sometimes smaller, you know, everything from the gyms to the services. You know, I guess that's what you're trying to say is how many different people would want to rent this type of property? Is it just so pigeonholed to a gym?
Okay, well, that's okay if everyone wants to keep. Problem is if another gym opens up down the road, is that going to be an issue, et cetera? So I guess on the value of the...
Sorry, that's what you do as part of due diligence. So you do a competition analysis when you think, and then you even look into the business. So you can do credit history checks. You check their rental ledgers. This is going to blow people's mind. Sometimes you get their P&L statement.
So you get to look at their profit and loss to see how they're actually doing as a business, which can you imagine if you asked to see like the tenant's tax returns for residential? Yeah, yeah, yeah. So what are some of the things that people don't know?
You mentioned there around, what are some of the other DD things that you do and you never miss, right? Obviously, everyone does a building and pest, not all everyone, but everyone should be doing a building and pest when they buy resi, but
You know, what are some of the other key documents and yeah, there's a bit of cost involved, right? That's on you to, to, to do this DD. Um, so you gotta be careful what you sort of, what rabbits you chase. What are some of the things you have to do?
We, we try to chase all of them. So like that, hopefully I'm known as the person who buys good quality commercials. Like I've got six people in my due diligence team, which is more than my acquisition team. Whereas most companies are the opposite. That's like all sales kind of thing.
I got three qualified values in there. Guy who was a property manager for 10 years in commercial.
it's there's just so many nuances because everything is off like under the table so even just like buying a property you can look like the yield and lease may say 80 grand a year but you look at the bank account and it's not it's actually only 70 grand going in because yeah
because times are tough so then there's even complications where you've got a thing called like a disclosure statement which is with the contract which overrides leases so sometimes we get a disclosure statement and it'll say that like um this stuff because it's net yields like they most time they cover council rates water rates management fees insurances all that stuff and if that basically doesn't agree with the lease they can override it so you can buy it the lease will say oh yeah the tenant pays this this and this
And then you settle and the client comes to basically knowledge of, oh, no, I don't have to pay this anymore. And then there's an argument. So there's just stuff like that. Even like insurance can just trip people up. We had one last week. We bought a red rooster. all going well.
The bank came back and then wanted it to be valued, was the 2.4 mil. They wanted the building replacement cost to be 3.5, which is just ridiculous. I think it's a weird, quirky bank thing. And then I had to tell my clients, the insurance premium went from 18,000 to 45,000.
And in the lease, the tenant is supposed to cover 100% of the outgoings. And we were like, hey, even though theoretically they're going to pay, you might settle on this thing. And then there's a massive argument where you have to stomach this extra 25 grand. Be aware of that.
And then we have to kind of do all that like that. And that's going back and forth with the broker, the bank.
Just things like even what can change an insurance premium is whether the place has CCT, whether it has double lockup, whether it has a security system, whether it's got a fence, whether it's got bollards, what type of business. There's all that nuance. You go get building insurance for a residential, it's building insurance.
I had two tobacconists in my portfolio. I had to kick them both out because insurance premiums went to $70,000 plus. Yeah.
Cause like you're getting bombed. Yeah. Yeah. Yeah. Yeah. The payment changes everything as well. I'm not sure if I answered your question there. Just went on a bit of.
No, no, it's good. It's just, I think that, you know, I think it's coming through quite obvious that there's a lot to do with DD that, you know, um, and I think you gotta do a lot with Rezzy.
I, I think that a lot of people misunderstand that what you've gotta do there in terms of particularly buying in parts of the country that you don't know that well, and you know, the ones that are sort of trying to rush the purchase and,
got to buy now and you know this urgency they absolutely aren't doing enough not only just checking on the property but also just being a bit diligent on what they're buying right and saying we're not going to buy in that part of the suburb we're going to buy on those streets or that just isn't liked by the locals because they just have moved to the suburb but the local specialist bas have just got that real local knowledge and now it's i guess assessing any risk with the resi but
With commercial, it just feels like it's, you know, many times fold that. Obviously, you're seeing a bit more competition in this space. I mean, it's still pretty light, you know.
And how do you think about, like, sort of different states and how different is it when you want to go to sort of Queensland or you want to go to Victoria? Like, is the commercial world completely changed?
I mean, in resi, it can shift quite a lot in terms of the buying process and contracts, or is it quite similar with commercial?
You still need separate like conveyances, valuers, property managers, because there's all those nuances with how the contracts are staged. Fundamentally commercial, like the process is the same. Like if you're trying to assess whether the vacancy rate of a warehouse in Perth versus one in Sydney, the process is the same.
There's nuances, though, for like percentage of owner-occupier. So I used to buy so much in like Gold Coast, Burley Heads, areas like that, because owner-occupier demand was outstripping investor.
So if a property was selling vacant, it was getting 15% more in purchase price because the owner-occupier was. So I was like, as soon as I knew that, I was like... let's buy up now before it keeps going nuts. Because that's also a good sign of a strong economy.
If all the businesses are flourishing and they're buying more than the investors, that's the spot I want to be in. But the lucky for me, and I didn't have this at the start, is now I've got a staff member in every state.
So we kind of get that local knowledge and just so many deals now, 800, 900 plus deals. I've kind of know what are the good industrials. One of the cool things, probably slash easier things is you don't get the same kind of like,
So what I'm looking for, like, um, cultural hatred of certain areas in the same suburb. So if you're buying like an industrial property, it's not like, oh, don't go to that industrial street. That's, that's a bad one.
Like, oh, there's more housing commission and that is like, so like, most of them don't care. Again, there's still good pockets and bad pockets and then ones that have like flood issues and overlays and all that type of stuff.
I always strip it down to, I look at the asset and funnily enough, I actually don't care who the tenant is. I do because it makes the client have a better experience for the next five years.
But I look at an asset and go, is it going to be in more demand in 10 years time than it is now? And then you need to back that up with data. So you go, oh, look, the population is growing by 15, 20%. They're doing this new infrastructure.
Vacancy rates are already tight. They're changing this residential area from low density to medium density. So that's going to have more people where you're going to need more car mechanics, fabricators, wholesalers, like distribution, et cetera. So yeah, cool. It makes sense that there's more demand.
And the reason I say I don't really care who the tenant is now is the best tenant's still going to leave. If I buy you an industrial property and I get the best tenant in the world, guess what good tenants do? They grow. They move to a bigger warehouse.
So you kind of always want a tenant who's, yeah, they're all right. They're growing 5% a year. They're there long-term. Caveat to that, retail, completely different. You want a really strong business. A hairdresser doesn't move. They open another salon. A medical center doesn't move. They open another medical center.
So that one, strength and value. Caveat, second caveat to that, if you're in the higher price points, which we mentioned before, then yes, the tenant is really important because they typically stay seven to 15 years, a 500 pay warehouse, they're staying one to three years.
Yeah. You mentioned some interesting things. Because in resi, population growth is kind of overcooked, right? I feel that it's like, oh, you want to buy where there's a growth corridor. And often with resi, it means that a lot of supply is coming as well, right? And that, if anything, restricts growth.
It hasn't in recent years because they couldn't build them fast enough and building prices went up. But typically that was sort of what happened. But with commercial, do you sort of see that as the...
you know, some of the biggest opportunities where you feel that it protects you a lot because, you know, there is a bigger, more people wanting more things or services. And that really helps create more demand for sort of different commercial businesses.
The point you just touched on about the population growth and the new supply coming, that's because people just don't understand how to interpret the data. Like they're looking and they're buying some form of greenfield type area. I apply the same principles to commercial.
I'm not going to buy you in a greenfield estate where new stocks come in unless there's a reason for it. And you normally have to get a high yield. So 95% of what I buy is well encapsulated by residential already.
Data I'm giving them, if the council's got all the right fundamentals, the population's growing, they're not building any more warehousing. So that's why I can safely say in this time there's more demand for this asset. That changes.
If you start going out and like, so we buy in like Rockingham, which is Perth, which again, there's new stock coming there because they're doing the submarines and there's lots of infrastructure going in.
But you weigh that up with the vacancy, you get a high yield, you get a six, six and a half versus the five in the CBD. So it's just a balance of the risk versus reward.
Again, it's just nuance like two years ago into the Sunshine Coast town hall meeting for commercial, they've run out of stock that was supposed to last into 2035. So like they're already done. So they're scrambling, building new ones left, right and center.
Buying new stock has its own risks because there's normally like lease backs, there's a surge in oversupply. Again, not against it, but you need to go and know the risk you're going into it.
Yeah, I think, I mean, you're seeing it in like Sydney, right? Like I was on the Google Maps, I put on satellites, see all those white roofs and you think, yeah, that's all commercial, but bit by bit, those white roofs get taken out, right?
And a tower goes up and it's turning to resi, you know, think about the airport area and lots of parts of Sydney, right? It's almost got that shrinking supply and it's in the capital cities, right? And they're trying to build all their warehouses out on the fringes.
And is that something also that's kind of like a longer term force behind the commercial market? Is that it's often a shrinking supply of what you buy sometimes?
I want to buy a shrinking supply in regards to more people needing that service of that type of commercial based on where I'm buying. But that's probably something worth touching on.
Where, say, an industrial property is outside of like residential retail, where you're buying industrial property changes the types of tenants that you also get.
So if I buy in that well encapsulated residential market, that's going to be the car mechanics, the kitchen fabricators, the local service-based businesses. You go buy on the outskirts near the airports and stuff like that, like the new airports.
They're more manufacturing type businesses because they either need to build the stuff. Ship it in, yeah. Cheaper rent out there. They can get a bigger premise. They don't have to worry about the pollutants and all that type of stuff. Same as if they're near a highway and they'll distribute it.
Then like you mentioned earlier on the podcast, if you buy close to the CBD, they're more kind of white collar. So you need kind of more technical, they're like labs and engineering companies and things like that.
So it's not just as simple as like, oh, 200 square meter warehouse, this is the demand for it. It changes the types of tenants in the area, which is why you do the due diligence. You look in the industrial complex you're buying, who are the other tenants?
And you'll see that there's normally a pattern. Then you go to the adjoining complex, who are the tenants? And you start seeing patterns that way. So that's, again, another layer of the due diligence you have to go down the rabbit hole on.
Steve, there's so much gold in here. I've learned a lot myself and you're in safe hands, obviously, if you're going down the commercial route with you and your team. And so I appreciate you coming on today. I mean, before we just wrap up though, just your thoughts on the budget.
Obviously, nothing's been legislated yet because we're in this middle zone, but what's your take on it and how do you think it's going to shift buyer behavior and seller?
I've always been one of those investors that never buys based on tax anyway, because I try to look at the big picture.
And they're annoying when you're losing based on tax, but if fundamentally, like I said, the 10 year strategy that I've got, it's still ending in a positive, I'm still going to do it. But to answer your question, there's going to be more of a shift to the kind of more cash flow assets.
So the lower price residential markets might have a bit of a bump. And I've already seen I'm getting way more inquiry. Like the day it happened, we had 18 inquiries. So like, oh, sorry, I should say the day after. Like normally we get maybe like five, six.
So like there is probably a big push to commercial as well. All right. Good chat, Steve. Appreciate you coming on. Legend. Thank you, Chris. Cheers.
Thanks so much for listening today. We hope you got lots of value out of it. If you'd like to speak to our guests today, there's links in the show notes on how you can get in contact.
And if you're buying your first home, upgrading, renovating, or need any finance-related queries, obviously we'd love to help. There's links in the show notes to us as a mortgage broker, and we look forward to next week's episode.
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