Adding a commercial property to your portfolio is without a doubt the best way to diversify, lockdown solid capital growth and improve your cash flow in 2021. However, many people are not experienced in commercial investing, or don’t yet appreciate the sheer benefits of adding it to their portfolio. In best selling author and property investment expert Scott O’Neill eyes, that’s the biggest risk of all.
Let’s look at how the pandemic has supercharged commercial property into a ‘property investor’s dream’, and why now’s the opportunity of a lifetime to invest.
COVID has supercharged the commercial property market
Residential has hit a ‘yield ceiling’
A few years ago, we realised we had hit a ‘yield ceiling’ with residential property. We realised that the highest cash flow in Australian real-estate was locked away in commercial property.
Gone are the golden days where you could purchase residential properties with (gross) yields of 6, 7 or 8 per cent. Or build a self-sustaining property portfolio based solely on residential. You simply cannot find these yields anymore.
We hit a turning point and decided that if we wanted to continue receiving the strongest returns on our investments, then adding a commercial property or two to our portfolio, or shifting purely to commercial, was the only way to go. It’s been an absolute game-changer.
The perfect storm
The post-COVID climate in Australia has supercharged property. Interest rates are low so cash is cheap and high-quality commercial assets are now scarce due to increased demand (people have more savings because they’ve been forced to stay home and are now looking to put their money to work).
All of these factors have contributed to a tightening of the market, resulting in yield compression for commercial property (capital growth). This is the reason that commercial property is far outweighing the ROI that residential property can deliver.
Highest cash-on-cash returns seen in almost a decade
At Rethink Investing, we are currently securing 6-9% net yields on the high-quality commercial properties we’re buying for our clients. However, when you look at the returns on your initial cash investment, the numbers are even better. We’re talking 25% to 40% cash-on-cash returns – something we’ve not seen in Australia since 2012.
These numbers are the reason commercial property has caught the eye of sophisticated investors. Not just in our own backyard, but internationally. It’s a luring incentive for new entrants to the commercial property scene. It’s nothing less than a property investor’s dream.
Why now’s the time to get into the commercial property market
Money is cheap
With interest rates at an all-time low, money has never been this cheap for buyers. Historically we expect to see a gap of 2% between interest rates and yields. But currently, we’re seeing an incredible 4% gap. This means, right now, there’s the opportunity of a lifetime to get the best cash-flow returns you’ll ever see out of commercial property.
The best time to buy is always now
Don’t think of commercial property as a risky investment just because we’re in a pandemic. Sophisticated investors know how to identify an exceptional asset and target the most resilient types of businesses.
Our strategy of buying medical, logistics, and other essential services–type investments with strong tenants has proven to be very resilient. If you always make sure to purchase high-quality commercial assets (found off-market if possible), which are always positively geared, boast superior cash-on-cash returns and, most importantly, already have a secure and robust tenant, you’ll be successful.
Pay your debt down to zero by 2031
Unlike residential, commercial properties have the potential to pay themselves off in just 10 years. After that, you are generating passive income, investing back into your portfolio or using the equity from your property to expand your portfolio. Hello, financial freedom and early retirement!
Earn the highest cash-on-cash returns in a decade
With 25% to 40% cash-on-cash returns – something we’ve not seen in Australia since 2012 – it’s imperative to take advantage of this lucrative opportunity.
Get into the market early
Although commercial property has long been a well-kept secret amongst sophisticated investors, that’s starting to change. At Rethink Investing, we’ve been receiving increasing interest in commercial property investment as it becomes more popular in the mainstream. If you can engage an experienced buyer’s agent and capitalise in this market before it fully takes off, you’ll secure an incredibly lucrative investment for yourself. One that will continue to pay dividends as the years go on.
This is an edited version of an article originally published on Kochie’s Business Builders.