There is a certain amount of mystery attached to what is involved with commercial property investment. Like anything it does come down to the fundamentals. Chris Lang from Commercial Property Made Easy says you need to know about commercial property and it all rests on just six Pillars.
Kevin: Well, there’s a certain amount of mystery attached to what’s involved with commercial property investment. Like anything, it does come down to the fundamentals. Chris Lang from commercialpropertymadeeasy.com says that while there is a fair amount of information you need to know about commercial property, it does actually rest with just six pillars, and that’s what we’ll talk to Chris about. Chris, welcome to the show. Thanks for your time.
Kevin: Help us understand what’s involved. Where does someone start with commercial property investment?
Chris: Well, you’re right, there’s a fair amount of information out there but most of it is not in a simple format for the average investor to easily make use of and you can very quickly become overwhelmed. You need to understand that investing in commercial property is a game. Sure it’s a very serious game, but nonetheless, it’s just like any other game and it has its own set of rules. So until you understand those rules, it’s very hard to enter into the game and it’s only.. You start to enjoy real success once you begin to master those rules. Having said that, it’s certainly not rocket science and it just takes someone with a clear head who’s prepared to learn and can think on their feet. Now, obviously you want to have a good return on your equity or your capital that you invest in the property, but there’s more to it than that. And hopefully we’ll cover some of those things today.
Kevin: Well let’s that start on that, if return on capital is not the be all and all, what should we focus on?
Chris: I guess the first thing you need to do is to safeguard your initial capital. You don’t want to become sidelined by chasing what appears to be a good return on your capital, only to experience the anguish of putting at risk the return of that initial capital when the time comes to sell. You need to take good advice. You need to learn how to properly analyse properties. However, if you have any doubts at all, you just simply don’t proceed with the deal. No matter how appealing it may look.
Kevin: Let’s talk about liabilities for a moment. In the area of liabilities, what gets your attention most?
Chris: The good news is with investing in commercial property unlike residential is that your tenant pays most if not all of the building out goings. So really your focus needs to be on your borrowing costs. And my preference would be for a fixed interest loan. It may cost you an extra half percent, but it will allow you to sleep at night and besides the interest is tax deductible. And another thing worth considering would be nonrecourse finance where there is no requirement for personal guarantees as the property provides the sole security and this will limit your borrowing to between 60 to 65%, but it also reduces your overall exposure going forward.
Kevin: For many investors getting into residential property, they believe it’s as simple as buy and hold. Does that necessarily apply with commercial property as well?
Chris: When you merely sit on a property, your only source of growth is from inflation or automatic annual rental increases. However, there are other ways that you can add value to your commercial property. Sometimes it’s as simple as a cosmetic upgrade about 12 months before the market rent review to help maximise your rental growth. And with commercial properties you often have the chance to subdivide them and you can actually even do that with smaller strata titled properties. You can actually further subdivide them and a lot of people don’t realise that.
Kevin: Let’s talk about reviewing a portfolio because we do know, it’s not about set and forget and I’ll talk about that in a moment but how often should a commercial property portfolio be reviewed and what’s the process?
Chris: Well, most people view property as a longterm investment, which is correct. However, I recommend my clients undertake a formal four year mandatory review of every commercial property they own. That doesn’t require them to sell it, but it does force you to convince yourself as to why you should continue to own that property and your final decision will be based upon the remaining term of the lease plus where you are in the current property and economic cycles. And if you decide to hold the property and have been adding value along the way, you’re probably in a good position to have it revalued and then release some additional equity in order to go and purchase another property.
Kevin: This is pretty much a mindset you’re talking about here. It’s almost like having every part of your portfolio ready to sell almost.
Chris: Yeah, it is because you need to understand that your personal circumstances could change at any time and therefore your plans to add value should be hatched as soon as you settle on that property and then progressively implemented while you own it. And we talked earlier about the possibility of further subdivision, and the secret is to do that early during your ownership because while the cost of doing that is not all that great, it can sometimes take up to nine months before the new titles formally issued. And that way if the need does arise for you to sell there’s no need for a mad panic to get everything ready.
Kevin: You mentioned earlier about the tenant, I want to pick up on that because I’m keen to know in commercial transactions where the tenant sits in the transaction and where do you believe they sit in relation to the investor’s relationship with the agent? Chris?
Chris: You’re probably aware that commercial leases are generally for at least three, sometimes up to 10 years. So your relationship with tenants is vital for your success. If you think about it, it’s the tenants that are effectively your partners because they are the ones who are actually paying the interest on your mortgage and therefore be responsive to their needs and engage a managing agent who thinks just like you do. Because that way when the market rent falls due, your tenant will see you as a caring landlord, and your new rental should reflect the good relationship that you actually cultivated.
Kevin: What’s the bottom line here for a safer and more sound commercial investment journey? What are your top three tips for the beginner?
Chris: Top three tips. Well, firstly, you need to learn as much as you can as quickly as you can by reading books or enrolling in courses. Now, having said that, you need to choose wisely because there are plenty of American and a handful of Australian books, but unfortunately not many of them will prove to be all that helpful. And I say that because you’re looking for books to provide you with hands on use tomorrow training rather than something that’s been hyped up with examples that you’re unlikely to be able to easily emulate. Secondly, you need to start putting together your own team of trusted consultants. And I’m talking about people here, like a lawyer, a good lawyer, not just a family lawyer, an accountant, a mortgage broker, a building consultant and so on. And not only will they safeguard your interests and give you added confidence, but they will also shorten your learning curve along the way. And lastly, you need to get yourself a mentor to provide guidance and the one extreme, there are those who will want to have you enroll in their expensive courses and the other extreme, there are those who just want you to immediately retain them to go and purchase a property on your behalf.
Chris: However, what you want is someone who’s prepared to initially share information with you, expecting or without expecting any formal upfront commitment so that you can get to know, like, and trust them and then as the relationship builds, you can start working together and start to establish yourself as a successful commercial property investor.
Kevin: Yeah, it’s a very good point you make there Chris too, because I think it’s a two way street here. It’s one thing about understanding who you’re talking to, but by the same token, the mentor you choose really needs to get an understanding for you to decide whether they can help you. Very, very sound advice. I’ve been talking to Chris Lang. Chris’ website is called commercialpropertymadeeasy.com and when you go there, you’re gonna find an opportunity to get an ebook as well, or a book that’s called The Investor’s Guide for Success with Commercial Properties, It’s been written by my guest, Chris Lang. Chris, thank you very much for your time.
Chris: My pleasure.
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