Commercial Property: Introduction & Strategic Considerations

1. The Role of Commercial in a Portfolio

• Deliver high, reliable cash flow with net yields of 5–7%

• Reduce management burden with the tenant covers most outgoings

• Diversify away from purely residential and capital-growth assets

• Consolidate multiple lower-return assets into one high-quality asset

• Anchor portfolio income to fund lifestyle, reduce work reliance, or self-fund retirement

• Provides inflation-resilient income, especially with fixed annual rent increases that outperform CPI volatility.

Case Study – Equity Rich, Servicing Capped

How to present commercial to clients who aren’t ready yet

• It’s not about pitching early, it’s about planting the seed.

• Frame commercial as a graduation once residential has done the heavy lifting.

• Highlight how it complements an income strategy and anchors the portfolio.

2. When to Recommend Commercial

3. Residential vs Commercial - Core Differences

• Residential:
• Value is driven by owner-occupier demand and supply.
• Landlord typically pays for all outgoings (rates, insurance, etc.).

• Commercial:
• Value is underpinned by the rental income (capitalisation rate).
• The term “cap rate” (capitalisation rate) reflects the relationship between income and value — lower cap rates indicate lower risk and lower yield, higher cap rates indicate higher risk and higher yield.
• Tenants generally pay outgoings, so we often calculate on net yields
• Leases are usually longer than 2–3 years remaining, providing stability.

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4. Capital Growth & Yields

• Commercial growth: typically 4–6% p.a.

• Target Net Yield: 5–7%
• Below 5% → safer, stable asset but weaker cashflow.
• Above 7% → riskier; vacancy periods could stretch 6+ months.

• We aim for balanced yield to combine risk of low vacancies with strong income.

• Yield compression typically fluctuates by ±0.5% depending on interest rate cycles and investor demand. When yields compress, asset values rise, an important growth driver for commercial investors.

5. Lending Mechanics

A. Full-Service Loan

• Based on full financial assessment of the borrower (income, expenses, liabilities)

• Requires tax returns and servicing calculations similar to residential

• Suitable for clients with strong personal income or business serviceability

• Typical terms:
• Up to 85% LVR
• Lower interest rates than lease-doc (approx. 6% at 70% LVR, 7% at 80%+ as of Jun 2025)
• Offered by major banks

• Not common for our investor clients due to tighter servicing

B. Lease Doc Loan (Most Common)

• Assessed on the lease income of the commercial property

• No personal income required for approval

• Common terms:
• 70% LVR for metro industrial/medical, even in strong regional hubs (e.g. Toowoomba, Ballarat)
• 65% LVR in smaller or lower-tier regional markets
• 80% LVR available for SMSF deals, but at higher interest (approx. +0.5%)
• Interest-only (IO) for 2–5 years, commonly refinanced before expiry
• Redraw available, but no offset accounts

• Typical lease-doc loan rates sit around 6% IO (as of late-2025), subject to lender, LVR, and risk profile.

Lease Expiry Management

• As leases near expiry, we ensure:
• The property manager is proactive with renewal discussions.
• Tenant payment records remain consistent.
• Market rent reviews are completed to maximise income.

• Annual lease reviews are required by lenders; we support clients by preparing a CMA-style market assessment to satisfy lender documentation.

⚠️ Lease Doc Loan Watchouts:

• Annual reviews: lender will assess lease, arrears, and tenant profile annually and may adjust the interest rate

• Market analysis required each year — we assist clients by providing a CMA-style report as a licensed provider

IO vs P&I

• Both used, inside and outside SMSF, depending on circumstances

6. What Commercial Assets We Buy

Key Property Types:

• Industrial and Medical assets make up almost all of our commercial deals (versatile, high demand, resilient to tech disruption)

• Retail assets are considered when anchored by a major supermarket (IGA, Coles, Woolworths) and supported by multi-tenanted specialty stores.

• Fast-food retail (e.g. KFC) may be purchased in regional areas achieving >5% net yields. Metro fast-food sites typically yield <5% and are avoided.

• Sweet spot yield range: 5–7% net.

• Avoid <5% (too safe/low return) and >7% (high risk of vacancy/asset issues).

• However, a lower yield 5% yield doesn’t mean a worse deal than a high 6% deal

• Vacancies are part of the game, assume 3-month vacancy every 3 years or 6-months per 5-year lease for planning purposes - this is around ~8% vacancy which is factored in our calcs, same as residential assumptions

• Our 90-day benchmark refers to leasing days on market, not sales days — a measure of tenant demand and liquidity.

• However, we never buy vacant, they always have a tenant-in-place with strong lease terms.

Price Points & Strategy:

• Most of our current deals are: $1.5M to $5M for industrial and medical

• Risk and competition drop off sharply at the $2m+ price point
• Around $1.5M is a sweet spot for “mum & dad” investors with large super balances
• Once you push past this at $2m+, you attract more sophisticated investors

• $3M+: higher-quality assets, stronger tenant covenants, better risk-adjusted returns

• Over $5M: usually industrial, more institutional-grade tenants

• Can split budgets for diversity — but generally prefer single larger asset for stronger return and quality

7. Where We’re Buying

• Capital + Large Regional cities: Brisbane, Perth, Newcastle, etc.

• Tier-1 regionals: strong economies, growing infrastructure, for example, Ballarat

• Lower-growth or low-health-score areas: often suited for medical due to tenant stability

• Lower bank appetite

• Higher vacancy risk

• Difficulty reselling

8. The 3 Ms – Mitigating Commercial Risk

1. Market
• Low vacancy (<3% for industrial/medical).
• Low days on market (<90 days).
• No oversupply (check incoming development pipeline).
• Genuine scarcity and limited industrial zoning are leading indicators of future capital growth.

2. Management
• Thorough due diligence to avoid high capex risk.
• Ongoing property management to keep tenant happy.
• Lease terms that protect landlord.

3. Money
• Maintain cash buffer (~3 to 6 months gross rent) - can also be in the form of liquid assets such as stocks and bonds.
• Conservative debt levels.
• Factor in worst-case scenarios for vacancy and capex.
• Maintain adequate liquidity for capex events and lease rollover periods — roughly 3–6 months of gross rent in accessible funds.

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9. Lease Management and Expectations

• Lease renewals typically require 3–6 months’ notice to market to new tenants

• Our general assumption:
• 3 months of vacancy every 3 years
• Plan for 6 months vacancy for every 5-year lease term

• Standard growth assumptions: 4–6% p.a., depending on location and tenant type

• Rent increases can be:

• Fixed amount → preferred in today’s environment.

• CPI-based → fluctuates with inflation.

• Fixed increases provide predictability; CPI-based increases can lag inflation in low-CPI years but catch up during high-inflation periods.

10. Two-Phase Due Diligence Process

• Receive the Information Memorandum (IM)

• Check lease terms (remaining term, increases, tenant obligations).

• Analyse market vacancy, days on market, incoming supply.

• Confirm tenant payment history.

• Review zoning, flood/fire risk, easements.

• Ensure rent is at/under market rates with potential uplift. Avoid over-rented assets unless brand new.

• Seek director guarantees (SMEs) or bank guarantees

• CMA with at least 5 recent comparables, based on rent per sqm

• Review historical performance of the asset

• Confirm net yield meets target range and is within market cap rate range.

• Validate leasing market metrics: vacancy rate, days on market (<90 days), and recent leasing evidence.

• Onsite inspection by buyer + trusted builder/roofer.

• Capex risk assessment (focus on major items like roofing/structural).

• Negotiate repairs or price reductions.

• Tenant interview to check satisfaction & future plans.

• Validate outgoings in practice, not just on lease.

• Obtain valuation, legal review, strata reports (if applicable).

• Conduct in-depth lease review via solicitor (as a triple check).

• Confirm with agents and valuers that the cap rate aligns with similar transactions in the area.

11. Structuring the purchase

• Trust structure recommended for high-income clients (flexible income distribution, CGT discount).

• Owner-occupier purchases with leaseback can be highly effective for business owners — allows rent to be paid into an SMSF and creates tax efficiency.

• Always client to confirm with accountant.

12. Acquisition & Negotiation

• Properties are presented via Loom video including:
• 10-year cashflow modelling.
• Tenant background checks.
• Lease term review.
• Market performance data.
• WALE
• Cap rate comparison against current market benchmarks

• Chris physically inspects each property.

• Negotiation timeframes:
• Off-market: ~2 weeks.
• On-market: generally quicker.

• A professional valuation is obtained (fee applies).

13. Other Considerations

• Stamp duty discounts apply in some regions:
• 50% concession in regional VIC
• 100% exemption in SA (as of current policy)

• SMSF purchases possible via lease-doc loan, but factor in higher rates and stricter structuring

• Yield compression tends to occur in strong economic periods or when interest rates fall — plan strategy with both yield and cap rate sensitivity in mind.

14. Acquisition timeline

• From sign-up to settlement: usually 3–4 months, but can take up to 6 months depending on stock and negotiations.

• Standard timeframe is 3–4 months from sign-up to settlement, but can extend to 6 months in tight-supply markets or for highly-vetted institutional-grade assets.

15. Long-Term Portfolio Management

• Commercial assets are typically held 10+ years for income stability and yield compression benefits.

• Regular reviews should cover:
• Lease renewal timing
• Tenant diversification (if multiple assets)
• Capex forecasts for major works
• Revaluation opportunities to release equity

• Exit timing should align with:
• Maximum WALE or recent lease renewal
• Peak market yield compression for optimal sale price

Summary

Sending clients commercial deals

Instructions for sending clients past deals

1. Navigate to the ‘Recent Commercial Deals’ Google Drive - drive.google.com

2. Download the relevant deal PDFs to send to client

3. Send to client

Cashflow Model

Objection Handling, Common Questions & Key Talking Points

1. “Why focus on $2M+ properties? Isn’t that too much?”

• Competition drops significantly at the $2M+ level, meaning less buyer competition.

• Around $1.5M is where many “mum & dad” investors with large super balances buy.

• $2M+ assets are often purchased by experienced investors and institutions, which means fewer emotional buyers driving prices.

2. “How is commercial different from residential?”

• Residential is driven by owner-occupier demand and supply; you (the landlord) pay most outgoings.

• Commercial value is underpinned by rent, with tenants usually covering outgoings.

• Leases are typically 2–3+ years remaining at the time of purchase, providing income certainty.

3. “What’s the expected growth and cashflow?”

• Capital growth typically sits around 4–6% p.a.

• Target yields: 5–7% net.
• Below 5% = strong, safe asset but lower cashflow.
• Above 7% = higher risk of extended vacancy.

• We aim for a balanced yield with strong cashflow and low vacancy risk.

4. “How do you avoid long vacancies?”

• We target:
• Vacancy rate <3%.
• Days on market <90 days (quick re-leasing if tenant leaves).
• Low incoming supply.

• We buy in sectors with proven tenant demand: Industrial and Medical.

• Use the 3Ms framework to address vacancy concerns.

5. “What’s your due diligence process?”

• Refer to two phase due diligence

6. “What about maintenance and big repair bills?”

• The two main risks in commercial are vacancy and capex (capital expenses).

• We ensure properties are in strong condition to avoid large repairs.

• Common issue: roofing – inspected by a roofer and builder before purchase.

• Large future costs are forecasted upfront for big assets.

7. “What makes the assets you buy easier to resell?”

• We target the top 2% of quality assets – these attract buyers in any market.

• Well-leased, in-demand properties are easier to sell and hold value.

8. “Why fixed rental increases over CPI?”

• Fixed increases offer certainty and predictability for income.

• CPI can be volatile and sometimes lower than fixed rates.

9. “How long does it take to find a property?”

• Typical timeframe: 3–4 months from sign-up to acquisition (up to 6 months in some cases).

• We only present properties that pass strict due diligence and market checks.

10. “What about tax structures?”

• Many investors use trusts for estate planning and income distribution flexibility.

• Always seek accountant advice to determine the right structure.

11. “Can I hold commercial long term?”

• Yes – these assets are built for long-term passive income.

• Strong, well-located commercial properties can be held for decades. Especially with us buying the top 2%

12. “When we say ‘90 days on market,’ does that refer to rental days or sales market days?”

• This refers to leasing days on market — how long it takes for a vacant property to be leased.

• It’s an indicator of tenant demand and how quickly income can resume after vacancy.

13. “Would we ever consider retail assets in the future? I understand the risks like vacancy and tenant churn, but what about stable ones like supermarkets or KFC?”

• We do consider retail assets when they meet strict quality criteria.

• Must be anchored by a supermarket (IGA, Coles, Woolworths) and supported by multi-tenanted specialty stores.

• We will purchase fast-food retail (e.g. KFC) if regional and achieving >5% net yield.

• Most metro fast-food sites sell below 5% net, which doesn’t meet our return thresholds.

14. “If a 5% yielding commercial asset becomes vacant, how does that impact its value?”

• It depends on local demand and buyer type.

• In the ~$2M space, there are often owner-occupier operators, which can keep prices strong even when vacant.

• Example: In Smeaton Grange (NSW Industrial), vacant assets have sold for more than purchase price due to high owner-occupier demand.

• The key driver is supply vs demand — if demand remains high, values hold. If oversupply hits, growth slows or reverses.

• Most 5% yield assets have strong fundamentals, so values typically stay resilient.

15. “How should lease doc loans be managed as they approach expiry? Do we support clients with renewals?”

• We ensure the property manager stays on top of renewals and tenant performance.

• Check that rent is paid on time and review market rents to ensure the client achieves optimal income.

• Support clients with insights and reminders around lease renewals where relevant.

16. “Do most investors hold commercial property for life, or is there a time when selling makes more sense?”

• Most investors hold for at least 10 years under a buy-and-hold, passive income strategy.

• Selling may make sense when:
• The tenant mix or lease profile weakens.
• Capital growth goals have been achieved and funds can be recycled.
• Personal portfolio rebalancing or retirement planning requires liquidity.

17. “What are the main considerations when selling a commercial property in the future?”

• Tenant quality and lease length (WALE) have a major influence on price.

• The best time to sell is often at maximum WALE or immediately after a renewal to capture investor demand.

• Market conditions and yield expectations also determine the timing of sale.

18. “Where do we source the most reliable data when assessing commercial assets?”

• Valuations and on-ground agent/property manager insights.

• RP Data, Areasearch, and Cordell for supply metrics.

• Local knowledge remains essential — relationships with active agents add real-time context that data can’t capture.

19. “If supply is low due to restrictive zoning, how do we confirm genuine scarcity?”

• Use Nearmap satellite imagery to assess undeveloped nearby land.

• If there’s abundant surrounding land, it signals potential future supply.

• If the area is surrounded by residential zoning, supply expansion is limited — indicating true scarcity.

• Rezoning is a long, infrastructure-heavy process, and often stimulates growth when it eventually occurs due to job creation and investment.

20. “Do we help clients find commercial property managers?”

• Yes — we source the right property manager for each asset and location.

• Selection is based on specialisation, tenant type, and local market knowledge.

21. “Why do some business owners buy the property their business occupies and lease it back to themselves?”

• It’s a smart SMSF and tax strategy.

• Allows owners to pay rent to themselves through their business, keeping wealth inside the SMSF.

• Provides asset protection, stable rent, and long-term control of business premises.

22. “Do we expect net yields to compress over time?”

• Yes, yields typically compress by around 0.5% (+/-) depending on interest rate trends.

• Rising demand and limited supply also contribute to yield compression over time.

• For long-term investors, yield compression generally supports capital growth.

23. “Is the term ‘cap rate’ still used, and what value does it add in conversation?”

• Yes — cap rate remains a core measure in commercial property.

• It represents risk versus return:
• Lower cap rate = lower risk, lower return.
• Higher cap rate = higher risk, higher return.

• It’s a key benchmark when comparing asset types, locations, and tenant profiles.

24. “What percentage of loans are full doc vs lease doc?”

• Approximately 99% are lease doc loans.

• These are preferred for commercial investors due to simplicity and reliance on the lease income rather than personal income.

25. “What are typical interest rates for lease doc loans?”

• Around 6% interest-only (IO), depending on lender, asset type, and borrower profile.

• Rates can shift with RBA movements and risk assessments by lenders.