Faced with the prospect of more moderate-at-best returns from their residential property investments, many investors are now turning their attention to commercial real estate.
Today, I wanted to look at three key terms and definitions from an investor’s perspective, that are used when discussing commercial property.
#1 – Net Yield or Cap Rate
The term net yield is a product of the net rental income, after all running costs of that property have been deducted, but not the mortgage costs.
It’s the net income of that property, divided by the purchase price of that property – so, if the net income was $10,000 and the property cost you $100,000, that would be showing you a 10% net yield or net return.
The term cap rate, meaning capitalisation rate, is essentially the same as net yield or net return, but it’s used in situ slightly differently.
Let’s say you bought that $100,000 property and had $10,000 net rent from that property. A real estate agent who quotes that sale might tell you that the property was bought at a cap rate of 10%.
You’ll see some agents use different words to say the same thing. And once you get used to the numbers, it’s very easy to see that you always just want to get to the net yield… or more specifically, your return for that property.
TIP: Get in the habit of asking agents about the net yield or cap rate of similar properties in that location in the last 6-12 months.
#2 – Strata Title (or Community Title)
Essentially, strata titling is the division of a larger property into smaller titles, and you get a title that you can borrow money on.
Strata title is actually an Australian invention – first introduced in 1961 in NSW to better cope with the legal ownership of apartment blocks.
With a strata title, generally speaking you own the internal walls (to the surface) of the property, but all the internal parts of that wall and the common areas of that property are called common property.
A strata title property is usually run by a professional manager who looks after the common property of the building and the exterior maintenance.
Thankfully, Australia has a very good title system, so it is just as good as owning a whole property, as far as an investment goes.
But of course, there are lots of things to check out with a strata property, and this should be part of your due diligence.
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#3 – LVR (Loan Value Ratio)
LVR is the Loan to Value Ratio, or the percentage that the bank or financier will lend you on a property, based on the valuation of the property.
Let’s say you buy a property for $100,000, and the bank or financier is going to lend you 80% of that property. That means they will lend you $80,000 on that $100,000 property.
Often different banks and financiers have different LVRs, and sometimes even different property types will attract different LVRs.
If you were buying a service station for example, you may find that some banks consider them riskier, so they may only want to lend you 60% on that property.
Before you look at commercial property deals, you should know what percentage a lender will typically lend you on that type of deal.
When compared to residential property investing, it’s widely accepted that commercial real estate provides greater cashflow benefits, better rental certainty due to longer rental periods, and fewer ongoing expenses…
And, if you do your research, practise due diligence, and understand the risks, commercial should be a valuable addition to your property portfolio.
To Your Success
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