Property Hub - Investment Insights & Inspiration - Realty Talk: Higher commercial yields + Bright side to rate rises

Episode Date: June 9, 2023

This week's show revolves around interest rates, following the 12th interest rate rise in 12 months.  Scott O’Neill kicks things off by looking at the impact that rising rates are having on commercial property and what you need to consider when looking for higher yielding opportunities. To restore confidence in construction and its considerable benefits, the founder of Builder Finders Lynette Manciameli introduces you to the innovative world of builder broking. BMT’s Brad Beer lays out what rising rates mean to property investors and it is not all bad news. RealtyTalk is part of the Property Hub podcast channel, your home for property investment insights, inspiration, and stories from Australia’s top property experts, investors, leaders, and analysts. Subscribe now to get every RealtyTalk episode delivered to you each week for free, and also get full access to Get Invested, the leading podcast for Australians who want to unlock their full ‘self, health, and wealth’ potential and get inspired by the stories of investors, founders, and entrepreneurs. NEW - Join the Property Hub community on Substack! Sign up to get Australian property news, opinion and episodes in your inbox: https://propertyhubau.substack.com/  Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media. Business and partnership enquiries: [e-mail] omnystudio.com/listener for privacy information.

Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by Realty.com.au, connecting buyers, sellers and agents differently. Hi and welcome to your Property Hub's Realty Talk show, your go-to place for property investment insights, inspiration and stories from Australia's top property experts, leaders and analysts. I'm Bushy Martin from KnowHow Property Finance, and with this week's 12th interest rate rise in as many months, the program revolves around the impacts and opportunities. Scott O'Neill kicks things off by looking at the effect that rising rates are having on commercial property and what you need to consider when looking for high-yielding opportunities. To restore confidence in construction and its considerable benefits,

the founder of Builder Finders, Annette Manciamelli, introduces you to their innovative world of builder broking. So watch out for that. And to close out the show, Brad Beer unpacks what rising rates mean to you and what you can do to stem the tide. Now, before we get in the way, if you're enjoying the show, I need to ask you a special favour. Can you please take a couple of seconds now to hit the subscribe button wherever you're

listening to or watching the show, as this will ensure that we continue to attract the industry's best of the best so that you can enjoy cutting edge insights. And if you'd like a free copy of my award winning book, Get Invested, make sure you also sign up on the realty.com.au homepage. We've got lots to share, so let's get on with the show. Successful property investment is a game of finance. Do you have the right team and the right game plan? Realty Talk is brought to you by KnowHow Property.

More than mortgage brokers, Bushy Martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs, tax, risk and stress while increasing your capacity for growth. KnowHow has helped over 1,900 homeowners and investors secure more than $800 million in property wealth. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom? Visit knowhowproperty.com.au. The current rising interest rate environment is a challenging time to invest in commercial property

as it's difficult to maximise and maintain yields in a constantly changing environment where borrowing costs are high and property values are softening and in some places decreasing. So it's never been more important to carefully consider your investment strategy and understand the potential risks and rewards. So what do you need to consider when looking for higher yielding opportunities with long-term growth in times of rising interest rates? Well to assist you with this we're joined by Realty Talk regular Scott o'neill who's the co-founder and director of rethink investing australia's number one buyers agency for commercial property investors so welcome back to the show scott thanks bushy

good to be back absolutely you want another good topic to dive into today and i guess just to kick things off can you give us a quick dot point summary of the key commercial property considerations um look right now we you do need a good yield so uh high level probably six percent net or better just based on the current interest rates you need something where there's a raising uh rising rent value at the moment because that's going to create capital growth and obviously uh create a hedge against the interest rates we're seeing as well at the moment and uh just stability of tenant is probably something to consider as we you know approach a potential recession in the next year or two ahead though there's all sorts of variables in the economy uh so you would like one

less variable with your tenant because something's stable and uh there's plenty of those types of tenants when you need to when you're looking out there so they're probably the top three i'd say yeah one of the other the key considerations i've heard you talk about before is starting with getting the fundamentals right uh what do you mean by getting the fundamentals right in real terms you mentioned the the yield target uh are there other aspects there that we need to be familiar with um yeah so like i said the stability tenant would be a fundamental um and also probably going one step further uh which helps stability is just a property that would be re-let easy so this is probably coming into the quality type comment so a good quality asset will attract a quality tenant

in less time a good example of that would be if you're looking at retail you want the corner site with the exposure that you know a real estate agent or a well-known dentist might be in you don't want something in the side alley where there's no foot traffic even though it's in the same suburb it doesn't represent the same quality so um i think you just think about those types of scenarios and you know if you've got a property that can be easily re-let then it does de-risk the situation greatly yeah so the location is clearly very important what about the length of the lease is that is that a fundamental that's uh part of the mix Personally, I'm not super driven by the length of lease.

This is something that you generally will pay more for. So if you want a 15-year lease, there's a premium for that asset because people will be more attracted the longer lease is at play. Like I recently purchased a property and it had eight tenants and the average lease length on it was just under 12 months. There was a couple of three-year leases, a couple of six-month left leases. this doesn't sound great but the reality is they were about 30 under rented and i know the tenants were all pretty keen to stay and if they're not it's a one percent vacancy rate market so

no stress there so you wouldn't want a long lease in that case because you'd be paying too much for it and the value add opportunities will will come back with it so i guess horses for courses there's obviously benefits to long leases it can help with lending it de-risks that if you are buying a property that might not find a tenant easily but um yeah look i think you've got to mix things you know down the middle you don't want something that's too short you don't want something that's too long and just one quick side note uh industrial space for example a long lease will actually devalue your property potentially because the rent is going up a lot quicker than it can possibly go with the lease for example jll produced a report saying last year national

industrial rents grew by 24 percent australia wide so if you were locked into a 10-year lease going at three percent per annum uh you're well behind the eight ball and you're losing income every year that lease is in place so you've got to consider the market with these leases as well yeah brilliantly said and uh an insight again that the average punter wouldn't get their head around unless they understood what you've just explained to us so we really appreciate your thoughts on that uh one of the other areas that gets a lot of talk is market risk is that an important consideration when you're looking in the commercial space yeah big time so there's obviously there's four main segments in commercial property you got industrial office retail and

specialty which is your uh you know single purpose assets like child care fuel stations and even medical centers so uh out of the big four there's one asset class which is not looking good right now and that's office specifically cbd office space so you need to consider the market in that example because vacancy rates they're still almost double what they were pre-covid um sydney as an example was seven percent pre-covid it's around 12 percent uh around that figure so like they're pretty big numbers in terms of vacancy rate and what that means for the everyday punter is if you bought into that scenario you're not going to get much rent growth because the tenants have variety they can negotiate against you they're not going to sign big long leases because

they're going to be incentivized to go elsewhere it's just not a good situation for an investor to be in so i'd rather be in those markets where you don't have to deal with the vacancies and and there's you know central retail medical industrial they're all as tight as they've ever been and uh yeah so like depending on which asset class you go it will have a material difference in wealth i think yeah very good read a couple of other aspects that i like your thoughts on are the uh particularly in the current uh rising interest rate environment uh give us your read on the importance of rental income and loan repayment considerations yeah i think first of all it's important to say that no one's going to feel as rich this year as they did last year so

cash flows are squeezed so don't be disheartened everyone's in the same boat uh you've got to take a long-term approach with with interest rates and we're kind of at the you know what what i would have thought as a long-term average now um or closer to it's probably still under but um you know we're looking at rates that this is where they probably should have been for you know if there wasn't a gfc you know in the place so if anyone that was kind of banking on two percent interest rates were living in a false paradise and uh i guess the real thing that uh higher inflation does is it makes rents grow it makes building harder suppliers going to get constrained so the rental markets will get tightened in a high inflation market that will create more long-term

wealth than the lost cash flow any day of the week and to sort of you know if you think about what's happening with the rents growing as quick as they are in residential and commercial that's going to have a lasting positive impact on your wealth because if rates drop which they will at some point um history shows the rents don't drop with it so you're left with a higher interest rate and you've basically got a better cash flow at that point but you've bought at a time hopefully if you're buying in the last 12 months you're getting a very good deal um that will be hard to replicate in future years so yeah i think there is benefit to uh going into a tighter cash flow situation weathering the storm and then when you come out the other end there might be a

quite a large equity grab and positive cash flow from it love it i love the your read the exercise and the opportunity that's arising from mate so i really again want to thank you for drawing our attention to these important considerations scott and thanks again for your generous time on the show today thanks bushy appreciate thanks scott well as you've just heard as a property investor whether you're investing commercial or residential economic conditions can change very quickly as they've done over the last 12 months and yields that were attractive may no longer be as profitable so by investigating a variety of yield considerations you can be more adaptable to changing market conditions and if you need professional help with this in order to make

better informed property decisions reach out to scott and the team at rethinking at sorry i'll get this right rethinkinvesting.com.au stay tuned for more on your property hubs plus voice for all things property here on Realty Talk. Call BMT on 1300 728 726 today for an obligation free quote. In recent times, it seems like a week doesn't pass without more bad news about problems in the construction industry with costs and delivery times blowing out and unfortunately, builders going bust.

But building a property is still the best way for you to get the home that you want without compromise or to secure a significantly tax-advantaged investment property with superior cash flow affordability given the stamp duty savings and the depreciation benefits that are only enjoyed by new builds. So how do you navigate the confusing, uncertain construction maze and separate the sheep from the goats when it comes to building your dream home or investment property to ensure that you're achieving great value in terms of time, quality and cost? And how do you identify a good, reliable builder that will last the distance?

Well, up until recently, you were pretty much on your own and at the mercy of the builders when it comes to selecting one. But that's now changed with the pioneering and very new, innovative Build-A-Broker service. And to unpack what it means and the benefits to you, we're joined by the co-founder of Build-A-Finders, Lynette Manciamelli. So welcome to Realty Talk, Lynette. Thanks very much for having me, Bushy. I'm really excited about this.

I think what you're bringing to the industry is well overdue and is going to make a massive difference to the confidence and comfort that people have in the building process. But before we sort of get into that, can you sort of start off by telling us a little bit about what builder brokers do? Okay, so the easiest way to explain what builder brokers do is the analogy I always like to use. And if you've used a mortgage broker before, as many Australians have, and in case they have and it's it's you know like a broker like an insurance broker or a mortgage broker some kind of

broker that has a whole suite of offerings a builder broker is no different so I'll go with the mortgage broker analysis so you go to your bank your bank don't go to the bank go to the mortgage broker and they've got a panel of lenders that they could link you up with so a builder broker is much the same I have a panel of builders that I've researched reference checked and gone through a due diligence process sort of checking them all out and then I will match the client's needs with the what the builder does basically so if I have a client that's looking for a renovation I'll look for a builder on that panel that has an appetite for the type of work that the client's wanting to do and basically almost like a matchmaking service putting the right people

together but yeah but from that sort of preset panel that is already existing within the business. Yeah I love it so I think it's a an awesome and very timely innovation given what's happening in the industry but tell us why did you start Builder Finders then and and how did it come about? Okay so I started the company with my husband John. John's also a mortgage broker so hence where that came from and they're about 17 years into the business when the Royal Commission into banking started and it really shook that industry and the way forward during that period of time was a little bit sketchy. It wasn't quite sure whether mortgage brokers were going

to survive as an industry going forward. Luckily, it did and everything's fine. However, that made us think, right, well, what can we pivot and what can we do a little bit differently to diversify the business offerings that we have? So I sort of was the spearhead behind Builder Finders because I come from a construction family. So I'm not a builder or an engineer or anything.

I don't have any qualification in that space. But what I do understand is very firmly how a broker model works. And so when we were sort of thinking about, you know, how to move forward, we sort of had heard about a builder broker before and with sort of the knowledge that I had from, you know, growing up with my dad as a builder, I kind of thought this model could really work together. So we started it, yeah, sort of out of a need, which was not an ongoing need from a business perspective, but there was a lot of personal background to it too. We had used a builder.

So prior to that, we did a backyard, an extensive backyard renovation, you know, redid the pool, put a massive alfresco area into our home. And at this point in time, my dad, he's now retired. He's quite elderly now. But, you know, growing up, he did everything for me. I never had to go and source a builder and I found myself in a place of need of actually needing to find a builder and you sit there sort of scratching your head going who do I trust where do I go what do I do so I actually went with a builder that had done the renovation at the home next door and also across the road but if two neighbors had you know been satisfied with his work I'd give it a crack

and it was not a great experience the result was good but the journey was horrific and you're spending months at a time with a builder particularly if you're doing a new home you You know, you've got to spend a good year with this person. And I walked away thinking, you know, the whole bottom line for me with creating Builder Finders was there's got to be a better way to find a builder. So you don't have a dad. And so you don't have any contacts in construction.

Like a lot of people have friends that are trainees that can give them a referral to this or, you know, a plumber or an electrician. But where do you go for someone to holistically oversee the entire build if you have no contacts? so yeah it was very much that bottom line was there's got to be a better way and so for all those varying reasons um builder finders was commenced yeah brilliant uh as i've said i think it's a very timely and and uh huge hugely advantageous uh offering for people who aren't familiar with the the building process and there is a lot to it as as uh you and i both know we're

given our histories in the industry. But I guess the obvious question, Lynette, is why would clients use your service rather than going directly to a builder then? Well, how do they know who they can trust to start with? You know, they could, as it was my situation, I didn't know that I could trust that builder that I went to. I was just going off an experience.

So if they came to me looking for a builder, I've done lots of researching and reference checking. i've i've created trust and rapport and understanding of who the builders are how they work um and clients need that as well but they also a lot of people are time poor they don't have the time to go and do all the research and the reference checking that they should be doing you know it's not really sufficient enough to just go i like what that builder is building down the street that looks good but there's a lot that goes into the situation um and assessing who to go to and how the whole process is going to work out for you so time time poor time poor people

people that really just don't know where to start and just everybody how do you know how to trust so um there's some of the reasons i think you know why you would um some of many of the reasons that you would use a builder broker for makes a lot of sense so uh moving on from there then how do you save clients time and money in the process just by doing all that research and reference checking for them um as some of the ways that you save their money i mean just giving them lots of um lots of you know information and a lot of the knowledge that i have so i can put them in contact also but you don't you don't just need a builder if you want to build that's the last step you need a building designer or an architect you need an engineer you need a surveyor you need a town

planner you need quality surveyor estimator there are so many things people that you need before you actually need the builder and i can save them that time i have a very strong network of all those professionals that i just named um at my disposal that i work with on a daily and regular basis so i can provide them the you know guidance as to who to go to for what they need which also therefore saves them time um and then other things like we use a we use a scope of works that we refer our clients with an online tool and basically it helps them work out everything that they want in the build and it saves them money so they're giving as much fine detail to the builder about what they want in their build and basically if you're not doing that um the

builder has to guess you know they need to make an estimation on what you want so the more detail that we teach our clients to give to the builder the better the outcome and therefore there is the cost saving and time savings yeah and the certainty too for both the builder and the client because if it's specified and it's it's as you say the detail is spelled out there's no guesswork for each party or the opportunity then for time or cost blowouts that inevitably occur when that happen so look i really want to commend you on bringing a fantastic and pioneering this service in the industry i i can see that it's going to be a growing opportunity uh giving uh you know what's going to be happening with the massive undersupply of housing in australia and the need

to build hundreds of thousands of homes to satisfy the ongoing population demands so i really want to thank you for opening our eyes to this great innovation on builder selection initiatives, Lynette, and thanks for joining us on the show today. Thank you very much for having me. Thanks, Lynette. Well, as an ex-architect and project manager, I'm a big fan of the significant benefits of building a home or investment property over the compromise of buying an existing one.

Done well, new build properties allow you to manufacture equity and, as an investor, allow you to drastically reduce your ongoing holding costs and vastly improve your cash flow affordability. So if you'd like to learn more on how I build a broker, you can assist you and enjoy all of these new building advantages, reach out to Lynette and the team at builderfinders.com.au. Stay tuned for more on your property hub's trusted voice for all things property here on Realty Talk. Successful property investment is a game of finance. Do you have the right team and the right game plan? Realty Talk is brought to you by Know How Property. More than mortgage

brokers bushy martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs tax risk and stress while increasing your capacity for growth know how has helped over 1900 homeowners and investors secure more than 800 million dollars in property wealth. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom? Visit knowhowproperty.com.au. Are you one of over 2 million property investors who are seeing your holding costs steadily increase as interest rates continue to rise? Rates have risen 11 times over the last 12 months and increased by 3.75% with potentially some more to come adding over eleven hundred dollars to monthly payments on a five hundred

thousand dollar loan with a 30-year term so if you're an existing or potential property investor what do rising interest rates mean to you and what do you need to do to stem the tide to share some timely insights on all of this we're joined by long-term show supporter and favorite brad beer the ceo of bmt tax depreciation for australia's leading provider of tax depreciation schedules So, welcome back to the show, Brad. Bushy, great to be here as always. Love talking property. Yep, it's our favourite subject and a good topic to jump into today given the sort of

media focus over the last 12 months. But from your perspective, mate, to kick things off, what do rising interest rates mean for property investors that you see? Well, look, rising interest rates, I mean, the simple answer is they cost us more money. with interest rates increasing obviously the cost to hold those properties uh gets a bit more stressed your monthly payments increase uh and and you know what that means is it's just hard to make it stack we're buying property to make some money and it's hard to either make it stack to buy it or hurts and i talk to investors a lot and uh there's a you know 11 rises uh and lots of

investors you speak to haven't you know haven't been through rates of this sort of height uh i have because i've been investing for a fair few years uh but in saying that i haven't been through the you know the the really high 17 percenters um i do remember having some stuff locked in at seven and a half percent many years ago and that sort of turned me off locking things in but and i guess like it has other effects on the market um you know there's less people that going to afford to buy the home there's less pressure on the market when you're trying to buy we've also seen interest rates raise sorry um rentals raised substantially over the last little period of time uh because of a lack of you know it's driven by a lack of stock but look the cold

hard truth is it just costs more money yeah well you're absolutely right and we've certainly seen in you know from april last year through to now we've we've seen a lot of investors who were cash flow positive or cash flow neutral now into negative gearing material as a result of the rate rises. So it's certainly having an impact on the ongoing holding cost. And as of course you would know, as rates rise, the buying capacity drops. So your purchasing power reduces and of course the flow on there as you start to see some softening of prices for properties that don't have other things going for them. So it's certainly an interesting environment. But I guess the killer question is uh how can investors believe the financial stress of rising interest rates then

uh brad well look you know there's a few things you can you can do to try to like and the difficult thing is the the monthly cost at the higher interest rates is tough so um you know is there a is there a question around paying some interest only instead of principal interest um to reduce the cost to get through the tough times um the concept of adjusting your tax throughout the year doing the pay certificate so that you don't um you can get less tax taken out on a on a monthly or week fortnightly basis from your from your salary income which accountant can help you with to just have that cash flow to suffice or to to pay those payments on the way through the year but i think obviously the most important one bushy

or or sometimes i guess the the often missed uh thing is is you know we see 70 or 80 percent of investors not maximizing their depreciation deductions now you need income in order to take advantage of these it is my space it is what we do but it's the second biggest deduction you get the average first year out of our reports last year was nearly ten thousand dollars now Now, if you haven't done that properly, then I mean, and when interest rates are low, and it's not costing that much money, it's easy to pass over things that mean dollars. And in these times that get a bit harder, we often do like, okay, because people go, I need to find all my money, because I need to pay for these things. And you can use that depreciation number to help with your PAYE through the year because you can have your tax adjusted based on including that depreciation number, which is non-cash deduction and makes a pretty big difference. And I think, you know, that's probably the, like everything else, you know, try to minimise it and get through.

But that depreciation just, whatever you're making income gives and gives each year and can make a pretty big difference to the cash flow if you adjust on the way through. Absolutely. I know from the know-how perspective, Brad, you know, we do it consistently anyway, but more so particularly over the last year with rates increasing,

we're actually getting investor clients to make sure they get a quantity surveyor prepared depreciation schedule and then working with their accountant to do that PAYG withholding tax variation and in really simple terms you know let's say there's 10 grand's worth of claimable deductions in the year on the particular property then if someone's getting paid on a weekly basis that's nearly 200 bucks a week extra they get in their pocket that smooths that cash flow and makes it easier to hold and and sort of minimizes the pain for people that are holding onto properties long term so that's certain and it's certainly something that some people sort of vaguely know a little bit about but very few get around to doing it so i'd certainly encourage everyone

listening and watching the show to take advantage of that now if you don't have a depreciation schedule reach out to bmt and get that done immediately and then use that in conjunction with your accountant, the tax office, and your HR department to get that PAYG, withholding tax variation, done, and that will certainly have a meaningful impact on minimising the pain of rising rates. So, mate, as always, I want to thank you for your very timely observations and suggestions, Brad,

and thanks for joining us on the show again today. Thanks, Bushy. Always a pleasure. Thank you. Thanks, mate. Well, as you've just heard, it's not all doom and gloom when it comes to rising interest rates for investors. So if you'd like to know more about how you can relieve the financial stress of rising interest rates using depreciation to assist you on that, reach out to Brad and the BMT Tax Depreciation Team at bmtqs.com.au. Keep tuning in to your

Property Hub's trusted voice for all things property here on Realty Talk. Well, that brings us to the close of this week's show. Another big thanks to our guests, Scott O'Neill, Lynette Manci-Melly and Brad Beer. And before we go, make sure you don't miss another episode of your a trusted voice for all things property by subscribing to the Property Hub now on your favorite podcast player or wherever you're listening to or watching the show. We'll also enjoy the Get Invested podcast delivered to you each and every week. Thanks again to realty.com.au, BMT Tax Appreciation, Appiro Marketing, DM Media, and Southern Cross Austereo for their ongoing support. I'm Bushy Martin from KnowHow Property Finance, and along with Kevin Turner and the

entire Property Hub Realty Talk team, please remember not to be afraid to give up the good in order to go for the great. That's more food for thought and we look forward to seeing you again next week. Miss something in this week's show or want to catch up on past shows? Do it anytime at realty.com.au where we connect buyers, sellers and agents differently.