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Commercial property has been appealing for its higher cash flow, lower management, and strong capital growth – but how can investors transition from residential assets to make the most of these opportunities?
In their latest podcast episode, The Property Nerds hosts Jack Fouracre from Fouracre Financials, Arjun Paliwal, and Adrian Lee from InvestorKit, have shared essential tips for investors looking to transition from residential to commercial property.
Commercial property has recently been viewed as a key opportunity for many residential investors as it provides high rental yields, lower management hassles, and a boost in cash flow.
Fouracre said that there are two primary pathways for investors seeking to transition into the commercial market.
“The most conventional way is just to build up a residential portfolio all the way up until you are ready to retire,” Fouracre said.
“When you are in a position to exit out of those residential properties and into a blue-chip commercial, that’s pretty much the exit strategy.”
For those with higher incomes or who invested early, Fouracre said transitioning into commercial doesn’t have to wait until retirement.
He said that investors can choose to exit their residential assets into a blue-chip commercial asset and then begin to rebuild their residential portfolio as a separate entity.
Paliwal said that selling residential assets can pave the way into commercial property, but investors must structure their purchases correctly to optimise returns.
“If you actually exit the residential, you solve the deposit problem because they usually come from the growth of the residential assets,” Paliwal said.
“You’ve actually just created a whole new wave of borrowing capacity because now you’ve got that first asset, positive cash flow in a trust or company.
“Now you can move on to the next wave, going back to residential.”
“Then you’re into commercial and then you can actually go back to residential again quite easily and you can almost repeat it again.”
Paliwal said that $2–$2.5 million-plus is the “sweet spot” when it comes to blue-chip commercial assets, allowing buyers to restart building their residential portfolios.
Additionally, Fouracre said that commercial assets of that scale offer substantial returns, allowing investors to downsize their residential portfolio without sacrificing potential capital growth.
“On that size portfolio on a commercial, you’re getting double the rent, and it’s net, and it’s a lot less to manage,” Fouracre said.
“At a certain point you want to have a more affordable portfolio and get a higher cash flow. But you are still going to get that capital growth.”
According to Lee, commercial properties can also serve as an innovative strategy for businesses to invest surplus profits, acting as “effective treasury management” instead of leaving funds in an interest account.
Lee also said it is essential for buyers to have a clear idea of what they want to achieve with their portfolio.
“Why do you want to purchase this asset, and what is it actually going to do for your portfolio and the goals that you’re looking to achieve?”
“We’re not just reactive in terms of purchasing for the sake of purchasing,” Lee concluded.
Listen to the latest Property Nerds podcast episode here.
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