The different types of properties.
We go through the different types of properties and give you the understanding of the following:
Residential Property Investments
Commercial Property Investments
Investing in Property Funds
Here, we go into some detail on the above as well as other classes.
If you would like further discussions on anything financial, please contact us at [email protected]
OR
Click on the link linktr.ee/angeladvisory.aus
Stefan Angelini
Hello. Hello. Welcome to another episode of the Real Wealth podcast with Tommy Gleeson and Stefan Angelini. Tom Gleeson was referred to during the week as the face of the podcast, the pretty one. And suppose I do all the talking. So if you're not watching, go and watch it. Now, we're talking about different types of property today. There's a lot of different types of property out there. Tommy is going to go and ramble off the different kinds of properties we're going to talk about. Go for it.
Tom Gleeson
Okay. So we're going to cover quite a bit of stuff, but also we're on a time limit because as much as you'd like to, we can't just upload a six hour episode. We want to cover this short and sharp with examples and give an understanding of the following things. Bear with me while I get through this. So we got basically, we're looking at types of property investments under two broad categories, investing by yourself and investing with other people. When looking at investing by yourself, you've got, for buys and holds, you got residential long term, residential short term, commercial long term, and commercial multiple tenancies, which we'll go into. For development, develop to hold, which so build to rent, and then develop to sell. That's all by yourself. When investing with other people, the private investment, so you pulll money together and buy larger assets. Unlisted trusts and companies where you use an expert manager and you own a diversified pool of real estate. Then listed trusts and companies have an underlying portfolio that's owned, developed and managed, and these are traded on the stock exchange. That's what we're going to cover. Just keep it to... Let's go short and sharp.
Stefan Angelini
Yeah. If you love property, this is a way to explain. There's so many different ways to invest into property. You don't have to just buy a house and get a loan for that house. There's heaps of options out there.
Tom Gleeson
We start with... Sorry, go for it.
Stefan Angelini
No, no what. We're going to do
Tom Gleeson
I was going to jump into it. You do the thing.
Stefan Angelini
You do the thing?
Tom Gleeson
No, I'm sorry.
Stefan Angelini
Alright. Just letting you know that everything we talk about here is just general information. Please don't consider it as personal advice. If you want personal advice, go and speak to your licensed financial planner. Guess what? We're licensed financial planners at Angel Advisory. So if you want any help with your finances, investing, or general financial planning, [email protected] is a way to get on top, on top, in touch with us.
Tom Gleeson
Don't get on top. Get in touch first.
Stefan Angelini
Thank you. Right. Tommy,
Tom Gleeson
Let's go.
Stefan Angelini
All right. Kick it off with investing by yourself.
Tom Gleeson
We're looking at buyers and we're looking at residential versus commercial and different terms of long term, short term, and then we'll go into multiple tenancies.
Stefan Angelini
What are we starting with?
Tom Gleeson
Starting with start with resi, because I think that's simpler to grasp and more people are going to relate to. Then we can move into commercial, leaping off the back of that.
Stefan Angelini
All right, you give me which one and I'm going to answer you. Alright.
Tom Gleeson
Actually, that's good because then I can keep you two at a time. First one, residential, long term.
Stefan Angelini
All right, residential, long term. This is just your general house you buy. You go out there, you buy 1, 2, 3 Smith Street. You're normally going to borrow money from a bank and you have a tenant in there that signs up a one year lease and then keeps renewing the lease. If they're gone, the next person comes in. Because you've got a longer term lease, the risk is quite low and you can get really cheap debt from this because the banks love lending for this property investment.
Tom Gleeson
That's good. The next one is residential short term.
Stefan Angelini
Short term, right. Big thing has popped up now. Rather than having just one tenant, why not rent out your property on short term accommodation platforms? Your Airbnb, your stays. People try to do this now to use their holiday houses, but also get money from them as well. But other people just have apartments. A lot of people are buying apartments now to rent them out in short stay. So for the closer to the CBD, people don't need to go and stay at a hotel and pay $600 a night. They can stay somewhere and pay $600 for four nights by going through an Airbnb or a stay.
Tom Gleeson
That is still that apartment in the city type example is still through Airbnb or stays or one of them. It's still that short term, long weekend.
Stefan Angelini
Yeah. So you've got people that are coming in there for a short period of time and they pay above market rate. You don't have the security of the long term. I've rented out some things on the short stay and there are periods of lulls. So you've got to be able to make those repayments where you don't have the secure income coming through. So it's a riskier way to invest into residential real estate, but it is quite popular now.
Tom Gleeson
So you're likely to be able to charge them out for more. But the length of the tenure is where the risk comes in because as opposed to having someone on a 12 month lease, you've got the Smiths one week, the Jones the next, or the weekend, even.
Stefan Angelini
Yeah. So if you have something that might rent out for 700 bucks a week, right? That's $100 a night. That's for a year lease. Whereas you might want to target people that are going to pay $300 a night. So if you're in debt for three nights in a week, you make $900 for the week.
Tom Gleeson
Yeah.
Stefan Angelini
So as long as you're getting more than that two nights a week, then you're making money. So you get three or more and then you're beating your residential strategy.
Tom Gleeson
Yeah.
Stefan Angelini
That's cool.
Tom Gleeson
That's residential. Let's go for commercial long term. Starting with long term again, commercial.
Stefan Angelini
Alright, commercial property, first off, what are commercial properties? Basically, things that people don't live in. Factories, industrial.
Tom Gleeson
Retail.
Stefan Angelini
Retail, hospitality. It's broad. You want to see all the categories? Go on realcommercial.com.au. So what do we say? Commercial, long term?
Tom Gleeson
Long term, yeah.
Stefan Angelini
All right,
Tom Gleeson
we'll launch it.
Stefan Angelini
So long term, this can go really long. You can buy a childcare center that's got a 25 year lease on it.
Tom Gleeson
Really?
Stefan Angelini
Yeah. Anything that's purpose built or purpose fitted out, they want a long term lease because they put their money into it.
Tom Gleeson
Yep.
Stefan Angelini
And they need to operate for a long time. You can have a 25 year lease on something and the lease agreement will have an increase price, the rent you're getting increase in by, say, 3% or increase in by inflation, many different options. Right?
Tom Gleeson
Yep.
Stefan Angelini
Then you go less long term, you might have, let's say you look at factories. Let's say factories, you might have a 5 year lease or a 10 year lease.
Tom Gleeson
Yep.
Stefan Angelini
Or you might have some retail or offices that weren't leased out for 10 year because they got to do a fit out. So anytime they're putting money into the property, they typically want a longer lease time. So it gives you more security of your money.
Tom Gleeson
Yep.
Stefan Angelini
Because no matter what, they're in that contract, they don't want to be there anymore. They've got to find someone else to fill that contract. I was talking to somebody the other day, they've still got a property over on Spencer Street with all their signage on it, but they don't run the company anymore. So they're paying rent because they signed up for 10 year lease.
Tom Gleeson
Oh, what?
Stefan Angelini
So they're still paying rent on the place. No one's there. So that's why owning a commercial property can be good. It's generally tougher to find someone to fill the place once they're out because there's less people. You got a home, you got a house.
Tom Gleeson
Yeah.
Stefan Angelini
People can always come in and a new renter will come in. The market is a lot bigger. In commercial, you've got to pretty much have a business.
Tom Gleeson
Yeah.
Stefan Angelini
That comes into there.
Tom Gleeson
So once you get it, you lock them down.
Stefan Angelini
That's it, lock them down. Then you got shorter term. So five year leases, which might be on factories, might be on smaller retail, things like that. Generally very rare that you get, say, one year leases in the commercial space. It's only longer than one year, which is what's typical in residential, but it can go from 5 to 25. But if you've got a hospital, you can have a 30, 40, 50 year lease. We're looking at a property fund at the moment. It's got an average lease expiring quarter WALE, or weighted average lease expiring of 16 years. This is like a health care fund. It's mainly aged care facilities. They own aged care facilities, they own hospitals, they own a whole bunch of different things in a health care space. Because the cost figure out so expensive, they want to take long term, like 50 year leases.
Tom Gleeson
Is aged care like hospitals, like 30, 40?
Stefan Angelini
Yeah.
Tom Gleeson
Yeah. Okay. Because it's so customized.
Stefan Angelini
Yeah, that's it. Yep. That's the long term commercial gain.
Tom Gleeson
The next one is commercial. So multiple tenancies, the example of which we want to... Well, we want to give an example. So an office building. So you own the whole building. Within that office building, you've got floors upon floors of companies.
Stefan Angelini
Yep.
Tom Gleeson
And then below that, you've got retail.
Stefan Angelini
Yep.
Tom Gleeson
Then there's a coffee shop. Who knows what else? But basically, you own the whole thing. And within that, there's a whole bunch of different people operating.
Stefan Angelini
Yeah, that's it. This is what we call it a diversified asset, normally reserved for people with a whole lot of money because they're big assets. Right? And if you're not looking for it, you probably don't see that 460 Nylonsdale Streets for sale. You might not know that. When we say diversified, because there's so many different tenants, if one moves out, it doesn't really ruin your cash flow.
Tom Gleeson
Yeah.
Stefan Angelini
So if you've got 10 levels and one level moves out, you've got to fill that one level, but you've still got nine levels of income coming through.
Tom Gleeson
Yeah.
Stefan Angelini
And then you've got different lots of retail down the bottom. So you might have four different retail shops. If one person moves out, you still got three that are paying rent. So you got security, and that's why big families like to own these things or big companies. And this is what you see a lot of the fund managers invest in because they got a lot of money, but they want to make sure they're paying their investors a consistent return. And that's why diversified asset, someone's got a lot of people in there. It's a lot cleaner because there's a lot more smooth cash flow.
Tom Gleeson
Yeah.
Stefan Angelini
But let me just bring it back to what's also becoming very popular. That's a.. It's a commercial investment. It's diversified different income streams, but it's cheaper. You might have a group of factories or factory heads within a big factory lot, or you might have storage facilities.
Tom Gleeson
Yep.
Stefan Angelini
Where storage facilities rent out. Everyone rents out a storage cage. But also you might have rooming houses, so you might have a house and everyone rents out a room within the house. One person moves out, you still got eight people paying rent.
Tom Gleeson
Yep.
Stefan Angelini
So that's like, these are the more affordable ways rather than buying a big office building
Tom Gleeson
Yeah.
Stefan Angelini
That you can get in, but at least you own. This is all about owning the asset yourself.
Tom Gleeson
Yeah.
Stefan Angelini
Not owning it with other people.
Tom Gleeson
But it comes with that security and consistency.
Stefan Angelini
That's it. Yep. Stable cash flows. So that you own a long term commercial property and you have one tenant, that tenant moves out, you have no income, so you get that next one.
Tom Gleeson
Yeah.
Stefan Angelini
Which is a killer.
Tom Gleeson
Yeah.
Stefan Angelini
Have cash ready.
Tom Gleeson
Yeah.
Stefan Angelini
So yeah.
Tom Gleeson
So that covers investing by yourself. Now, we want to look at investing with other people, the first of which is private investments, where you're pulling money together to buy bigger assets.
Stefan Angelini
Yeah, so you got a lot of people that just come together, family members and things like that, and they might form what's called Unit Trust, the company. Or you can even get self managed super funds together. If you want to get really tricky and be good from a tax money perspective, call us if you want any more information on that. But, yeah, this is like groups of people pulling their money together. What causes issues, though, is because you got different people all participating in the one thing that can cause issues, because everyone's got different scenarios. So if someone needs to sell out of the property.
Tom Gleeson
Oh yeah.
Stefan Angelini
Then you'd have everyone agree to sell the property to give that person their cash back, or someone has to buy them out. And depending on the structure, we've got stamp duty here in Australia.
Tom Gleeson
Yeah.
Stefan Angelini
And we've got capital gains. So the person selling might have capital gains, the people buying might have to pay stamp duty again to buy the asset at the market rate. So there's complexity around owning it with other people. You've really got to get along with those people. You got to know their entire situation. And we actually say, probably better to own it on your own because you just don't know what's going to happen with other people.
Tom Gleeson
Someone else suddenly needs access. But then if it's a Unit trust, isn't it unitized? So one person can exit, not cleanly, but cleaner.
Stefan Angelini
How do they get their money?
Stefan Angelini
Oh, sorry, I'm with you.
Stefan Angelini
Yeah. Yeah. So like everyone put in. Let's say they want to buy. Four people want to buy a $2 million factory and they don't want to use any debt, so everyone puts in $500,000. They got the $2 million factory. One person goes, look, you know what, I'm getting divorced. I need to pay out my wife, so I need my $500,000 back and then everyone else has to go, all right, well, our choices are, do we sell the property and everyone sells out? Probably won't want to happen. We're going to buy you out. And if you do buy you out, who's going to pay the stamp duty? Because we got to pay it on that 500 grand.
Tom Gleeson
Yeah.
Stefan Angelini
Sometimes, depending on the structure, depending on the state. And that's where it just becomes tricky because you got to deal with other people. You don't know.
Tom Gleeson
Whichever scenario, whichever path you go down, your hand was forced. It wasn't a decision that you made.
Stefan Angelini
Yeah, that's right.
Tom Gleeson
You're running to keep up.
Stefan Angelini
But if that person owned the property in their own name, they don't have to go back to three other people and say, I need my money.
Tom Gleeson
Yeah.
Stefan Angelini
They just go, I'm going to sell the property. That's why. Just watch out if you are getting into other people. These are some things that can pop up that we see pretty regularly.
Tom Gleeson
Fair enough. All right, next one. Unlisted trust and companies.
Stefan Angelini
All right. Unlisted trusted companies. So this is normally by professional managers who have a pool of assets. They've only got money coming into the go off and buy assets. Their job is like property managers, development managers. They own assets, they buy assets, they own assets, they develop assets.
Tom Gleeson
Yep.
Stefan Angelini
And you get a portion of their growth, their gain, their sales, their income. You normally pay these people a fee to manage that portfolio, but the benefit is you get a diversified group of assets when you buy it. So we've got one fund, for example. Let's say people want an industrial property fund. You know how hard it is to find a factory out there that you can own by yourself? You probably don't know, but it's really hard.
Tom Gleeson
No, I don't. But I can imagine you want exposure to that, but you're not going to go out and buy a factory.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah.
Stefan Angelini
But you might say, look, I want exposure to the asset class because I like that kind of asset. I don't like a lot of debt. So what I'm going to do is I'm going to invest with an unlisted property company. I'm going to give them my money. They've already got a pool of a billion dollars worth of assets and they are actively in the market trying to buy more. And generally they buy higher class of asset for that space. When I say higher class.
Tom Gleeson
Yeah. What do you mean?
Stefan Angelini
They assess the tenant, they assess the property, they see if there's any issues they do all the work going into because they don't want to lose your money. And then all of a sudden you're into this property fund and you're a part of 100 properties, all with different tenants, all with different lease, expiries, all paying rent. So you get the consistency of the rent, you get the portfolio that might have capital growth or even capital losses, but it's diversified because you've got 100 properties
Tom Gleeson
Yep.
Stefan Angelini
And you've got someone actively looking at the leases, at the people, at the management, everything like that.
Tom Gleeson
Yep.
Stefan Angelini
And then as more money comes in, guess what they do? They either pay down debt or they go and buy more assets.
Tom Gleeson
Of course, yes.
Stefan Angelini
So that's where your portfolio can continue to grow with more assets and get more diversified as more people come in. So that's a way that a lot of our clients like to do it because they don't like having a lot of debt, especially when debt is very expensive.
Tom Gleeson
Yep.
Stefan Angelini
These companies that we're seeing, like you do, have companies that have a really high debt level, like 50, 60% loan to value ratio. But the ones that we see normally have like a 20 or 30% debt ratio, and they get debt a lot cheaper because they're not borrowing a million dollars, they're borrowing $100 million or a billion dollars.
Tom Gleeson
Yeah.
Stefan Angelini
So they get rates really cheap.
Tom Gleeson
Yeah.
Stefan Angelini
That's like more you're on that wholesale class, and you want it to be a long term investment because some that we use have monthly liquidity. They'll pay people out on a monthly basis.
Tom Gleeson
Yep.
Stefan Angelini
There's one property fund in the US. That's recently popped up. They've got $71 billion of assets. They have they had $5 billion of people ask for their money back in January
Tom Gleeson
Of this year?
Stefan Angelini
Yeah.
Tom Gleeson
What was the catalyst for that?
Stefan Angelini
The people want to get out of the space. You normally can't get your money back. They're going to say, well, we can't pay back because it's all locked up in real estate. What are we going to do? Sell the property.
Tom Gleeson
Yeah.
Stefan Angelini
So you just want to make sure it's a longer term perspective. Some of these companies are what they call closed ended funds. You can't sell out for, say, seven years.
Tom Gleeson
Oh yeah.
Stefan Angelini
So they're going to lock your money in.
Tom Gleeson
Yep.
Stefan Angelini
Or there might be an open ended one where you can sell your shares as you go.
Tom Gleeson
But the situation may arise where you say, I'm out, and they turn around and go, not yet.
Stefan Angelini
Yeah.
Tom Gleeson
Yeah.
Stefan Angelini
What we do is we've got managers that have monthly liquidity, quarterly liquidity? Yearly liquidity, or every four years or every seven years. So there's different options.
Tom Gleeson
Yep. So that is unlisted trusting companies. We want to cover off on listed trusting companies, how they differ.
Stefan Angelini
All right, this is what anyone can buy. So normally with the unlisted part, these are just like unlisted companies, but except they're on the stock exchange. Unlisted is you get the value of the assets within the portfolio as they get valued. Right. So that's what you buy. A portion of that, you get the actual valuation.
Tom Gleeson
Yep.
Stefan Angelini
From a listed perspective, these guys are listed on the stock exchange, so anyone can buy them. You can buy them really cheap. So if you got a stock worth $34, you can buy one of those stocks.
Tom Gleeson
Yeah.
Stefan Angelini
But then there's a market valuation of the stock versus the market valuation of the assets in the company.
Tom Gleeson
So it's juicy.
Stefan Angelini
It is. You might buy a company, let's say they own shopping centers.
Tom Gleeson
Yep.
Stefan Angelini
They get a value come through and value all their hundred shopping centers they've got. And they say, your shopping centers together are worth $10 billion, so it'd be good to own part of that $10 billion. Right?
Tom Gleeson
Yeah.
Stefan Angelini
You got a company like Unlisted. They're managing it. It's diversified, different income streams. You probably got a consistent, consistent revenue coming through. They do everything. But this is what happens in the listed space because they are traded to the open market. It's a demand and supply gain. So what we're seeing, and at the moment is a lot of these property companies, listed property companies, are selling at a discount to their net asset value, so what the assets are actually worth. So if the assets in the portfolio are worth $10 billion and they're selling at a 20% discount, then the actual market valuation of the company on the ASX is $80 billion, which is like, all right, am I getting a 20% discount for these assets, then?
Tom Gleeson
Yeah.
Stefan Angelini
You pretty much are.
Tom Gleeson
Yeah.
Stefan Angelini
But these got to wait for everything to come back to equilibrium, which it normally does, but that's where you got the more volatility. Whereas people don't invest in property for volatility. They don't want ups and downs. They want secure. I don't want to see the value of my property until I sell it. That's where everyone loves real estate. It's just like steady I can drive past and all I invest into. It's good. But that's where like the listed property stuff differs. Same kind of assets, but publicly traded. But I'll give you an example of, like, returns. I've done a lot of research on returns in stocks between the year 2009 and 2019.
Tom Gleeson
Oh, yeah.
Stefan Angelini
There's the Australian Stock Exchange top 200 companies.
Tom Gleeson
Yep.
Stefan Angelini
In the year 2019, they returned about 23%. Over the 10 years, up until 2019, it returned 7.38% on average per year. Whereas the listed property companies in top 300 ASX, performed better in that one year. But in the 10 years up to 2019, they returned on average 11.2% per year on average. Over that period, there were a higher performing asset class because Australians love property and the valuations have gone up, meaning it's really good. That can be good. However, that volatility is huge in that space. If you look at a chart like an asset return chart, you might see that you might have, and they call it AREITS, Australian real estate investment trust.
Tom Gleeson
Yep.
Stefan Angelini
On the bottom of the asset return chart on a few years, especially during GFCs and downturns like we've seen. But then the best performing asset class in years following. So very volatile. But I reckon that's it.
Tom Gleeson
That might be it for... Actually, that wasn't too bad. I thought you were going to really push something out. But I kept to my top point, and I had one eye on the clock.
Stefan Angelini
Property, or people don't realize is there so many ways to get involved, especially when you don't need to use debt, don't want to use debt, want to have it as part of your retirement strategy and just want long term hold. The different properties are right for different people, and that's why we exist. We help people identify what is out there, what are your options?
Tom Gleeson
Yep.
Stefan Angelini
And then go, right, well, these are your options. What's the best for you? Then how do we implement it? If you've got 10 grand, you can't go and buy a property.
Tom Gleeson
Yeah.
Stefan Angelini
You can't go and buy residential property.
Tom Gleeson
But you don't want to miss out on what you're seeing from the property market. There's different ways to get in.
Stefan Angelini
Yeah, that's right. Plenty of options out there. We love real estate. I love real estate. You do. You're forced to love real estate. Because we love real estate.
Tom Gleeson
It's infectious.
Stefan Angelini
Australasians love real estate. I'm going to say thank you for listening. Hopefully, you've learned a little bit in this podcast. Anything else you want to add?
Tom Gleeson
Hit us up. Any questions, let us know.
Stefan Angelini
Thank you very much. We will see you on the next edition of the Real Wealth podcast with Stefan and Tom. Have a great week. See you soon.
Tom Gleeson
Cheers.
Stefan Angelini
Bye.
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