Westbridge Funds Management chairman Damian Collins sat down with host Phil Tarrant on an episode of The Smart Property Investment Show to discuss making the switch from residential to commercial properties and why investors should diversify their portfolio.
According to Collins, prospective investors should consider their personal situation before entering the property market.
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“It’s so important, before you get into the property market, you understand your own investor profile,” Collins said.
“Until you understand who you are, your cash flow and your risk profile in particular, you shouldn’t be going out and buying property.”
Collins said striking the right balance between residential and commercial properties is the key to developing a diverse portfolio.
“You don’t need 20 properties. If you’ve got three good quality investment properties, that should set you up for life,” he said.
Risk v reward
Collins said that for investors looking to live off of their property investments, relying on residential returns would not be enough.
“By the time you take out all of the taxes that we get slugged with, even if you had no debt on your property, you might be down to a sub-2 per cent net yield.“ Collins said
“That’s just not enough to retire on”
Conversely, he said that commercial properties could bring investors a return of 6 to 7 per cent yield.
Collins said that while investors’ life stages play a role in building a portfolio, commercial property should be a primary asset as one approaches retirement age.
“Our philosophy on residential is that it’s a great place to start, but you want to finish off your portfolio in commercial,” he said.
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“Go in with the mindset of ‘get a few residentials under your belt, ’ but that’s not where you want to finish because you won’t have enough income stream to sustain you in retirement.”
Collins said that, while the commercial market may have more upside for investors, movements are also more volatile.
“You are going to see big up cycles and down cycles,” he said.
“It certainly can get more capital growth, and it often does, but it is going to be more volatile.”
Collins warned that while commercial assets typically see a higher return than residential assets, they can sometimes sit vacant for years at a time.
He said that while there is no way to entirely remove the risk of investing in commercial property, investors could certainly safeguard themselves.
“How you can minimise that risk is through diversification and getting exposure to multiple assets,“ he said.
Reaching for new markets
Collins said investors who avoid placing all of their “eggs in one basket” and invest in a variety of assets across classes and locations could mitigate the potential risks.
“Generally, you’ve got your home in your capital city and maybe one other investment in that city,” he said.
“After that, you really want to start thinking, ‘I need to be looking elsewhere around the country’.”
He said potential investors should ensure they liaise with an experienced buyer’s agent who is knowledgeable about the area, particularly if they are making interstate purchases.
“If I were looking to use a buyer’s agent, whether it’s residential or commercial, I’d want to know what their track record is and how long they have been in the game,” he said.
“If you get the right one, one who really knows their market well, they can really add substantial value, particularly to interstate buyers.”
Collins said that investors should avoid making rushed decisions, stay patient and make the jump to commercial when the time is right.
“When you are in your 20s and you don’t really need the income as much, it’s of less importance,” he said.
“When you reach your 50s and 60s and want to live off the income, then commercial becomes far more important.”
You can listen to the whole podcast here.