How are your assets diversified? What’s the best ratios?

[FrancisK]

I could pull out all sorts of facts and figures to support my argument but its a basic fact well understood by anyone who has substantial real estate experience. How often do you see a family home sit empty for three years? It rarely happens and if it does its usually dilapidated or in a crime ridden neighborhood (or a vacation home). But its very common to see offices or shops, cafes, etc sitting empty for three years.

The underlying reason for this is wage income on average is more predictable and less volatile than corporate profits. Hence if you are renting to wage earners they are more reliable in paying on average than businesses are.

In a booming economy businesses in aggregate can increase their profits by 50% in a good year especially if coming out of a recession. But the inverse is also true. During the 2008 global financial crises the S&P 500 earnings per share dropped 90%. Even if you look at underlying earnings which excludes write-downs and other non cash charges it still dropped 40 - 50%. During Covid the S&P 500 earnings per share dropped 30%. During the early 2000s tech wreck the S&P 500 earnings per share dropped 53%. For example during the 2008 global financial crises median household income from peak to trough only dropped 2%.

Its also the reason why banks lend to commercial property at lower loan to valuation ratios than they do for residential property because they understand the risk is usually higher with commercial (there are of course outliers but this is how it works the vast majority of the time). With residential real estate people can get loans to buy a property with as little as a 5% deposit if they are eligible for government incentives or pay lenders mortgage insurance, etc. Even a more standard loan in residential is still often only a 10% to 20% deposit. This is basically the way it works in the major developed economies including USA. Commercial property loan to valuation ratios typically range from 50% to a maximum of 80%.

Very rarely will it get to 90% at the height of a boom for top tier properties financed by private equity with mezzanine debt and junk bonds, etc. But generally speaking somewhere from 50% - 80% LVR is the normal range for commercial property loans depending on the property type, quality, location and whether its tenanted or not, etc.


I am not talking about the business I am talking about owning the premises. You can own the building and lease it to a hotelier or a publican (pub owner) and just collect rent. Same as farm land you can rent it to tenant farmers or corporations, etc and just collect rent.

Brother I'm talking apples and you're talking oranges, I'm giving first hand experience from the real world and you're quoting the WSJ. Which is totally fine but at this level of investing these things don't really apply they are just words and numbers on a computer screen, they don't get you anywhere on the ground. I could negate all your points but it wouldn't mean anything to you as they would be from my first hand experience.

Also nobody is buying a hotel to lease it out to someone, trust me I know that first hand. You may have someone run it for you as a partner to give them incentive which is very common as is the case for all of my Dad and Uncles hotels but you're still buying and and owning a business, it's not the same thing as investing in real estate. At this level of investing nobody is really buying occupied businesses, that's a whole other ball game as I said previously.

 

[bubs]

There is a strip mall shopping center in my area where some stores have been vacant for years (I think there is a video store that hasn’t been filled since around 2005 or earlier. The investment firm that owns the strip mall has outlandishly high lease costs on the property and many stores stay vacant despite local business owners wanting to be in that space but the lease/rent is too high. What someone told me was that the investment firm gets a better financial bottom line if they write off the losses on the high leases, vs lowering the lease to fill the void and have cash flow. I’m not sure if that is true or applies to rest of the commercial lease real estate segment but could help explain why space sits vacant for long periods of time.

 

[Australia Sucks]

Brother I'm talking apples and you're talking oranges, I'm giving first hand experience from the real world and you're quoting the WSJ. Which is totally fine but at this level of investing these things don't really apply they are just words and numbers on a computer screen, they don't get you anywhere on the ground. I could negate all your points but it wouldn't mean anything to you as they would be from my first hand experience.

Also nobody is buying a hotel to lease it out to someone, trust me I know that first hand. You may have someone run it for you as a partner to give them incentive which is very common as is the case for all of my Dad and Uncles hotels but you're still buying and and owning a business, it's not the same thing as investing in real estate. At this level of investing nobody is really buying occupied businesses, that's a whole other ball game as I said previously.

It’s just a dumb argument to try and say that on average commercial real estate (as an asset class) is less risky than residential real estate.

That would be like saying that micro cap stocks on average are less risky than companies in the S&P 500.

You are the first person I’ve seen trying to make this extraordinary claim that goes against common sense and you’ve provided no evidence for it.

 

[Australia Sucks]

There is a strip mall shopping center in my area where some stores have been vacant for years (I think there is a video store that hasn’t been filled since around 2005 or earlier. The investment firm that owns the strip mall has outlandishly high lease costs on the property and many stores stay vacant despite local business owners wanting to be in that space but the lease/rent is too high. What someone told me was that the investment firm gets a better financial bottom line if they write off the losses on the high leases, vs lowering the lease to fill the void and have cash flow. I’m not sure if that is true or applies to rest of the commercial lease real estate segment but could help explain why space sits vacant for long periods of time.

I don’t think what you are saying is the real reason because the numbers just don’t stack up.

I think the real reason is the valuation for commercial real estate is often based on projected future cash flow so it’s kind of an extend and pretend scenario if they can keep the nominal rent high they can on paper justify a higher valuation by saying “it’s okay those vacant shops will get rented eventually” however if you lower the rent and the shops get full at the lower rental level that means you have officially you’ve acknowledged the lower valuation of the property. If it’s owned by a REIT or private equity etc that means they have to write down their assets and in some cases that can even trigger a default clause in their own loans contract who ch often has maximum LVR levels built into the loan contract.

It’s like with commercial loans to zombie companies where sometimes banks made loans to a large corporation in the past and the company can no longer service the loan but the bank doesn’t want to write down the loan because it will impair their balance sheet/capital ratios so they just keep extending the loan and capitalising the interest but in reality the loan is already bad and will never actually be repaid.

 

[FrancisK]

It’s just a dumb argument to try and say that on average commercial real estate (as an asset class) is less risky than residential real estate.

That would be like saying that micro cap stocks on average are less risky than companies in the S&P 500.

You are the first person I’ve seen trying to make this extraordinary claim that goes against common sense and you’ve provided no evidence for it.

I'm not "claiming" anything I'm giving my personal experience, I've never had any issues with commercial real estate but residential has always been a mess for me.

If you would rather google search all your knowledge and read charts then why are you even here talking to people? Go talk to an AI chat bot.

 

[Australia Sucks]

I'm not "claiming" anything I'm giving my personal experience, I've never had any issues with commercial real estate but residential has always been a mess for me.

If you would rather google search all your knowledge and read charts then why are you even here talking to people? Go talk to an AI chat bot.

I am not talking purely about google searches. I have owned residential real estate in the past (rental properties) and while I have not owned commercial property I have friends and family who have.

Your personal experience is an anecdote that has no bearing on the facts. The fact is that on average commercial property is riskier than residential property, its not even up for debate. You are trying to argue like women do. A typical argument between a man and a woman will often go something like this:

Man: "Most women are like this......"
Woman: "Yeah but I am not like that...."

The woman misses entirely the point of what the man was saying and just cannot comprehend the logic.

If you prefer commercial property to residential that is fine but its not okay to make nonsense statements like this which clearly go against the facts:

I'm not sure if I agree with commercial being hit harder during a downturn or about vacancy rates.

 

[FrancisK]

I am not talking purely about google searches. I have owned residential real estate in the past (rental properties) and while I have not owned commercial property I have friends and family who have.

Your personal experience is an anecdote that has no bearing on the facts. The fact is that on average commercial property is riskier than residential property, its not even up for debate. You are trying to argue like women do. A typical argument between a man and a woman will often go something like this:

Man: "Most women are like this......"
Woman: "Yeah but I am not like that...."

The woman misses entirely the point of what the man was saying and just cannot comprehend the logic.

If you prefer commercial property to residential that is fine but its not okay to make nonsense statements like this which clearly go against the facts:

Well big guy "I'm not sure if I agree with commercial being hit harder during a downturn or about vacancy rates."

I don't know shit about the Australian market nor would I claim to and try to act like I know something based on an internet education or based on someone elses experience. But here in the USA with my personal experience, yes I have extensive experience in both, my residential properties were nothing but a disaster mess with small gains and my commercial properties were no nonsense big winners. Maybe your definition of "risk" is different from mine because mine is not based on numbers compiled for massive conglomerates from the internet it's based on what I myself as a normal person actually experienced in real life. My residential properties were endless repairs, tenants damaging property, chasing tenants for rents, going to court for evictions (which im doing right now) and even being sued by an ambulance chaser (which is also happening right now) while my commercial properties were just buy them, spruce them up one time, sit on them, lease them out sometimes and then sell them for a big gain.

It's not me that can't see the point it's actually because you can't comprehend that things don't always go like they do on paper, which isn't new for you. Not my first rodeo with you acting like a toddler and covering your ears screaming because someone told you something that went against what was already in your heathen head. Very cute that you of all people on this forum would try to tell someone how anything works between a man and woman, that's beyond hilarious.


But if you really wanna get cute about it did you want to talk about what happened to residential vs commercial property during the recession and housing crisis? Oh but of course that doesn't mean anything because your internet articles told you otherwise right?


The men here are trying to have a conversation about real life situations in the real world, go talk to your AI chat bot it has all the information you will ever care for apparently.....enjoy those "facts".

 

[Australia Sucks]

Well big guy "I'm not sure if I agree with commercial being hit harder during a downturn or about vacancy rates."

I don't know shit about the Australian market nor would I claim to and try to act like I know something based on an internet education or based on someone elses experience. But here in the USA with my personal experience, yes I have extensive experience in both, my residential properties were nothing but a disaster mess with small gains and my commercial properties were no nonsense big winners. Maybe your definition of "risk" is different from mine because mine is not based on numbers compiled for massive conglomerates from the internet it's based on what I myself as a normal person actually experienced in real life. My residential properties were endless repairs, tenants damaging property, chasing tenants for rents, going to court for evictions (which im doing right now) and even being sued by an ambulance chaser (which is also happening right now) while my commercial properties were just buy them, spruce them up one time, sit on them, lease them out sometimes and then sell them for a big gain.

It's not me that can't see the point it's actually because you can't comprehend that things don't always go like they do on paper, which isn't new for you. Not my first rodeo with you acting like a toddler and covering your ears screaming because someone told you something that went against what was already in your heathen head. Very cute that you of all people on this forum would try to tell someone how anything works between a man and woman, that's beyond hilarious.


But if you really wanna get cute about it did you want to talk about what happened to residential vs commercial property during the recession and housing crisis? Oh but of course that doesn't mean anything because your internet articles told you otherwise right?


The men here are trying to have a conversation about real life situations in the real world, go talk to your AI chat bot it has all the information you will ever care for apparently.....enjoy those "facts".

Arguing with you is a waste of time. You resort to a bunch of ad hominem character attacks because you don't have a leg to stand on when trying to refute my argument other than "well in my personal experience it was not like that". Besides you contradicted yourself multiple times regarding vacancy rates for commerical and residential property. You said your relative bought an abandoned bank building and it sat empty for years before it got rented out to Chipotle. For most people's definition of risk that would be considered high risk to buy a property that sits empty for years.

It's a different game with commercial, the big boys swallow up anything that will see instant returns with tenants and they are priced sky high. If you're not one of them you have to buy things as speculation and sit on them, but the potential returns can be massive.

So here you admit that commercial property (at least the ones accessible to most people) are highly specultive and yet in other places you try and say that commercial property is less risky than residential. Which one is it? Is commercial property safe or is it speculative? You cannot seem to make up your mind.

 

[Australia Sucks]

my residential properties were nothing but a disaster mess with small gains

Plenty of people who built massive real estate empires with residential real estate. Even many guys on this forum who made millions from owning multiple family homes. Just because you executed badly it doesn't mean residential real estate is not worthwhile. This just indicates to me that you didn't know what you were doing.

 

[FrancisK]

Arguing with you is a waste of time. You resort to a bunch of ad hominem character attacks because you don't have a leg to stand on when trying to refute my argument other than "well in my personal experience it was not like that". Besides you contradicted yourself multiple times regarding vacancy rates for commerical and residential property. You said your relative bought an abandoned bank building and it sat empty for years before it got rented out to Chipotle. For most people's definition of risk that would be considered high risk to buy a property that sits empty for years.


So here you admit that commercial property (at least the ones accessible to most people) are highly specultive and yet in other places you try and say that commercial property is less risky than residential. Which one is it? Is commercial property safe or is it speculative? You cannot seem to make up your mind.

Oh okay so telling someone they talk like a woman wasn't a character attack? Yea you're such a victim, par for you.

What argument? That's facts and figures compiled for Morgan Stanley and Berkshire Hathaway on a piece of paper say residential is less risky than commercial? Great awesome, that has not been my personal experience at all and we're normal people having a conversation here we're not AI chat bots.

My definition of risk is losing money on a property, I've never lost on commercial and when you factor in all the costs and especially my time there has been residential where I would consider it a loss.

I'm talking man to man common rationale and you're quoting numbers....which tells me you don't actually have any experience with anything you're saying.

 

[FrancisK]

Plenty of people who built massive real estate empires with residential real estate. Even many guys on this forum who made millions from owning multiple family homes. Just because you executed badly it doesn't mean residential real estate is not worthwhile. This just indicates to me that you didn't know what you were doing.

Never said it wasn't worthwhile and never said anyone hasn't done well from it, not once. You have a reading comprehension issue, again not the first time you have thrown a hissy fit because someone told you something that wasn't what was already in your heathen head. Turn off the chat bot and try listening for once you might learn something, God gave you two ears and only one mouth for a reason.

 

[Australia Sucks]

I'm talking man to man common rationale and you're quoting numbers....which tells me you don't actually have any experience with anything you're saying.

Another ad hominem. I already stated before that I have previously invested in residential properties. I've also invested in other assets such as stocks, crypto, precious metals, etc and have been investing overall for the past 15 - 20 years. So yes I do have relevant investment experience over multiple cycles. You seem very emotional. Investing largely is a numbers game and things need to be based on data and numbers. Yes qualitative judgements and experience are important also but so are numbers.

 

[Australia Sucks]

Never said it wasn't worthwhile and never said anyone hasn't done well from it, not once. You have a reading comprehension issue.

You didn't say it explicitly that residential real estate is not worthwhile but the tone of your posts implied it. And you have the reading comprehension issue. I did not actually say that you actually said residential real estate is not worthwhile.

 

[FrancisK]

Another ad hominem. I already stated before that I have previously invested in residential properties. I've also invested in other assets such as stocks, crypto, precious metals, etc and have been investing overall for the past 15 - 20 years. So yes I do have relevant investment experience over multiple cycles. You seem very emotional. Investing largely is a numbers game and things need to be based on data and numbers. Yes qualitative judgements and experience are important also but so are numbers.

But you don't have experience with commercial real estate, other than what you read about it online. Awesome, so if you already know everything you need to know and someone's personal experience man to man means nothing then why are you here on this website?

 

[FrancisK]

You didn't say it explicitly that residential real estate is not worthwhile but the tone of your posts implied it. And you have the reading comprehension issue. I did not actually say that you actually said residential real estate is not worthwhile.

Haha oh okay, my tone....got it.

 

[Australia Sucks]

But you don't have experience with commercial real estate, other than what you read about it online. Awesome, so if you already know everything you need to know and someone's personal experience man to man means nothing then why are you here on this website?

Not saying that other peoples experience means nothing but you need to consider the credibility of the person saying something also. When Sam Zell or Warren Buffet say something that is different to random dude on an internet forum says something. And doubly so when the said random dude has said a lot of nonsensical stuff in the past. Not saying your opinion is worthless by the way but I feel it should be taken into consideration but needs to be discounted accordingly. Not everybody's opinion carries equal weight.

 

[FrancisK]

Not saying that other peoples experience means nothing but you need to consider the credibility of the person saying something also. When Sam Zell or Warren Buffet say something that is different to random dude on an internet forum says something. And doubly so when the said random dude has said a lot of nonsensical stuff in the past. Not saying your opinion is worthless by the way but I feel it should be taken into consideration but needs to be discounted accordingly. Not everybody's opinion carries equal weight.

Dude we're on a message board talking man to man to each other, that's the whole point of this place. You do understand that right? If every thread was for quoting numbers from internet articles then what the hell are we even all doing here?

You own residential so you somehow took it personally that I preferred commercial, as if I was somehow personally attacking you by having a different experience and point of view. We've had a run in before you and I and it was this same situation where I said something from a different point of view which I had intimate personal experience with, a discussion between men, and you took it as something offensive instead of maybe learning something or trying to understand it.

 

[Australia Sucks]

You own residential so you somehow took it personally that I preferred commercial,

I did not take anything personally. Where I did I take anything personally? So anybody that does not agree with you is somehow taking it personally?

I merely disagreed with your opinion. You are the one who made all the ad hominem attacks on my character, knowledge and experience. If anybody took things personally it was you.

a discussion between men

Its normal for people to have different opinions and in the end disagree. Robust discussions are what make a good forum. If everybody agreed about everything it would become a very boring place.

 

[FrancisK]

I did not take anything personally. Where I did I take anything personally? So anybody that does not agree with you is somehow taking it personally?

I merely disagreed with your opinion. You are the one who made all the ad hominem attacks on my character, knowledge and experience. If anybody took things personally it was you.


Its normal for people to have different opinions and in the end disagree. Robust discussions are what make a good forum. If everybody agreed about everything it would become a very boring place.

Go back and read dude, I was just giving my personal experience and you started calling it dumb and it went from there.

You didn't disagree with my opinion, you told me my opinion was wrong because of numbers on a spreadsheet you said yourself there was "no debate". That is the direct opposite of a "robust discussion". Dude I'm not trying to keep getting into with you but you seem to have a lack of self awareness.

 

[Get2choppaaa]

I could pull out all sorts of facts and figures to support my argument but its a basic fact well understood by anyone who has substantial real estate experience. How often do you see a family home sit empty for three years? It rarely happens and if it does its usually dilapidated or in a crime ridden neighborhood (or a vacation home). But its very common to see offices or shops, cafes, etc sitting empty for three years.

The underlying reason for this is wage income on average is more predictable and less volatile than corporate profits. Hence if you are renting to wage earners they are more reliable in paying on average than businesses are.

In a booming economy businesses in aggregate can increase their profits by 50% in a good year especially if coming out of a recession. But the inverse is also true. During the 2008 global financial crises the S&P 500 earnings per share dropped 90%. Even if you look at underlying earnings which excludes write-downs and other non cash charges it still dropped 40 - 50%. During Covid the S&P 500 earnings per share dropped 30%. During the early 2000s tech wreck the S&P 500 earnings per share dropped 53%. For example during the 2008 global financial crises median household income from peak to trough only dropped 2%.

Its also the reason why banks lend to commercial property at lower loan to valuation ratios than they do for residential property because they understand the risk is usually higher with commercial (there are of course outliers but this is how it works the vast majority of the time). With residential real estate people can get loans to buy a property with as little as a 5% deposit if they are eligible for government incentives or pay lenders mortgage insurance, etc. Even a more standard loan in residential is still often only a 10% to 20% deposit. This is basically the way it works in the major developed economies including USA. Commercial property loan to valuation ratios typically range from 50% to a maximum of 80%.

Very rarely will it get to 90% at the height of a boom for top tier properties financed by private equity with mezzanine debt and junk bonds, etc. But generally speaking somewhere from 50% - 80% LVR is the normal range for commercial property loans depending on the property type, quality, location and whether its tenanted or not, etc.


I am not talking about the business I am talking about owning the premises. You can own the building and lease it to a hotelier or a publican (pub owner) and just collect rent. Same as farm land you can rent it to tenant farmers or corporations, etc and just collect rent.

One issue about the S&P 500.... The SP dropped for a period but over the long haul it has increased

In the last 32 years, the S&P 500 index (in USD) had a compound annual growth rate of 10.68%

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It's net net up significantly and as long as the world's Reserve currency remains the Petrodollar... It will continue to grow and grow over time.

Individual milage may vary but...for most people who are looking at passive investments...

I would not suggest being a landlord.

A couple issues with an AC unit or a dishwasher or or shitty tenants and that asset becomes a big liability.