What type of business and property investor are you?
We hear many mixed messages. Interest rates falling, international trade Wars, Slowing down of the economic growth and now COVID – 19 virus etc. The question is, where do you invest your money, what business model you are after and what are the business opportunities in Australia? Are you looking for an opportunity to start a new business or do you prefer to buy an existing one? More importantly, how do you invest in protecting and growing your income?
It depends on what type of investor you are and what are the risks you are prepared to take.
Should I sell up and put all the money in the bank?
This has always been a popular option in the past. With rates on interest-bearing deposits currently less than 1%, many investors are likely having second thoughts.
Should I invest in the share market?
Many International share markets, including the Australian Market, have continued to grow in the last few years. Despite predictions from some commentators to expect a correction the market appears to be holding up for the moment despite the falls at the start of the pandemic. The share markets most significant advantage is that you can buy and sell reasonably quickly. At the moment average returns appear higher than an interest-bearing deposit. On the other hand, the global financial crisis in 2008 has shown things can change and how quickly prices can fall.
Residential property investments.
Residential Real Estate has always been a popular entry into the property market. Residential real estate has shown good capital gains and has been described by many property commentators as a safe investment when compared to commercial property investments.
Recent falls in rental returns in some areas are creating a bit of uncertainty in this market. The current return for residential investment property in the major cities of Australia is around 2 to 3% net with lower rates for higher price property. Residential real estate outside the main centres reflects the slightly higher risk with higher investment returns.
Commercial investment property.
Good quality investment property with quality tenants on long leases is showing around 3-5% net return at the moment with higher returns for more riskier tenants. What would happen if the economy slows down? In the past, most investors sell and put the money in the bank until the storm blows over. With interest rates at record lows, many would likely have second thoughts about moving into fixed deposits.
Commercial Property with business.
This is where it gets interesting. These investments are not passive. While returns can be high around the 15 – 25% net mark these require owners to have at least some involvement in the running of them. These businesses can be complicated. They could include Hotels (larger properties show lower returns), Restaurants, Motels, Function centres, Childcare centres etc.
Before stepping into this type of commercial business investment, do your homework and make sure you have the experience to be able to run them. Another advantage of this investment is that if you manage and grow the business successfully you have the option of selling the business side and having the business owner paying you rent. This could be an ideal exit plan when you plan to retire. I will cover this in future blogs.
Buying an Australian business on a leasehold basis.
As you are buying and run a business without the real estate, the entry cost is lower. By not owning the property, you have to factor the business servicing the lease as well as the other costs. On the other hand, this is where the risk and returns are usually higher.
What to look at when looking at businesses for sale?
Most investors have their ideas when looking to buy a business. It can be more cost-effective to buy an existing business. The obvious one is how profitable is business and what is the asking price. Other items include the length of the lease, the quality of the premises and the rent payable.
The current pandemic has seen many changes in the Australian & worldwide business markets. The market has changed in 2020 with the fastest growing demand for the stay at home and work from home-based business-related industries such as home delivery, health/fitness, home entertainment etc. As a result, many retail stores sales are moving away to the online business model.
How much is a business in Australia worth to buy?
Prices for businesses can vary. Small business prices such as a small cafe could sell for as low as 1:1. While similar businesses with better leases, better positions, longer leases could go as high as 3:1. Some well-established businesses and franchise for sale do go for higher price ratios.
These ratios are the annual net returns on the cost of the business. I will give the following examples.
The first Business is selling for a ratio of 1:1. This has a net profit (including owners wages) of $150,000 per year (before tax) and sells for $150,000. On the other hand, you may have a well-established second business, with an excellent lease, which is well equipped, sound management systems in place and more easily managed. In other words, requires fewer hands-on management from the owner selling for $1,000,000. If this has an annual profit before tax of $200,000 then the ratio would be 5:1. Or 20% return on buying price.
These estimates are general as many factors have to be taken into account.
What are the best opportunities in Australia for you?
Feel free to contact Con Tastzidis on 02 9882 2221 at CST Properties If you would like to have a no-obligation confidential conversation or appraisal on your property or business.
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