ArticlesAussie couple who turned $60,000 house deposit into $20 million property portfolioA few years ago, I realised that I was hitting a ‘yield ceiling’ with residential property and that the highest cash-flow in Australian real-estate was locked away in commercial property. As comfortable as many Australians are with investing in residential, the reality is, it’s not enough to retire on. As uncomfortable as some of us are with commercial property investing, the reality is that it’s not difficult, it’s just different to residential. It’s imperative to have commercial in your portfolio if your goal is to generate a workable passive income for an early retirement. So, let’s take a look at how you can retire in just 10 years with commercial.‘Rethinking’ Property Investing. If you owned three residential properties worth $700,000 each, and they were all completely paid off, you would have $2.1m worth of property assets. Sounds great, right? However, at a 4% gross yield, your income on your debt-free property would only be about $60,000 per annum after council rates and water bills, insurance and maintenance costs have been taken into consideration. You would also need to factor in income tax that would be payable on your $60k rental income.For a portfolio worth $2.1m with no debt, $60,000 in gross pre-tax income just doesn’t cut it I’m afraid!So what if instead, you invested $2.1m in commercial property offering a 7.5% net return. With the tenant picking up many of the ongoing costs, such as council rates and maintenance, this investment would pay you $157,500 per annum after costs. Of course, income tax is still payable on these profits, but if you’re comparing commercial with residential returns over the long term, there’s a clear winner here. It’s a no-brainer, right?These are big numbers I’m talking about here, but there are a lot of opportunities to buy a commercial property at a lower price point and with a good-quality tenant in place. People often think commercial is a highly expensive asset class that requires millions of dollars to get into, but the reality is that you can find a commercial property in a capital city for $350,000 – or sometimes even less.Creating a $20 million plus property portfolio doesn’t happen overnight. It doesn’t happen in your own backyard. And contrary to what many think, it doesn’t happen with residential property anymore. This is our story of how we built a $300k passive income through investing. And how you can do the same.Starting out: 2010In 2010, Mina and I were looking to purchase our first investment property, however there were constant doomsday warnings of a 30 to 40 per cent price drop.I knew that I needed more information, so I educated myself. I spent hours reading thousands of property comments, web forums, and devoured every property book I could find. Scott and Mina O’Neill started out investing in 2010.Because most people were fearful of price falls and had a negative mindset during this time, the opportunity was there to buy a property at a great price. It wasn’t that different from what we saw in 2020 with COVID-19.So, we did our research and had found a property with numbers that stacked up. Our first property was in Sutherland (a freestanding house with a granny flat and cost $480,000). Our initial investment of $60,000 was from five years of working at bars, and some other part-time jobs such as cleaning cars at a car dealership, McDonald’s and working as a surveyor field hand.Because the granny flat and the house were rented separately, we had two rental incomes producing a total rent of $660 a week. This income covered all costs and left us positively geared with $200 a week spare as a passive income. Their first property was a house in Sutherland for $480,000, the Sutherland house netted them a passive income of $200 a week.Today, even with the recent falls, that Sutherland property is valued at over $1 million, roughly $600K more than we paid for it. I’m glad I didn’t listen to the doomsayers, had we bought into the property crash fear we would have lost a small fortune.We purchased our second property in Maroubra in 2012, a unit, and its value rose by $300,000 in just four years. Admittedly, lending was a little easier back then, and at the time we were creating equity while maintaining cash flow.By now we were addicted and Mina and I were quickly thinking about our third property.The ‘aha’ moment: 2013In the European summer of 2013, as we were sitting on a Greek beach, it hit me. What if we could somehow purchase another five properties similar to those in Sutherland and Maroubra, but outside our own ‘backyard’? Mina and Scott in Greece.Sydney was getting expensive – the numbers weren’t stacking up anymore. I worked out that we could earn more than $7,500 a month clear plus capital growth if we bought another five properties elsewhere in Australia.This figure would constantly grow over time, of course, and we’d have enough passive income for a comfortable retirement, all achieved through property. Scott had an “aha” moment in Greece and began to crunch the numbers.We purchased our third property in Port Macquarie. It was four units on one title for a total price of $425,000. So if you work it out, we only paid $106,250 per unit.It was far from my familiar patch in Sydney, and almost everyone I talked to about the property at the time expressed concerns: it was too regional, it wasn’t going to attract any capital growth, the banks wouldn’t like it, and the tenants would give you too much trouble. And on.But the numbers worked. At the time, the average yield in this area was about 4 to 4.5 per cent, yet this small unit block was showing a gross yield of 9.8 per cent generated from four separate tenants each paying $200 a week.We purchased many, many more residential properties after this, until things started to change.The big pivot: 2015After enjoying five years of successfully generating great returns from our residential propertyportfolio, we ran up against an obstacle: the yields were getting lower and lower.Rents were not keeping up with the growth, which meant that replicating the quality residential investment deals we had once relied on to create income from positive cash flow was getting increasingly difficult.The way I saw it, we had two options. We could persevere in the residential property, where we’d clearly hit a ‘yield ceiling’ or we could look again ‘outside our own backyard’ — to the commercial market. By 2015 Scott and Mina O’Neill were looking to pivot into commercial property investment.To my surprise, the numbers and yields were far greater than anything I had seen in the residential markets. I couldn’t believe it!To an obsessive number cruncher like me, it was a potential gold mine. It was almost too good to be true. How and why was this possible?After around 12 months spent reading and learning, my objective was to find a property I believed could withstand a recession. I wanted a high yield, a long lease, a solid trading history in a market that hadn’t already boomed and preferably in an essential service industry. In the end I found it and many more. Scott and Mina O’Neill’s first commercial property investment.By 2016, we’d grown our portfolio to 25 properties in both residential and commercial and we were both only 28 years old. It was an exciting feeling, but it also made us think about taking what we had done to the next level.At the time we owned four commercial properties that produced a whopping $207,000 net income. The mortgage cost was around $75,000 for the commercial loans. So our income had jumped $132,000 from these four commercial properties alone. This meant our passive income sat at just under $300,000 from our total portfolio.We realised that we wanted to spend our future helping others achieve their own wealth goals — and so our professional business, Rethink Investing, was born.Helping our clients: 2020Today, Rethink Investing is Australia’s leading commercial buyers agency. We’ve purchased more than $1 billion of Australian real estate for our clients, most of it commercial property. And the numbers continue to grow. The O’Neills now help other people invest in property.More people are realising that investing in commercial property is the number one way to grow your wealth and receive the strongest returns in the industry. And right now, we’re seeing 25-40 per cent cash-on-cash returns on the commercial properties we’re buying for our clients, something we’ve not seen in almost a decade.For most, it’s undeniably the opportunity of a lifetime. For us, it’s been an absolute gamechanger.Scott and Mina O’Neill are co-authors of Rethink Property Investing (Wiley $29.95) and founders of Rethink Investing. After retiring at the age of 28, they now live off the passive income generated by their personal $20 million property portfolio. Find out how to do the same at www.rethinkinvesting.com.auFebruary 3 2022SHARE View media article >In The Media Let’s discuss your property investment goals. Speak to one of our property experts today.