Property investing remains an exciting and very buoyant area in Australia. Here is everything you need to know before getting started.
1. Why invest in commercial property?
There is a fear factor for some investors about entering commercial property - and this is entirely due to not understanding the market. In fact, commercial real estate offers more stability and security for investors than the peaks and troughs experienced in the residential property market. The investor can get higher returns, there is far more flexibility in terms of development and tenants will typically work with the investors to add value to the building or property.
2. What are the main pros of commercial property investment?
Longer leases: As an investor you’ll have a longer lease period with the tenant. Commercial property leases can be anything from 2 to 10 years. This instantly gives you safety and security.
Strict tenancy terms: The terms of tenancy are far more rigid and laid out than for residential tenancies. The conditions of the contracts make the tenant’s responsibilities quite clear and it’s easier to evict non-paying tenants.
Higher returns: All data shows that the rental returns are far higher for commercial properties than for residential. In Australia it’s possible to get a gross rental yield of up to 12% yearly average rental income whereas residential property returns tend to sit around 3.6%.
Value adding: Tenants of commercial properties will usually make their own improvements and enhancements to the office. It’s in their interests for the property to be as presentable as possible. They may upgrade the space or layout which in turn, allows you to increase rents, as the property is more desirable.
Fewer expenses: Unlike residential properties, the investor doesn’t have to pay water rates, utilities or strata fees and maintenance costs. Instead these are all paid for by the tenant leaving you less out of pocket.
Price stability: Just like residential properties, commercial properties will increase with capital growth each year. However, commercial properties are far more stable. This is because the property’s worth is set by a property valuer, and so it’s less at the mercy of an erratic market.
Professional relationships: Unlike residential properties, there’s less emotion involved with a commercial property tenant. You’re usually dealing with a business and they also have a vested interest in looking after the premises and having a good relationship with the investor. While residential tenants can be wary of and sometimes even hostile to the landlord, commercial tenants will want to work with you.
3. What to consider when buying commercial property?
Location: Just as with residential properties, the location is everything. Some important aspects to consider: is the property easily accessible? Is it close to good public transport? Is it near a hub of other businesses that can help with customer traffic? It’s also worth researching and finding out any future development plans for the area that may affect the property, whether from council or private developers.
Tenant quality: Without a doubt this is one of the most important aspects of a commercial investment property. The goal of any commercial investor should be to always improve the quality of tenants as this adds extensive value to your investment. For example, getting a multinational company into your building or a large government department on a long-term lease makes the property more attractive should you wish to sell in the future.
Infrastructure developments: This comes down to the quality of the building itself and how much work needs to be done for it to attract high quality tenants. Research is the key here. If it is an older building it’s worth considering how much capital you will need to invest into the building to get it to a high standard, whether that is the layout or a major structural renovation.
4. How can I finance a commercial property?
Just as with residential properties, the investor has a number of options when it comes to getting loans from brokers or banks or other lenders. There is a lot of different loan packages that cover variable, fixed, split rate or interest only.
Banks will usually lend up to 60 to 70% of the property value but even then there are caveats. You may be able to borrow more depending on the property type and what category it’s fallen under. Also, the loan to value ratio can be determined by the potential rental income from the property
It may be worth considering joining a commercial property syndicate if you do not have enough funds for a deposit. These can be highly beneficial but it is vital to research the syndicate’s track record, what kind of returns it has been making and how much expertise it has.
Another option is a line of credit commercial mortgage. This allows funding up to a set amount and you only pay interest on the funds drawn.
5. Who can purchase investment properties?
Anyone can purchase an investment property provided they meet the guidelines set out by the Australian Tax Office. Self-managed super funds (SMSF) can also buy commercial property, just as they can invest in residential property. In fact, there are less stringent rules on SMSFS. Unlike the rules around residential properties, SMSF’s can buy commercial properties from fund members, and relatives of the SMFS can use that SMSF asset if they want to.
Spend the time to research every aspect of the commercial property you are thinking of buying and investigate all the different financial options ahead of you. Talk to an Altegra consultant today for more insights into which kind of investment will work best for you.