How does commercial property investment work?
Attractive returns and long lease terms are among the reasons many investors choose commercial property, but as with most investments buying these assets are not without risks, which first-time buyers need to be aware of, experts say.
Some of the advantages of investing in commercial property include lease terms of three to five and up to 10 years, depending on the type of property you buy, rental increases written into the lease, and tenants being responsible for most outgoings.
Commercial investment properties range from your traditional high street dress shop to service stations, office blocks, showrooms, factories and warehouses: essentially any non-residential property that makes a profit.
How does commercial property investment differ from residential?
The main difference is why you are buying one over the other. For instance, a typical commercial property investment attracts a 5-10% net return compared to 2-5% for a housing tenancy.
A residential property, however, may given you a stronger capital return.
So many investors use commercial for cash flow which can be double or triple that of residential to fund other ventures such as business or residential for long term investing.
As a first time commercial investor, it’s important to understand that it involves many different variables, and associated factors. Getting the first one right is imperative to building momentum and allowing the investment journey to be an enjoyable one. Here at Cooinda Properties we are here to help you buy an investment that suits your investment strategy. Please call us to discuss. 07 3335 5632
Pros and cons of commercial property investment
Contemplating investing in commercial property but don’t know where to start? Here are some variables and fundamentals to consider:
· Strong rate of return on capital invested. Commercial property generally provides a higher return on investment
· Secure income stream
· Typically, structured rental increases are included in lease agreements
· Longer lease periods. On average a lease for a commercial property is anywhere from three to 10 years (and sometimes more), whereas average leases for residential are six months to one year.
· Leases are mostly transferable
· The tenant is usually responsible for a property’s outgoings like council rates and water use
· Tenants normally add value. Hence, there is an incentive to make improvements that go hand in hand with raising the value of your commercial property. This may lead to a commercial property owner being able to charge higher rates to later tenants
· Greater choice of properties to suit a wide range of budgets
· Untenanted periods equal loss of income, due to vacancy
· Difficulty repaying debt due to income reduction caused by a vacancy
· Fit-out contributions and incentives (rent-free periods)
· Broader economic conditions affecting the tenants’ ability to pay rent (economically vulnerable)
· The greatest hurdle for entry into the commercial property market is the upfront capital required, with lenders sometimes needing deposits double that of residential property
· Capital works required to upgrade the building. Facade, roof, services, and complying with BCA standards.
· Change of laws governing operating hours (for example lockout laws)
· Capital gains tax and transaction costs