Have you thought about investing in commercial property? (TIPS)
When you think about property investing, a lot of people immediately think of residential property.
But there are also opportunities to generate wealth from commercial property investment, so long as you understand the key differences between commercial and residential investment markets.
While many investors understand residential property because they may have bought and sold homes themselves, commercial property is more complex. The factors that drive the success are different and the things to consider when choosing your purchase are different.
And before you start, you need to get a few things in order:
- Pre-determine a budget
- Consult with your finance broker
- Check with your accountant if you need to register for GST
- Decide what entity you will hold the property in
Property Wizards director Liz Sterzel shares her tips for achieving success in commercial investing – for those crossing over from residential or those just starting out:
- Careful selection
- Assess location, access and parking
- Consider the likely tenant base for the property
- Examine the lease
- Closely analyse cash-flow and capital growth prospects
- Conduct thorough due diligence
- Understand that start-up is generally more costly than residential
There are many ways to reduce your risk through careful selection and screening, but many investors aren’t aware of how. Given each investor’s circumstances and expectations affect their decision-making, it may be useful to compare some of the main factors affecting the two types of properties.
Residential versus commercial
|YIELD||Traditionally experience lower yields compared to commercial properties.||Traditionally enjoy higher yields. However, keep an eye on the market, as in recent times these have softened.|
|LEASES||Tend to be more standardised and can therefore be easier to manage.||Nothing standard about commercial leases. Lease issues can significantly affect the value and performance of a commercial investment – thoroughly examine the lease.|
|CASH FLOW||Usually involve a holding cost to the investor – the cost you pay now for future growth.||Can often deliver better cash flow as the tenant pays much of the outgoings. Also generally easier to estimate the ongoing costs.|
|CAPITAL GROWTH||Generally higher – but not always.||Capital growth is generally less, however commercial investments in superior areas may also deliver good capital growth. The same trade-off between growth and yield applies to both commercial and residential.|
|GEARING||Banks will usually lend more for residential – 80% to 90%, so you need less cash to get going.||Normally need to put in 30% of the purchase price (sometimes 25%) and start-up costs are higher. Because you’re putting more cash in, your final internal rate of return might not be as good.|
|TERM||Loans are normally over 30 years.||Loans are normally over 10 to 15 years.|
|TENANTS & VACANCIES||Generally easier to find tenants as there is usually a larger base of potential tenants.||Securing tenants can be more difficult as there is a smaller pool of potential tenants to choose from, and their needs can be more specific. Vacancies can be costly.|
|TENANT ISSUES||Tenant issues can become a headache – engage a good property manager.||Despite common perceptions that commercial tenants need less attention, if you don’t have a hands-on property manager it can cost you dearly in the long run. A good commercial property manager can optimise rent and help increase the property’s value.|
|PRICE||Assessing what to pay for a residential property is a lot easier – provided you’ve done your homework.||The price of commercial property is affected by extra factors such as the lease, quality of tenant, comparative yields, etc.|
|BUDGET||Can be bought for most budgets – small or large.||There’s a perception that big money is required to buy good commercial property. Getting in on a lower budget is possible, but the market is more competitive and there are fewer quality opportunities.|
Whether you’re looking for a commercial property for your own business or to generate income from tenants, Property Wizards helps commercial investors find the properties they need. Here’s a case study about how Property Wizards helped a client secure a fantastic commercial property that met an extensive wish list.
So if you’re interested in investing in the commercial sector, why not read our Get Ready to Invest in Property eBook.
Or, if you’re just starting to think about property investment, why not complete our Getting Started form to get the ball rolling.
To find the right investment property, you have to have a strategy. If you’re not sure what type of strategy would best meet your needs or you would like to work out your investment strategy, download our 4 Strategies to Success form.
And, if you’ve got questions about finance, call us for a free Financial Health Check: 08·9381·7450 or download our Finance Services information.
Or, if you’ve got any other burning questions, leave us a comment on our Facebook page.