Commercial Property Investment
There are a lot of common misconceptions about commercial property and many investors think that they are over priced and out of reach. This simply is not true.
It is common for commercial properties to sit on the market for many years, as most investors are buying residential houses and are too afraid of the unknowns to go into commercial property.
Fear is one of the main reasons commercial property is not sold as often as houses – as people can not live in them and loans appear harder to get. In the current climate the interest rates are around 9.85% so if you’re buying a property for cash flow positive alone, it does not make sense to buy a commercial property; returning 6% as this would be negatively geared.
However there are properties that return 11% and above, and in some cases even 20%. These can exist outside of the capital cities in large rural areas, often with long term tenants. For example, one commercial property that cost $1,350,000 is leased out to a long term tenant, with returns of $152,000.
There is another property – a 20 unit motel in a large mining and farming city worth $1,250,000. The returns on this one are approx $200,000. As a savvy investor, you might offer $1,000,000 for this property and employ a manager (or run it yourself). You could even rent it out permanently to mining companies, which will increase the yield by $100,000 and would return around $300,000 for the life of the contract.
You may need a minimum of 15% to buy commercial property. A way of doing this is buying with other investors, and bear in mind a lot of commercial property is bought with a vendor deposit or OPM (other people’s money).
I purchased my first Commercial Property while it was being built and negotiated 5% deposit and then a further 5% once the contracts were ready and unconditional (this was a delay tactic to give me time to get the other 5% together). Everything is negotiable, even the deposit. I also included early possession in my terms so I was able have the unit rented/fitted out prior to the completion of complex and settlement. I know this can be a risk if settlement never went through, but it was financially worth it.
At settlement the Capital Growth in the property had given me 15% equity in the property which I was really pleased with and I was returning 10%.
One tip I must give you is don’t forget GST… I did!!! Commercial properties attract GST and this can affect your cash flow if you are not aware of this. Under the advice of my Accountant I brought the property under a Company Trust and got the GST back in the following quarter. I now have to charge GST on the rent to my tenants.
One other thing that I love about Commercial Property over Residential is that the tenants pay all the associated costs, ie. fit out costs, rates, body corporate fees, etc.
Commercial properties can have a lot of potential, with good Capital Growth and other long term benefits.
Happy Investing!
Filed Under: Investment Strategies
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