With residential prices spiralling and gross residential rental returns in our capital cities averaging at below four percent, more and more private investors are choosing instead to invest in commercial property.
There can be some significant advantages to commercial property investment, including:
· The potential for higher yields
· The stability of longer leases (often between three and ten years)
· Less difficulty removing non-paying tenants
· Fewer ongoing costs.
However, there are plenty of risks and pitfalls too, and if you’re thinking of investing in commercial property there are some complex issues you’ll need to consider. We’ve developed these top 7 tips to help you.
1 - Know the risks
Commercial property is a very wide category, incorporating:
· Retail (kiosks, cafés, shops, restaurants etc)
· Office space
· Industrial (everything from parking lots to manufacturing plants and warehousing facilities)
vj· Other types of property, such as health facilities, recreational spaces – or even billboards.
The value, demand and yield for each type of property will depend on a huge number of factors, including size, location, nearby facilities and infrastructure, and local population trends. It’s important to understand that even minor changes in factors beyond your control – such as the alteration of a bus route taking foot traffic away from the street – could have a dramatic impact on the value of your property.
Commercial property can be especially sensitive to local, national and even global economic conditions (after all, people have less to spend when interest rates rise, and if businesses are not thriving, commercial property won’t be in demand) so it’s vital that you get a thorough understanding of current and predicted market conditions for the type of property and specific location you’re considering.
2 - Seek professional financial advice
Given the high risks and the complexity of the market, it’s really important that you seek professional guidance before making the decision to invest in commercial property.
Consulting your financial advisors will help you establish whether commercial property would be a good fit for your risk profile, tax position and long-term financial plan (for example, capital gains on commercial property can often be lower than residential gains, so a commercial investment may be more useful as a tool to boost cash-flow than for long-term wealth accumulation) .
3 - Structure your investment efficiently
There are several ways you can structure your commercial property investment, including individual ownership, setting up a company or trust, or joining an investment syndicate. Your financial advisor can help you select the most suitable option for your circumstances.
Commercial property is a permitted investment to hold within an SMSF, which can have considerable tax benefits – but there are strict rules and restrictions to negotiate in addition to the inherent risks, so be sure to seek specific guidance from your financial advisor if you’re contemplating buying commercial property through your SMSF.
4 - Engage an agent
If you decide that commercial property is a suitable investment for you choosing and acquiring the ideal property can still be a complex process.
It’s wise to engage a reputable and knowledgeable commercial property agent (be sure to get a recommendation or seek feedback from their existing clients) to help you narrow down your target area and identify and buy a suitable property.
Once you’ve purchased, an agent will be able to:
· Help you attract potential tenants and negotiate terms (including rent, rental increases and renewal options)
· Advise you on how to structure your lease – who pays ongoing costs such as strata fees, rates and utility costs; what changes will be permitted and whether the premises are to be restored to their original condition at the end of the lease, etc.
· Manage the ongoing relationship with your tenant and the strata body or centre manager (where relevant – for example for a retail unit within a shopping centre), as well as taking care of maintenance of the property if this is not to be the responsibility of the occupant.
5 - Consider your legal position
As the owner of a commercial property you may have to meet various legal and regulatory requirements – such as applying for licences and permits, or complying with local zoning laws or environmental targets. The cost of compliance may be considerable, and failure to meet your obligations could have serious consequences.
Before investing in any property, check with your legal advisors in case there are any liability or compliance concerns, and make sure you fully understand your obligations to your tenants and members of the public.
6 - Choose the right finance
Just as with a residential purchase, finding the most suitable finance for your commercial property investment will take care and research. Your ability to access finance and the interest rates, terms and conditions you can secure will depend on factors such as:
· The location, size and type of investment you are considering
· Whether you have collateral to offer (such as your home) and how large a deposit you are able to put down (usually a minimum of 30% for commercial property)
· The type of finance you seek (mortgage or line of credit, fixed or variable rates, interest-only or interest and principal repayments - there are 10 different small business loan options).
It’s wise to speak to an experienced broker who can advise you on which lenders specialise in commercial property loans, and help you find and select from products suited to your needs.
7 - Have a financial buffer
It can be much more difficult to find occupants for vacant commercial properties than for houses or units, since each business is likely to have very specific requirements – so there can be long gaps between tenancies where you’ll be receiving no rental income.
When your lease is drawing to a close, it’s important that you plan ahead to cover your financial obligations for as long as it takes you to find a new tenant. (For this reason, commercial property may be most suitable as part of a portfolio rather than as a standalone investment – investing in several smaller properties rather than one larger facility could help you to spread the risk).