Have you considered investing in commercial property? There is a growing interest in investing in commercial property but investors do need to be aware that it can work differently from residential property investment.
Important differences between commercial property and residential property investment
When you invest in commercial property you still expect to rent out your property and receive rental income from a tenant as you do when you purchase a residential property investment. However, there are some important differences:
- Tenant is usually call a Lessee
- Leases are generally for longer periods – usually several years with rents reviewed annually
- Vacancies between tenancies can be longer
- Goods and Services Tax applies to commercial property – both to the purchase price, rent received and any expenses in relation to the property
- Maintenance costs are usually paid for by the lessee which means net rental income tends to be higher
Issues to consider
As with any investment, you need to have clear buying guidelines when it comes to investing in commercial property. Let’s take a brief look at a few issues you may want to consider:
- Location – consider visibility, accessibility to public transport, position within the surrounding suburb, surrounding business that could offer support to lessees, absence of similar properties in the local area
- Infrastructure – consider current infrastructure but don’t forget to investigate future development which may impact your investment, for example, a new freeway may make the investment easier to access and increase value
- Tenant quality – look for a strong corporate or government tenant with a long term lease, consider a property with a multiple tenants, consider the financial strength of the tenants – do they have the ongoing ability to pay the rent?
- Building quality – how new/old is the construction? Will the building require significant capital expenditure? Is the internal design flexible to allow for a changed layout if required to attract a different type of tenant?
- Yield – what is the current yield, is it below or above market, are rental reviews tied to CPI or incremental? Who is responsible for building maintenance?
Private commercial property syndicates
A private commercial property syndicate could be considered by investors who either don’t have enough capital to make a commercial property investment on their own or who would like to learn from other’s experience.
Most capital cities have a number of syndicators. You would need to seek them out in your area by doing your own research. Look for a syndicate manager with:
- A significant track record of solid returns for clients (20% pa from income and capital gain is not unreasonable)
- A view to improving tenant quality
- Existing clients who are prepared to provide references
- The capacity to take superannuation monies (if relevant to your circumstances)
- A proposed syndicate with a life of approximately 4 to 7 years
Hints and tips from an experienced commercial property investor
One of the best ways to learn is through the experience of others. An experienced AIA commercial property investor has shared his experiences and assisted in providing the information above. He also has provided the following hints and tips:
Quality of investment
Look for a quality office building or shopping centre with a number of vacancies, some short term leases and existing tenants paying under market rental. This will allow for improvement in the quality of the tenants over time which will improve the rental income.
As an investor, expect to make far more from capital gains than from income so ensure that improvement of tenant quality is the key focus. Increased income from tenants and a better quality of tenant is what will attract the buyers in the future, which should lead to enhanced capital gains.
Take an active interest in your investment and ensure that tenants are being sourced and managed appropriately. Control your expenses by using fixed interest loans. Control the risk of significant maintenance issues by ensuring a comprehensive inspection prior to purchase.
Inspect the property yourself, take the time to ask leading questions, check out similar properties in the area, do your research.