Commercial property can be a financially rewarding asset class. But in many ways it works differently from residential property. Here’s what you need to know to get started with a commercial property investment in Australia.
Across the nation, our cities, suburbs and regional areas offer a lot more in the way of ‘property’ than just residential housing.
Commercial property is a significant asset class – one renowned for being a strong source of regular income. Yet investors may overlook commercial property because they’re unsure about how it works.
With this in mind, here are 6 factors to be aware of when getting started in commercial property.
1. Understand the different commercial property segments
The commercial property market is made up of different types of properties. Broadly speaking, they can be broken down into industrial, retail and office properties, though other subsets exist, such as hotels and service stations.
Making the right choice of commercial property means getting to know how each type of property works, and the sorts of businesses that will be attracted to different properties.
2. Look for a location that appeals to businesses
As with all real estate, a good location is critical to the success of a commercial property investment in Australia.
Unlike residential properties, a commercial property will be tenanted by businesses. So location features such as nearby beaches or great views don’t apply.
When it comes to commercial property, look for a location with excellent transport links, like road and rail networks. Proximity to ports, airports and capital city centres is another plus.
A tenant leasing a commercial property will need a workforce. So nearby residential housing that offers a pool of employees is a plus.
It also makes sense to look for a location with a healthy local economy. This way, if one tenant moves on, there will be plenty of other businesses keen to take out a lease.
3. Get to know how commercial leases work
Commercial leases usually run for at least 3-5 years – much longer than residential tenancies. That makes sense because businesses dislike the disruption of having to relocate. Long leases are good news for investors. It means greater certainty of rental income, and a more predictable cash flow.
In addition, commercial leases typically include an option for tenants to renew the lease at the end of the initial lease period. This is why you may see commercial lease terms described as ‘5 + 5’. It means the lease is for five years initially, with an option to renew for a further five years.
4. Decide the lessee’s obligations
In a commercial lease, it is common practice for the tenant to pay many of the outgoings normally paid by the landlord in a residential lease. These costs can include rates, utilities, body corporate fees and insurance.
This arrangement is a plus for a commercial property investor’s cash flow. But it can add to the complexity of the lease, and it is worth seeking legal advice to be sure you are entering into a lease that is fair to both you and the tenant.
5. Work out a buying budget
No matter what type of commercial property you buy, be prepared for GST to be added to the price. In effect, this can bump up the cost by 10%.
As the owner of a commercial property, you will likely also pay GST on many expenses relating to the property. Unlike residential property though, you should be able to pass most of these costs on to the tenant and be able to claim input tax credits for the remainder – as long as you are registered for GST.
This being the case, it’s a good idea for commercial property investors to apply for an Australian Business Number (ABN) and register for GST with the Australian Tax Office.
6. Identify ways to add value
One of the big points of appeal of any property investment is the opportunity to add value.
Recognising commercial property sites where vacant land can be utilised, or looking for properties where the floorspace can be reconfigured to suit the needs of tenants, can add value to the property over the long term, and underpin lasting tenancies that deliver low vacancy rates.
While the six factors we’ve looked at can help investors get a toehold in the commercial property market, the reality is that the cost of commercial property can see direct investors limited to one, maybe two, properties.
This can concentrate – rather than spread – risk across a variety of properties.
A simple way to overcome this risk, without the need to tie up significant capital in a single property, is to invest in a professionally managed commercial property fund. It’s a low-stress, cost-effective way to reap the rewards of a diverse commercial property portfolio without the hassle of day-to-day management.
To discover more about commercial property investing in Australia, get in touch with us via the form below.