Have you thought about investing
in commercial property?
You’re not alone — faced with
the prospect of more moderate returns from their residential
property investments, many investors are considering this as an
alternative.
By this, I mean offices, shops
or warehouses.
In today’s podcast, I’ll be
exploring the benefits of investing in commercial property, as well
as some of the negatives.
Benefits of commercial property
There are of course many
benefits from investing in commercial property
- Strong returns
— Over the years commercial
property has provided strong returns as a combination of capital
gain and income.
- Stability of income
— One of the important features of
commercial property is returns are generally high and more secure.
Returns for property fluctuate considerably less than returns on
shares.
- Low risk
— There is less volatility in the
value of commercial property than in shares — if you own the right
property.
- Exposure to different sectors
of the economy — Retail
and industrial properties have a direct relationship to the general
state of the economy. Retail property depends upon consumer
spending.
- Tax benefits
— Commercial properties provide
generous tax benefits with substantial depreciation allowances.
Some buildings also attract building allowances, where a portion of
the structural cost can be offset against the assessable
income.
- Hedge against
inflation — The value of
commercial property and rentals of commercial properties have
outpaced inflation over the long period.
- Investment control
— As the owner of commercial
property, you have a significant degree of control over your
investment. You can choose to do improve your return through
renovations, upgrading, and change of the use of the property, or
you may amend the terms of the lease or the type of tenant you have
and you always have the option of further development of the
property or dispose of it.
- Leverage
— Just as with residential
properties it is possible to leverage your returns by borrowing up
to 70% of the value of commercial property.
- Adding value
— Just as investors in residential
property are able to add value by buying a run-down property and
renovating or redeveloping it, there are opportunities in
commercial property to add value. In particular, if you can
increase the rental income from your property this will directly
reflect on the valuation of the property.
Ways you can add value to your commercial property
investment include:
- Renovating
- Upgrading
- Subdividing or enlarging the block
- Improving the appearance of the
property
- Obtaining permission for
redevelopment
- Renegotiating the lease
- Changing its use for example to
residential
The negatives of commercial property
Some of the disadvantages of
investing in commercial properties include:
- Lack of liquidity
— Selling a commercial property can
take several months — often longer than it takes to sell a
well-located residential property.
- Lack of pricing
information — Compared to
residential property there is little pricing information available
for investors in commercial property. It is, therefore, more
difficult to know the value of your particular property. You may
able to get some information from the Property Council of Australia
or from the following
websites
- https://www.commercialrealestate.com.au/or
- http://www.realcommercial.com.au
- Scarcity of other
information — If you are
interested in share or in residential property, there are many
blogs, magazines, newspapers, and websites that will help keep you
informed and make you a better-educated investor. There are
very few information resources for people interested in commercial
real estate. You will find some articles in the Australian
Financial Review and in the reports produced by some of the larger
commercial property agencies.
- Higher costs
— The entry level to purchase a
commercial property is usually higher than that for residential.
Partly because the price of a good commercial investment is
substantial and partly because you require a larger deposit as
banks won't lend you as high a proportion of your property compared
to residential real estate
- Ongoing management
— Direct property investment in
commercial properties can require your ongoing management but
usually requires less management than similarly priced residential
properties.
Links and Resources:
Michael Yardney
Metropole Property Strategists
Metropole’s Strategic Property Plan – to help both beginning and experienced
investors
Commercial Property Investment
Guide
Ahmad Imam - Metropole Properties Sydney
Some of our favourite quotes from the
show:
“My mistake was doing it a bit
too early because I didn’t recognize at the time that while I got
good cash flow, I didn’t get much capital growth.” –Michael
Yardney
“As a commercial investor you
need to come up with more equity, you need more cash in your stash
to get going.” –Michael Yardney
“In general, commercial
investors are looking for the security of the lease.”
–Michael Yardney
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