Investing in commercial property – such as shops, offices, warehouses, storage facilities, or factories – can be very financially rewarding. If you are considering doing so for the first time, you need to go into it with your eyes open. We’ve put together this brief guide to help you get started.
Treat your investment as a business
Whatever type of commercial property you invest in, it’s important that you view your investment as a business, and your tenants as clients. This means you should treat your tenants in a professional manner and work with them to develop good mutually beneficial business relationships, as well as support them in their efforts to make their businesses successful. After all it’s in your interests that your tenants make money!
Understand how commercial property differs from residential
- – In commercial tenancies, tenants are called ‘lessees’ – certainly in the contracts anyway, even if they might be referred to as ‘tenants’ in everyday language
- – Commercial leases are usually longer – while for a residential property they might typically be 12 months, for commercial they are more likely to be several years
- – GST is applicable – not only on rental income but also purchase price and expenses
- – Lessees usually pay for maintenance – while the landlord usually pays in a residential contract, in a commercial case, maintenance generally falls to the lessee, along with rates and other expenses. However, structural matters will still fall to the landlord. As such, it’s important to distinguish between the two at the start, so it’s very clear who is responsible for which activities and costs
- – Responsibility for fit-out often falls to the lessee – if so, it’s important that the agreement spells out what fit-out is permitted
Examine the quality of the investment, including:
- – Quality of the building itself – such as its location (whether it is positioned in a growth / high demand area for example), the age and condition of the building, and its capacity for capital gain. Be sure to conduct a thorough property inspection before purchase
- – Surrounding infrastructure – including what is earmarked for the future
- – Zoning – consider the ways that planned or likely zoning changes could affect the investment long-term
- – Quality of existing tenants – such as their commitment to meeting their obligations and their financial capacity to pay on time
- – Rental yields – and whether they are in line with market yields
- – Options for tenancy improvements – for instance, whether renovations and improvements to energy efficiency could attract higher-paying tenants and / or better capital gains
Make sure you fully understand the commercial lease
This includes terms and conditions, lease periods, renewal options, maintenance and fit-out, who has responsibility for which costs and so on.
It’s also vital that you understand the laws regarding defaults and evictions as these can vary from one state to another. It’s a good idea to get legal advice before signing contracts.
Consider private property group investments
Investing with others in a syndicate can be a good option when you are starting out. Make sure that all members are aligned in their interests, that you understand exit terms, and that the syndicate is well established and has a good track record. The Australian Investors Association says a solid return of 20% from income and capital gains is not unreasonable to expect.
In general, when it comes to commercial investments, make sure you do your homework, ask plenty of questions, and get expert assistance from a commercial property consultant. That way you will be more likely to reap the rewards you are after!