Blog - Commercial
WHY INVESTING IN COMMERCIAL PROPERTY SHOULD BE YOUR NEW FINANCIAL YEAR RESOLUTION
Like it or loathe it, Tax time often gives us an opportunity to review and reflect on our finances, portfolio and cash flow over the past year. This often forces us to make new financial year resolutions and influences us to look how to best invest our money. In our article we explore why investing in commercial property could now be one of your best moves yet.
THE APPEAL OF COMMERCIAL PROPERTY
Historically, commercial real estate’s ongoing appeal derives from it being a tangible asset, with hidden value that often extends beyond its ability to produce a return. According to Real Capital Analytics, private investors have placed over $1 trillion in Commercial Property globally since 2009. Australia saw $15.6 billion in commercial real estate activity in 2015 alone.
Commercial property often contributes to a diversified investment portfolio and can be less volatile, compared to assets that are subject to daily market pricing or publicly traded investments. Also, commercial property as an asset class is usually protected from rising inflation rates.
WHY IT’S BETTER THAN A RESIDENTIAL INVESTMENT
Residential investors rely on negative gearing
Most residential investors rely on negative gearing, which means the person owning the residential property has to make up the difference between rent and what the property costs to own, such as mortgage interest and maintenance rates. They are of course typically relying on the tax office, who make up some of this loss via a tax deduction. Residential investors also heavily rely on the capital growth on the value of the property. This means that when they sell they are hoping to make the loss back, and then some.
This can be a great short-term strategy. However, we often see investors failing to consider when their property will provide positive cash flow and what they would do if their property is not growing in value the way they had hoped. A safe property investment is one that has a positive cash flow from very early on, ideally from day one. Residential properties almost never yield positive cash flow early-on, despite the ongoing obsession of Australians buying it! Adam Hennessy, director of TGC’s office services agrees;
“It surprises me that even though commercial real estate is thriving as an asset class, only a small proportion of everyday Australian investors look to cash-in.”
Commercial property has higher yield
It is much easier to find a commercial property that is cash flow positive from day one. Investing in a commercial space means you are more likely see money in your bank account every month, even after accounting for all outgoing expenses such as your mortgage interest, maintenance and other costs. Commercial property rental yields are also much higher than residential returns: usually between 5 to 6.5% net per annum, with an annual increase in the range of 3 to 4%.
Better yet, owning a commercial property with positive cash flow does not exclude you from claiming depreciation of the building, fixtures, fittings and other tax benefits which may further boost your return. Of course, if you are seeing a positive net return from your commercial property investment, you may be required to pay a percentage of this to the Taxman. The entry level pricing for commercial strata investments can be as low as $300,000, reducing the barriers to entry.
Commercial tenants are more stable
When it comes to the tenant, commercial property occupiers are generally more stable than residential tenants, as most commercial leases are longer in length, usually about 3 to 5 years. Tenants also often contribute to outgoing expenses and may enhance your property with fit-outs and minor upgrades, adding to its value. Commercial tenants are typically required to pay a three-month security deposit, compared to residential’s one-month bond. Most noteworthy, commercial properties are not subject to the Residential Tenancy Legislation. This means that if your tenant cannot pay their rent or otherwise breach their lease it’s ultimately their problem, not yours, and you will not be subject to the onerous requirements which apply to residential tenancies.
Less emotional charged and less draining
Here are some final things to consider when making a decision on whether to invest. Commercial property tends to make for a less emotionally charged or draining investment because you will never live in it, which means it will not elicit a sense of belonging or infatuation that residential purchases may facilitate. This makes it a more rational and unbiased investment, which decreases your chances of simply paying too much. You can also consider purchasing commercial property through a self-managed superannuation fund. This is not possible with direct residential investments.
Search for properties that may have these potential upsides available, so you can get the most out of your investment.
You may soon see that your investment in commercial property will be the best performing asset in your portfolio.
WHERE TO START I HEAR YOU ASK?
Your first step is to hop onto tgc.com.au and familiarise yourself with the types of commercial properties available to purchase. Secondly, speak to your accountant or financial planner about owning a commercial property as part of your investment portfolio. Finally, and most importantly, if you are serious about investing and leasing out a commercial space, seek legal advice from a property lawyer. The leases of commercial property differ considerably to those of residential property and will most likely require a legal expert to read over and further explain some of the essential terms and conditions.
TGC has an experienced team of commercial property experts who would be more than happy to answer any questions you may have. Contact us here or give us a call on 1300 458 800.