When it comes to property investment, people tend to think of residential. But commercial property can offer some big advantages as well, either as a space for your own business or as an income provider. We examine the pros and cons of going commercial.
From warehouses and offices, retail to car parks, there are some serious potential benefits to non-residential property when you’re considering investment options.
If you already have residential investments, adding commercial property is a way to diversify your portfolio. Plus, if you own a business and are currently leasing premises, owning your own place can deliver another set of rewards.
Financial specialist Patrick Clarkson says many people overlook commercial property when looking to invest.
“It flies a little under the radar,” he says, “but it’s a different way of thinking… a different asset class, just with higher returns and capital growth and more consistency.”
Here, Clarkson outlines the pros and cons of investing in commercial property.
The potential benefits:
The highlight of investing in commercial property, Clarkson argues, is higher rental returns. “As long as you’re in the right market, you’ll get a better rate of return [than residential],” he says, pointing out that with residential property in capital cities, return can be anywhere between three and four per cent, but with commercial you can earn about six per cent.
While a residential lease can turn over every six to 12 months, a business leasing a commercial property will want a longer lease period – generally three or five years, possibly 10 – so there’s a lot more security. “A business moving into an office or a warehouse won’t want to be asked to leave in six or 12 months,” Clarkson says, “so three years is probably about the minimum.”
Better tax incentives
Another positive is the better level of depreciation a commercial property can return, i.e. there’s more you can write off, so you’ll get better tax benefits. “Carpets, air conditioning – everything has to be replaced more often in commercial properties, and you can write them off over a few years,” Clarkson explains.
Be your own landlord
If you’re investing in a property to operate your own business from, there are additional benefits (though Clarkson points out you do need to do your homework first to check it’s the right strategy for your business). If you’re planning to be in the location for, say, 15 years, buying and then leasing it after you’ve moved on (rather than paying rent to someone else for those 15 years) could make perfect sense. As the property belongs to you, you can make changes without needing permission from a landlord – you have full control and an asset appreciating for the business. One purchase option is to fund it through your self-managed superannuation fund (SMSF). The ATO lets business owners buy a commercial property through their SMSF for business use if they meet the criteria. “You’re building wealth,” Clarkson says, “getting a diversified return on your super and also not having to pay rent.
The potential risks:
Finding new tenants
While you’ll get longer leases with commercial properties, it can also take longer to find a new tenant, so vacancies represent the biggest risk. “That’s why it’s important to do your research and take time to understand the market and vacancy trends,” Clarkson says. Be sure to undertake that extra level of due diligence so you know as much as you can about the area and the demand there.
Lease loss affecting value
A commercial property’s value is closely aligned with its lease so if it’s about to expire, or your premises becomes vacant, its value will decline. “Most valuers ask about your lease contract and that will be part of the valuation as well as market demand,” Clarkson says. That’s why it’s important to make sure you have a good, solid lease in place.
Vulnerable to business climate
When business is booming the demand for commercial properties booms too, but a downturn can translate to a demand fall.
Currently, the business outlook is strong. According to the latest NAB Quarterly Business Survey, business conditions remain well above average with trading conditions, profitability and employment conditions “favourable”. Retail, however, remains weak, according to the report, making investing in commercial retail property riskier. “Retail is a rollercoaster,” Clarkson argues, “but offices, warehouses, those sorts of thing, are good.” Commercial property can be a smart investment, delivering plenty of benefits, but it’s very important to do your research and get the right advice to achieve its full potential. Your mortgage broker will be able to help with that as well as finding the best loan for this kind of investment.
Commercial property: the pros
- Higher yields
- Greater consistency
- Better tax incentives
- Be your own landlord
Commercial property: the cons
- Challenge of finding new tenants
- Lease loss can affect value
- Vulnerable to business climate
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