Why invest in commercial property?

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Whether you’re a seasoned investor looking for a new opportunity, or you’re after other ways to get your foot on the property ladder, a commercial property investment may be worth considering.

In this article, we explore the reasons why people venture into commercial property investing, and some of the areas to be aware of. And if you do decide to go down the commercial route, we can hook you up with an investment loan that suits your situation and objectives!

What is commercial property?

“Commercial property” tends to conjure up images of dusty industrial warehouses, but it’s a general term that covers all kinds of property that isn’t residential, or is used for some kind of business purpose. That includes everything from offices and retail outlets, to industrial sites and doctor’s surgeries. It can even include car parks!

The benefits of investing in commercial property

Attractive yields

If your focus is on generating income from rents, investing in commercial property may be the way to go. Commercial properties typically return a much higher rental yield than residential properties – usually upwards of 7% return. In comparison, the average residential rental yield across Australia’s capital cities fell to 3.2% in February 2017. (Rental yield percentages are calculated on the amount of rent compared to the cost of the property).

In addition, the costs of owning and managing a commercial property are usually lower, because most of these costs are covered by the tenant.

Potential for targeting growth areas

Commercial property investment often provides the opportunity to capitalise on growth areas, both in terms of location and the business economy. For example, a recent report by Deloitte identified that our future business economy is likely to expand rapidly in the areas of communications technology, hospitals and a wide variety of other health industries, food processing, private schooling and education. Hospitality and tourism are other areas that traditionally enjoy steady growth.

What to watch when investing in commercial property

Potentially lower rates of capital growth

While commercial property often provides more attractive rental yields than residential property, the capital growth potential is often not as strong because the land value of commercial premises is usually not as high. This is not always the case, so if you do your research carefully, you may be able to locate a commercial property investment in a growth location. Often it’s the popular shopping and holiday destinations that provide good capital growth potential for commercial property purchases, but these locations can be expensive and difficult to secure, so do your homework.

Associated costs

Goods and services tax (GST) may apply when you buy a commercial property, so you need to factor in an extra 10% of the purchase price when you buy. Properties used in the running of a business are also subject to capital gains tax when you sell.

Additionally, some lenders require a higher deposit for a commercial property investment – 30% instead of the usual 20% recommended for a residential property purchase. But this requirement differs from lender to lender and often depends on the value of the property you want to purchase. To find out more about how much deposit you may require, call us for a chat and we’ll be happy to help you crunch the numbers.

How we can help

If you decide to invest in commercial property, it’s important to have professional advice from your mortgage and finance broker and check with your accountant about the tax implications before you begin. We’re here to help you structure your loan the right way and do all the legwork to help you obtain finance to suit your current financial circumstances and future goals. There’s so much more to know and understand if you’re interested in buying a commercial property, so please get in touch today!

Sources: www.corelogic.com.au/resources, www2.deloitte.com/content/, www.ato.gov.au/Business/GST/

Common mistakes that property investors make

Common mistakes that property investors make

Property investment has always been popular in Australia. However, like all forms of investment, there are loads of variables involved and it’s easy to make expensive mistakes. Building wealth through property investment can be a lot of work – particularly if you’re new to property investment and are not aware of exactly what’s required. In this article, we outline some of the common mistakes made by first time property investors so you can plan ahead to avoid them.

Not doing your homework
Many people make the mistake of buying a property simply because they like it, or think it is a bargain. But not every property makes a good investment. When you find a property that you might like to purchase, it is very important that you do your research to ensure it will give you the return on your investment that you will need. Ask yourself these questions, and importantly, take the time to research the answers carefully:

• Will it be easy to find tenants/will the property be in high demand?
• What rental income can I expect?
• Does the property have strong capital growth potential? Is it in a growth suburb?
• Am I paying the right price? How long will I have to hold the property before I can make a profit by selling it?

Not factoring in all of the costs
Cash-flow is a very important factor when you plan to invest in property – and it’s the area where many first-time investors come undone. It’s not only important to factor in all the costs of buying the property, you must also factor in all the costs of running the investment and maintaining it from the outset.

When you research the rental income you can expect from a property, you will first need to know exactly how much rental income you will need to cover the costs of holding it. The actual costs will vary from property to property – if you purchase a new home, for example, you will not need to factor in much by way of maintenance costs at first. But if you purchase an older property, you will need to make an estimate of what work is going to be needed and when, and how much this will cost and factor that into the budget.

Ask yourself these questions:
• Will the rental income be enough to cover the costs of a property manager, advertising for tenants, regular general maintenance, council rates, building insurance and landlord’s insurance?
• How will I cover the costs of large repairs – say if the hot water system needs replacing quickly?
• How will I cover the costs when the property is untenanted and there is no rental income? How long is the average vacancy time in this area? How long will I have to budget for?

Not getting the property management right
A property manager is the liaison between you as the landlord, and your tenant. First time investors often believe that managing their own property will save them money. However, it should be remembered that your property management costs are usually tax deductible and few people have the skills to not only find tenants quickly, but choose the right ones.

Property managers find your tenants, vet them by performing credit checks and then collect the rent every month. They deal with tenant requests, organise regular maintenance and pursue action when disputes arise. They keep track of rents in your area and make sure your rent keeps pace with the market.

In short, a good property manager will help you maximise the return on your investment and save you from many sleepless nights. However, some property managers are better than others, and fees vary. You should carefully research your property manager before engaging them – ask around, check references and make sure they have the resources to do a good job. If you need help with this, ask us for a referral.

Not talking to a tax professional
Did you know that you should obtain a depreciation schedule as soon as you purchase the investment property, preferably at settlement? Not many people do. It’s a document that helps your accountant determine how much you can claim back on tax each year.

One of the major mistakes people make with investment property is not planning ahead to make the most of their tax deductions. In order to ensure you understand what you can and cannot claim, you need to talk to a tax professional and/or accountant early on in the process. Getting it right will help to ensure you come out ahead and enjoy substantial savings. Getting it wrong will cost you money you may never get back. We have many expert contacts in this area so if you need a quality referral to an accountant, please get in touch.

Getting the finance wrong
Before you commence your property investment journey, it is wise to make a plan about what you want to achieve – your financial goals for the future. We recommend you sit down and talk to us about getting the right financing to achieve these goals. Taking a haphazard approach to financing your first, and then subsequent investments, could cost you more money, limit the amount of investment properties you can acquire and even be a recipe for disaster if something goes wrong.

We can’t stress enough how important it is to formulate a plan before you begin, and talk to us about your financing before you even consider making a property purchase. We will help you set up the financing arrangement that is most advantageous to you – considering your goals and your personal financial circumstances.

If you’re thinking about making a property investment, why not talk to us? We are happy to take the time to discuss your plans, get you pre-approval for your financing and introduce you to a team of other professionals who can help you to avoid these expensive mistakes above! Give us a call – we’re here to help.