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8 Reasons to Consider Commercial Property Over a Residential

June 11, 2017 / NEWS

8 Reasons to Consider Commercial Property Over a Residential

Well, as it turns out, investing in commercial properties brings with it a host of benefits as well.

1)Income generated is greater

Commercial properties can expect to make an annual return of between six and 12 per cent of the purchase price of the property. Even on the lower end of that scale, that means you’re making much more than you’ll typically see returned for single family home properties (which are typically four per cent at most).

2)You’re generally going to have better tenants

You’re not going to run the risk of pets destroying the carpets, or kids drawing over the walls, for example. Commercial properties provide a more professional business-to-business relationship between landlord and tenant, and while this adds certain expectations to your own role (for example, though business operation hours, you will be expected to be available more rapidly than a residential tenant might be more patient), you’re far less likely to get stuck with tenants you simply don’t want in the property.

3)Triple Net leases

For commercial property there exists a Triple Net Lease opportunity, with some businesses willing to take on all property expenses, including taxes, leaving the landlord responsible exclusively for the mortgage costs. They’re attractive to big business as a branding opportunity, and they’re attractive for property investors in simplifying their investment right down.

4)Fewer protection rules

Anyone who has tried to evict a bothersome tenant would be familiar with this pain; it can be very difficult to do so. Commercial properties have fewer consumer protection laws, so if you do need to get a tenant out, it’s much easier.

5)Leases tend to be far longer

For residential property, you’re looking at a typical lease of a year or two, maximum. This creates a lot of revenue uncertainty, as well as the risk that for significant periods of time the property is not tenanted. Commercial property leases tend to be far longer, and you’re looking at average leases of 6.8 years with these.

6)It might be cheaper to buy commercial properties

Previously, securing capital to make investments into commercial properties was significantly more expensive than residential property. But recently APRA became concerned that the growth in residential property investment, and took steps to make it a less attractive investment opportunity. Now commercial lending rates are only one or two per cent higher than residential rates, but it’s a competitive space, and lenders are generally willing to discount commercial rates based on the total size of the debt in order to secure additional investment. This means that in many cases it will be cheaper to buy commercial property as an investment.

7)The tenants will often make your property more valuable

Businesses are deeply concerned with the image the project to their customers and clients, and they are aware that the impression that people have as they come into the office space is key to their image. Consequently, they are often keen on developing the property to suit their image, and this will typically increase the value of it.

8)Rents increase each year

Commercial properties typically have an annual review to the rent built in each year, and typically have a “increase only” clause, ensuring that the tenants will be paying more in rent each year. This guarantees a steady increase in the revenue that the property returns, remembering that the average tenant will also stay in the property for almost seven years. Generally the rental release will be approximately four per cent per year.

So how do I get into commercial property investment?

If you’re interested in making an investment into commercial property, there’s a couple of helpful pointers to start out with. The first is that it’s a good idea to start with something like a small office, in order to get a feel for how these investments work. Make sure it’s the kind of office that will be attractive to tenants, too; for small offices, you really do want something in the heart of the city, around other businesses that suit the kind of client that you’re looking for. For example, if you buy a property in an area that has a lot of law firms, it is likely that your own tenants will be lawyers.

Look for a property that is around convenience; businesses like having easy access to transport options (both public and private – try to secure a property that has parking, for example), as well as cafes, supermarkets, and restaurants. And ensure that the property will be able to provide tenants with the kind of services they’ll want to use inside the building. Properties that have an area to set up a kitchen and dedicated bathroom tend to be more highly valued, for example.

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