Commercial property
- What are the 5 biggest reasons why people should consider investing in commercial property?
- The first obvious reason to diversify into commercial property is diversification. Whilst you can diversify in residential property, such as houses and units, metro, CBD, regional, capital growth and cash flow, it is still all in the consumer market. Commercial property allows you to invest in different markets, and different industries, such as manufacturing and retail.
- Reliable income while its tenanted. Leases can be for several years, with an option to extend for several more years, usually in blocks of 3 or 5 year increments, so less hassle in advertising, and dealing with different people every 12 months.
- Higher rental income is an attraction. the tenant generally covers all outgoings (property ownership costs), which are paid in addition to the rent. This means that the tenant pays for the rates, insurance, body corporate, and any other property ownership costs (other than land tax) which apply to the commercial property. Furthermore, the cost of preparing a commercial lease may also be the responsibility of the tenant. This generally results in a much higher yield to the owner. Landlords require this expectation of higher net yields of say 5-10% instead of gross yields of 2.8-4.2% with residential property, with a net return of as low as 2% on residential property. It’s also opportunity cost, what else can be done with the same money elsewhere for equivalent risk. There can be greater risk with commercial property, so higher rental yields are required to help justify investing in the first instance.
- You cannot reside in a residential property if it’s in your SMSF, you can work out of your commercial property though, if it is in your SMSF.
- Another benefit of commercial property is that the tenant may update and improve the property in order to make it better suit their business needs (e.g. fitting out the property for use is generally at the tenant’s cost). Any modifications to the property may also require the tenant to ‘make good’ the property at the end of the lease. Tenants will generally maintain the property in top condition, as it is important to their business image, staff, and customers. Compare this to a residential investment; the landlord of a residential property has to ensure the property is presented at its best in order to attract a tenant, and the costs of any improvements are generally at the hand of the landlord.
