Guide to investing and understanding commercial property

Finding out about purchasing residential property seems to be a lot easier than non-residential property or commercial property. Homburg Real Estate want to make it easy for you to enjoy the benefits of diversifying your portfolio.

Commercial property can be a little daunting - if you do not deal with the day-to-day matters of running a business from a commercial building, most people are unfamiliar with the terms and conditions of commercial leases, GST implications and who is responsible for the outgoings (expenses) of the building.

Commercial property comes in three main forms, office, retail, industrial property. Investing in commercial property is quite different to residential property.

Return

Residential property investment is relatively low risk and as a consequence, low return. Commercial property has a higher return but this comes at a higher risk. For example, a flat or unit will average a return of 5% whereas industrial property, such as a warehouse, may average 8%.

Risk

The higher risk comes in the form of higher vacancy rates. Let’s use the warehouse example. It could take a while to find a new tenant for the warehouse, many months and possibly more than a year. Conversely, finding a new tenant for your residential property will take generally a week or two.

Duration of leases

Residential leases tend to be for six or 12 months. However, commercial property leases are generally for a much longer period of time. It is not uncommon to have leases that are for an initial five-year period, with the option to renew for another five years, and then another.

Quality of tenant

The tenant is obviously a crucial part of your property investment. In commercial property, a government or large corporate tenant is considered a ‘blue chip’ tenant. They are likely to rent your property for a long period of time and are unlikely to default on the rent.

Economic performance

As in any form of property investment, the economy is vital to your financial health. At the moment with consumer and business confidence at all-time lows, there are many businesses that have to close. If your building has one of these businesses as a sole tenant, you could face some very hard times. On the other hand, residential property is fairly resilient when it comes to the economy. The worst that may happen is that it takes an extra week or two to find a tenant or you may have to drop your asking rent by $5 or $10 per week.

High cost of entry

Buying commercial property is often much more expensive than buying residential property. CBD office or retail space is generally the most expensive space, due to its locality. Industrial property on the outskirts of the locality can also be expensive due to size of the property being purchased. Costs, however, can be minimised by purchasing smaller strata title premises.

Maintenance costs

Upgrading a residential property is relatively cheap. A paint job, new floor coverings, kitchen and bathroom can cost as little as $20,000. Refurbishing a commercial building, however, can be a very costly exercise. New air-conditioning, upgrading the building to meet new health and safety standards and refits can cost tens and sometimes hundreds of thousands of dollars. However, the costs are rarely borne by the owner.

Outgoings

One of the advantages of being an owner of commercial property is that the tenant usually pays most of the outgoings, such as council rates, insurance, repairs and maintenance. This means that most of the rent collected by the owner is able to be kept unlike the situation with residential property where the owner uses the rent money to pay for rates, taxes, maintenance and repairs.

All the details of who pays the outgoings, how much rent is owed, how often it is increased is all outlined in the lease.

The lease

This is the most important document in relation to commercial property. Unlike a residential lease which is commonly a standard document and about four pages long, commercial leases are often 50 to 60 pages in length, are not standard documents and generally need a solicitor to draw them up. Read the lease carefully and if you are unsure of anything, ask a legal professional to explain it to you.


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