Most investors will understand that lack of diversification across their portfolio increases risk and introduces volatility. For many property investors in Australia however, the ongoing stability and continued growth of the property market feels very comfortable – in bricks and mortar, "I can see my asset", kind of way. One option that may make sense and reduce volatility for such investors is diversification into the commercial property market. Security of income from commercial property is generally higher than thanks to the binding nature and longer term leases comparative to residential and commercial tenant's financial covenants are often superior.
Commercial tenants are also often responsible for the majority of outgoing expenses whereas residential tenants are not, providing investors in commercial property with a higher percentage of rent received. However, as with residential investing, there are still risks and traps associated and investors need to ensure they fully understand what they are investing in if they are to succeed. Commercial property covers a range of options, from offices and retail spaces through to car parks and industrial properties such as warehouses and factories. There are a multitude of options, which if accessed at the right time and right price can produce large returns, however things in commercial work a little differently to residential.
The small yet impacting subtle differences explained:
For many investors, the long lease arrangements are a great benefit of investing in commercial property, as it gives them greater certainty of rental income for a longer period of time. However, you must remember that the leases on commercial properties are more susceptible to economic volatility and therefore at times it can be harder to secure a lessee on a commercial property that is designed for a specific purpose. As such, opting for a property with multi-use appeal may help you attract a broader range of tenants and secure the right people for the long-term.
The GST Factor
GST applies to commercial property purchases so you must be aware that when buying you will have to add 10% to the purchase price.
Unlike in residential property, the costs of maintenance, rates, and repairs on a commercial property are paid by the lessee. This means more of the rent you receive goes towards your profit. To ensure clarity of responsibility make sure you have this clearly stated in the lease agreement.
As far as mortgage options go, there are a wide variety of commercial property loans available and most work in much the same way as a residential home loan. As an investor, you can choose between a variety of rate options and loan functions just as with your residential property lending.
With South-East Queensland continuing to grow and expand at a rapid rate across a number of industries and continuing low-interest rates, maybe right now, is a great time to explore what a commercial property would look like in your portfolio…If you would like to find out your Commercial Lending power, contact the team today!
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