Commercial Property Decisions
You have a choice to make when investing in real estate. Commercial properties may be more difficult to manage than residential homes. However, there are plenty of reasons why you should invest in commercial property.
So, you’ve decided to invest in real estate. Commercial properties may not seem like the best choice. They come with more complications than residential properties. This means you need to know more than the property investment basics. However, many argue that the benefits of commercial property outweigh the complications.
When investing in real estate, commercial properties may offer more security. However, there are plenty of other reasons for why you should consider them as an option.
Reason #1 – Stronger Yields
What rental yield should you aim for? This is a question that plagues many property investment novices.
Residential properties tend to offer lower yields. According to CoreLogic RP Data, you’ll achieve an average yield of 3.6% on a city-based residential property.
You can expect to earn anywhere between 8% and 12% yield on a commercial property. As a result, commercial real estate will often generate more income than a residential property.
Reason #2 – A More Secure Income
People often focus on risk when discussing commercial property. In particular, they concentrate on the issue of attracting tenants. You need to consider the needs of people in the local area. How your property caters to businesses relevant to those needs is also a factor. If your property doesn’t fit the bill, you’ll find it difficult to attract commercial tenants.
However, many ignore income security. With a residential property, you may find that a tenant leaves after six months. This means you have to go through the process of filling the vacancy again.
By contrast, a commercial lease lasts between three and 10 years. This means your property generates more income for a longer period of time. As a result, you can feel more secure in your income, and as a result make other investment decisions with more confidence.
Reason #3 – Rate Payments
You’ll often take on the responsibility of paying various rates with a residential property. In addition to council and water rates, you may also have to cover body corporate fees.
This isn’t an issue with commercial real estate. Commercial tenants will handle the rate payments for you. As a result, you spend less on the property each month.
Reason #4 – The Tax Benefits
Though you’ll enjoy various tax benefits with residential real estate, commercial properties have even more to offer.
Beyond capital works depreciation, you can also claim depreciation on plant equipment. This includes depreciation for air conditioning units and light fixtures. You can even claim for things like the carpet.
That’s not all. Commercial properties also offer strong building allowances, which you can use to reduce the amount of tax that you pay.
Reason #5 – A Lower Initial Cost
Commercial properties often cost less than residential properties. This is despite the potential they have to generate higher yields. For example, you may spend $100,000 on a commercial car park. By contrast, a small residential apartment could cost as much as $500,000.
As a result, you need to raise less money to get on the commercial investment ladder. Let’s assume you can get a loan worth 80% of the property’s value. That means you only need $20,000 to place a deposit on the commercial car park. The apartment deposit would cost $100,000.
Reason #6 – Protection Against Inflation
Inflation can have a massive effect on your property investments. If inflation rises, tenants have less money. With a residential investment, this leads to higher vacancy rates. You’ll also struggle to raise rents because tenants can’t afford higher prices.
You’ll deal with similar struggles when investing in commercial real estate. However, commercial yields tend to outstrip inflation. As a result, you have more protection when inflation becomes an issue. Even if you can’t raise your rents, a commercial property should still generate an income.
Reason #7 – You Can Rent and Own
Let’s assume you’re a business owner. You may want to buy an office, but that won’t make any money for your company. However, leasing means that your money goes straight into the pocket of an investor. What can you do?
With commercial property, you can own the property you rent. You can make the purchase itself using a self-managed superannuation fund (SMSF). Your business then moves into the property, during which time it pays rent into the SMSF. As a result, you essentially pay yourself, rather than a landlord, for use of the property.
The Final Word
There are many reasons to invest in commercial property. However, you need a high level of expertise to make the most of your investment.
Washington Brown can help with any depreciation concerns you have. Contact us today to find out how our Quantity Surveyors can help you to get more out of your commercial property investment.
About Tyron Hyde
Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.
Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.