Your Guide to Commercial Property Investment

Commercial Property Investment

If you’re looking to invest in real estate, commercial properties present plenty of opportunities. However, you need to consider the risks and market drivers. This commercial property investment guide will help you.

You must think about more than the property investment basics when investing in commercial real estate. There are many complex market issues at work, which means you take on more risk.

Understanding these issues will play a role in the success of your investment in real estate. Commercial properties come in all shapes and sizes, which you must account for. This commercial property guide will equip you with the tools you need to succeed.

The Market Drivers

Several drivers affect the state of the commercial real estate market. You must understand what these drivers are before you can invest successfully. They include the following:

The Risks

There are also several risk factors to consider when you invest in commercial property. Here are some of the most important:

The Lease

A poorly-constructed lease could lead to the failure of your commercial investment. These are the factors to consider when creating your leases:

What Else Should You Consider?

Depreciation CalculatorFurther to this, you need to arrange proper financing for your purchase. Many residential lenders can’t help you with commercial properties. As a result, you may have to locate a specialty lender. Furthermore, you may not be able to borrow more than 70% of the property’s value.

You’ll also deal with a commercial agent, rather than a real estate agent. These professionals specialise in attracting the right businesses to your property. They’ll also help you to create attractive deals for potential tenants.

The Final Word

As you can see, commercial investment is a complex subject. This commercial property guide will equip you with the tools you need to succeed.

The team at Washington Brown can also help you to claim depreciation on your commercial property. Contact us today to speak to a Quantity Surveyor.

Best Reasons to Invest in Commercial Property

Invest in Commercial Property

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

Depreciation CalculatorPeople 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

Depreciation Quote ScheduleInflation 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.

Commercial and Residential Property

So how does commercial property really stack up against residential in relation to depreciation?

While we have covered the differences between the two, there are also some similarities.

For example, the higher the quality of the commercial property the higher the depreciation. And the taller the building in commercial property, the higher the depreciation allowance. This is the same for residential property. Also, similar to residential property, the newer the building, the higher the depreciation allowance will be.

Let’s now crunch some numbers, using the Washington Brown depreciation calculator.

 

 

 

 

 

Note, also, that you will get more depreciation on a commercial suite than a factory unit or industrial suit). This is because a factory unit does not have as much plant and equipment. It is nearly all made up of concrete and steel.

In short, if you are the tenant in a commercial property, and think now might be a good time to become the owner-occupier, don’t forget to claim those tax depreciation allowances available to you as a landlord.

Or if you’re an investor, don’t exclude commercial property as an option. The depreciation is still beneficial as yields can be higher.

Let me share with you two projects we’ve worked on across various sectors. Including commercial, hospitality, retail and office/warehouse to illustrate the depreciation benefits for different investors.

CASE STUDY: Lend Lease

When I started way back when, never in my wildest dreams did I think I would be preparing reports for a multi-national company like Lend Lease. But I’m proud to say, over the years we have prepared many reports for them. From multi-million dollar shopping centres in Victoria and New South Wales, to factories in Queensland, and retail warehouses in New Zealand. Lend Lease likes Depreciation Quote Schedulethat we go the extra mile.

The key to preparing depreciation reports on these types of commercial and industrial properties lies in the research.

For example, Lend Lease purchased a 20,000 square metre shopping centre in Port Macquarie. The site had already undergone multiple upgrades over various years. One approach would have been to visit the site and make an estimation based upon any drawings we might have been provided with, inspect the site and discuss any changes that may have occurred with the building manager. But I always find that you need more than that.

With large projects such as a commercial shopping centre, you should always contact the council and sift through the endless archival documentation they have. This can sometimes take a whole day. There can literally be hundreds of files to sift through as each time a new tenant moves in and out, council generally has records of that move. Every time the previous building owner made changes to the building, council will have recorded the event. The advantage of going to council is that you ascertain when and what type of upgrades were completed. Sometimes the information even includes the estimated cost of the upgrades and plans of the work that occurred. This builds up a great case to go back to the client and say, “Look at all this extra stuff we discovered you can claim, and here’s how we can prove it.”Lend Lease liked that.

commercial and residential property

CASE STUDY: Ford Factory

When I first started preparing depreciation reports, I initially focused on residential investment property. Not because the reports are that different, we just hadn’t been engaged to prepare reports for commercial property. So when one of my mentors, the distinguished quantity surveyor Jim Ford, offered me the opportunity to work with him on the depreciation report of a Ford factory in Queensland, I jumped at the chance.

Off I flew to Jim’s office in Brisbane and started work on this project. I had never been to another quantity surveyors’ office before and I have to admit I was nervous.

I sunk my teeth in. The more I researched the part of the Tax Act relating to the manufacturing industry, the more areas I found where we could save our client money.

Remember, this was early on in the game. There were very few quantity surveyors specialising in this area. I discovered a little known part of the Tax Act that allowed this type of factory to claim building allowance at a rate of 4% per annum in comparison to the standard 2.5% per annum. You may think 1.5% doesn’t sound like a lot, but on a $10 million construction cost – that’s an extra $150,000 the client could write off every year.

Both Fords were very pleased.

Commercial Space Deductions

claiming commercial deductions

Make Sure You Claim All Depreciation on Your Commercial Real Estate

If you’re thinking about buying commercial real estate in Melbourne, you need to prepare yourself. Many people fail to claim the commercial tax deductions in Australia that are due to them. This results in thousands of lost dollars.

You can claim for all sorts of things on your commercial real estate property. For example, you can claim deductions for the wear and tear of your fittings, furniture, and the structure itself. In fact, making the right deductions at the right time can affect cash flow. You can change a negatively geared property into one that enjoys a good cash flow.

So now you’re probably wondering how to maximise depreciation on your commercial investment property in Australia. Our guide will show you how.

Get the Ownership Structure Right

How you buy your commercial property is just as important as the type of property you buy. You need to have the right structure in place if you’re going to claim the maximum depreciation.

For example, you can increase your deductions if you buy the property using a trust. The same is true if you buy with your self-managed superannuation fund (SMSF). In both cases, you can split your deductions. You can make claims on the building as a standalone entity. Furthermore, you can also claim on any tenancy assets. However, you must operate a business in the property to do this.Depreciation Quote Schedule

Furthermore, you can claim for any capital works you undertake during your ownership. These can include extensions and many other general improvements. Finally, if you occupy the building as a business owner, you can also claim depreciation for any fixtures or fittings. Again, you must use these as part of your business operations.

Maintain Your Records

It should go without saying that it’s vital that you maintain accurate records if you want to claim commercial tax deductions in Australia. However, a remarkable number of people don’t do this.

Document every expenditure that relates to the building. These include both the immediate and ongoing costs. Furthermore, you should add day-to-day expenditure to the list. Keep anything that relates to a financial transaction involving your building. These records can help you to claim more.

Use a Quantity Surveyor

Every commercial property investor should employ the services of a quantity surveyor. These professionals can help you to create depreciation schedules. A good schedule ensures you can claim as much as possible on your property.

A quantity surveyor will carry out regular inspections of your property. These help to determine what deductions you can make each year. They’re ideal for long-term planning as well. A good depreciation schedule will lay out how to claim deductions for the next 40 years.

Furthermore, quantity surveyors understand how to maximise your depreciation based on your timeline. You may only intend to invest in the property for a short period of time. That’s okay. A good surveyor will take this into account, just like they would for a long-term investment.

It’s likely your surveyor will recommend the diminishing value method if you’re a short-term investor. This assumes the value of your assets depreciates most during their early years. As a result, you can claim for more depreciation in the short-term.

Depreciation CalculatorLong-term investors may prefer the prime cost method. This assumes uniform depreciation over the lifetime of your assets. As a result, you claim the same amount each year, rather than the bulk in the early years.

Which method works best for you will depend on the time commitment you make to your commercial real estate investment. A good quantity surveyor can talk you through the different timelines.

Take Advantage of the First Year

Your first year of ownership is vital. It’s when you will set up the structure through which you will manage your commercial property for the years that follow. Getting things wrong during the first year makes things more difficult than they need to be later on.

However, you also need to take depreciation into account from the moment you invest in the property. This is where your quantity surveyor can help again. You may be able to depreciate some of your assets faster with a commercial property than you would a residential one. Your surveyor will point this out to you. As a result, you can make more upfront savings using depreciation, which means you have more cash to use during that difficult first year.

The Final Word

Maximising your depreciation from a commercial property isn’t easy, but you can do it. Use the services of a reputable quantity surveyor and don’t put anything off.

Remember that you can make claims for depreciation from the moment you invest in the property. Don’t lose money because you were slow on the uptake.