Owning commercial property may be a lot more achievable (and less stressful) than most people think. To arm yourself with knowledge to make better buying decisions, read on.

First of all, a commercial property is one which is used for retail, office, warehousing, or industrial purposes, as well as multi-unit apartment buildings, or social infrastructure like hospitals.

Let’s look at:

#1 – How commercial property investment differs from residential property investment.
#2 – The potential benefits of buying commercial property.
#3 – The potential pitfalls of buying commercial property.
What you must evaluate before buying commercial property:
#4 – Intrinsic factors
#5 – Extrinsic factors
#6 – Purchase options

#1 How is commercial property investment different from residential property investment?

The approach for investing in commercial property is different from residential property because:

  • The demand and supply markets are different.
  • The main use of commercial property is to run businesses, while residential property is usually used for living in, and this comes with its own advantages and disadvantages.
  • Commercial lease duration is usually more than a year long with annual reviews, while residential leases tend to be shorter.

#2 – What are the potential benefits of buying commercial property?

The benefits of commercial property compared to residential property are:

Financial Pros

  • Provides higher rental yields of 5% to 12% while residential property attracts 3% to 4%.
  • Can create higher cash flow.
  • Provides more rental income stability with longer leases.
  • Usually provides a reliable annual rental increase of 3% to 4%.
  • Provides more tax benefits through depreciation tax deductions.
  • Fractional property investment companies like BrickX, DomaCom and CoVESTA can open up new opportunities for owning commercial property to people with lower budgets than a typical commercial investor.

Operational Pros

  • Are better maintained by commercial tenants to make their business look good, in alignment with landlord interests. 
  • Have lower outgoings like council rates, utilities and strata fees as these are shared with tenants.
  • Fosters more professional business-to-business relationships between landlord and tenant.
  • Are easier to maintain than residential properties as businesses usually shut at night, and a commercial property is more likely to have an alarm monitoring service provider who manages any security breaches at night.

#3 – What are the potential pitfalls of buying commercial property?

Compared to residential property, commercial property may come with pitfalls.

Financial Cons

  • Requires more initial capital and capital expenditures, although fractional commercial property investment opportunities may lower the barriers to entry.
  • Poses a higher financial risk, especially if it is a single-tenant, single-use property.
  • Is more exposed to economic fluctuations especially times of low demand. Fluctuations due to changing demographics, interest rates, and population growth can affect the value of commercial property.
  • Attracts higher deposits (minimum 30%), interest rates and administrative fees for loans.

Operational Cons

  • Incurs more lease administration and maintenance expertise, time and costs (including GST), especially for multi-tenant properties or complex lease terms.
  • Poses higher safety risks as a lot more people use a commercial property than a residential one.
  • May have longer vacancy periods when landlords need to cover all outgoings, or lower rental interest or tenant satisfaction during property upgrades.

What to evaluate before buying commercial property?

  • Intrinsic factors about the commercial property
  • Extrinsic factors outside the scope of the property
  • Purchase methods

#4 – Intrinsic factors

Several characteristics of the property can affect its value. For example:

  • Yield. Calculate the estimated yield of the property. That is the annual income you can get from it, minus the purchase and running costs. The higher the demand, the better the yield. The yield can be affected by economic fluctuations.
  • State. Pay a site visit to check the property’s visibility, building accessibility, what businesses are permitted in that property, amenities including parking and end-of-trip facilities, as well as its heating, ventilation and air conditioning (HVAC) systems. 
  • Lease term. How long can you rent it out; the longer the lease term, the more steady your rental income stream.

#5 – Extrinsic factors

Consider surrounding factors that affect the value and yield of the property like these examples:

  • Location. Check where the property is located, what businesses or other buildings are around it. How easy is access to roads and public transport? Are there similar properties nearby?
  • Zoning. What are the current and future zoning? What’s the population and demographics past, present and future?

#6 – Purchase options

There are various ways to pay for a commercial property:

  • Direct purchase. Using your savings to buy all of a property is of course the least complicated method. You may also choose to draw from your self-managed super fund (SMSF). This may not be the best way for some investors as it takes time to sell your investment to get your money back.
  • Property investment scheme. Several investors pool their funds to buy a commercial property managed by a fund manager. This can be funded from savings or SMSF.
  • Loan. Financing requirements for commercial properties are more complex than residential ones, so first make sure you have a good credit score. Ask a property appraiser to determine the building’s value. Work out your deposit and payment schedules, find out what documents you need to produce for the loan, and get advice from relevant professionals on contract review, mortgage strategies and tax strategies.
  • Trusts. Australian real estate investment trusts or A-REITs are property portfolios listed on the Australian share market with shared ownership. Liquidity comes from selling shares or reinvesting dividends from capital growth or rental income.
  • Fractional property investment. Some banks provide fractional property mortgages, or they could be funded by savings or SMSF.

How KDD Conveyancing helps you succeed

Take advantage of our 30+ years’ experience in the Perth property settlement market to avoid potential costly pitfalls.

  • We suggest that before you enter into any contract to purchase a commercial property, please consult your accountant and/or financial advisor. KDD cannot provide financial advice, and the information in the blog is for general education only.
  • Before you sign any contracts for buying commercial property, we can provide expert conveyancing advice by reviewing your contract (which are often lengthy) and explaining the impact that each section has on you as the buyer. This helps you make an educated and informed decision on whether to sign the contract.

Let our experienced property conveyancing practitioners at KDD Conveyancing Perth assist you. Our friendly and knowledgeable conveyancers know the settlement process well in Western Australia. Contact KDD on (08) 9296 8717 or by email today.

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