Property has been my bang for over 25 years and while originally, I was all about building and investing in Residential properties, I started to dab my toe into commercial about 15 years ago, why? There are a lot more pro’s when it comes to commercial properties like longer term leases, strong returns, tax benefits and the tenants pay for the outgoings relating to that property, ie- rates, water, maintenance and land tax.
It really comes down to what you want to achieve when you invest in property whether it’s commercial or residential. Some investors look for diversity others look for positive cash flow.
I am all about the yield and the ROI (return on investment), for me anything that is at 8% or greater is worth my attention. As I mentioned above, there are a lot of pro’s when it comes to commercial properties such as strong returns which is a combination of capital gain and income. Stability of the income as your tenants are signing 3 or 5 year leases opposed to residential leases which are traditionally 6 or 12 month leases.
We live in a highly taxed country and as a business, I look for ventures that have great tax benefits. Commercial provide just that with generous benefits and substantial depreciation allowances.
But with any good pro’s and con’s mapping, there is unfortunately a con column. If you take the plunge into investing in commercial, do so with longevity in sight. Buying commercial is like giving birth to a child, you have to care and look after it for many, many years to come. One of the disadvantages with commercial is that it can take months and months and in some economic climates, years to sell or lease. Unlike our residential friend that could be snapped up within days or weeks of being listed for sale.
Knowledge is power in any industry and unfortunately there is very little information or resources for people interested in commercial real estate. This is where you need to have a good team of people behind you to guide you in the right direction.
My team consists of:
A Solicitor - they not only recognise the numbers but more importantly help out with understanding any leases or legal issues.
An Accountant - they help with the numbers, the appropriate purchasing entity and tax planning
A Financial Advisor - they help with setting my financial goals and help guide me and keep me focused on those goals.
A Finance Broker - they are essential in finding the best funding opportunity for each purchase. I never go directly to a banking institution as they limit your financial choices.
Keep educating yourself and keep asking loads of questions.
So, you are ready to purchase your first commercial property? Here are my tips on building wealth through commercial properties.
- Due diligence – I said it before, knowledge is power and understanding the commercial market is going to be the key to your success.
- Buy in a good location – Look into high growth areas with good exposure and with potential to add value. Also check out accessibility to public transport and car parking.
- Purchase a leased property – In this current climate, there are a lot of businesses that have suffered the Covid blues. To mitigate your own loss, look at purchasing a property where a tenant is already in place and is on a long-term lease agreement.
- Purchase with Potential – Believe it or not, there are a lot of underdeveloped properties out there so look for undercapitalised properties. Older buildings may not be using all the land which means you could expand. Also check the zoning of the land as it may allow you to increase the opportunities of that space.
- Pay it off – Paying down the debt against the building should be factored into your financial strategy. The faster you pay it off, the more money in your pocket and more equity you have in case you want to buy more in the future.
Investing in property can be extremely rewarding, I prefer to invest in property over and any other types of investment. To me, Property is king and done right, you can retire and live off the rental returns for the rest of your life. It’s a bit like that spray you put on your outdoor tiles; Set and Forget. That to me is commercial, set it up and then you can forget about it (to a degree) and enjoy the rewards of living a positive cash flow life.
The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions.