Many property investors feel comfortable investing in residential property as they directly or indirectly have experience in either renting or buying.
On the other hand, commercial property is an unknown experience to many investors and regarded as unapproachable. However, it is an increasingly valid investment option for buyers who have reasonable means and insights.
The following is some points to consider.
Commercial property comes in three main forms, office, retail and industrial.
Residential property investment is relatively low risk and as a consequence, low return. Commercial property has a higher return, but this comes at a higher risk. For example, a flat or unit will average a return of 4-5%, whereas industrial property, such as a warehouse, may average 7-8%.
The higher risk comes in the form of higher vacancy rates. For example, a warehouse owner could take a while to find a new tenant and sometimes more than a year. Conversely, finding a new tenant for your residential property might only take weeks.
In addition, if the sole tenant of your commercial property has to close due to tough economic conditions, you could face some hard times. On the other hand, residential property can be resilient when it comes to economic factors over the long term.
Length of Leases
Residential leases tend to be for 6 or 12 months. However, commercial property leases are generally for a much longer period of time. It is common to have leases that are for an initial five-year period, with the option to renew for another five years.
Quality of Tenant
The tenant is obviously a crucial part of your property investment. In commercial property, a government or large corporate tenant is considered a ‘blue chip’ tenant. They are likely to rent your property for a long period of time and are unlikely to default on the rent.
High Cost of Entry
Buying commercial property is often much more expensive than buying residential property. CBD office or retail space is generally the most expensive space, due to its locality. Industrial property on the outskirts of the city can also be expensive due to size of the property being purchased. Costs, however, can minimised by purchasing smaller strata title premises.
Upgrading a residential property is relatively cheap. Refurbishing a commercial building, however, can be costly due to the size of the property and location.
New air-conditioning, upgrading the building to meet new health and safety standards and refits may cost a lot. However, the costs are rarely borne by the owner.
One of the advantages of being an owner of commercial property is that the tenant usually pays most of the outgoings, such as council rates, insurance, repairs and maintenance.
This means that most of the rent collected by the owner is able to be kept unlike the situation with residential property where the owner uses the rent money to pay for rates, taxes, maintenance and repairs.
All the details of who pays the outgoings, how much rent is owed and how often it is increased should be outlined in the lease.
This is the most important document in relation to commercial property. Unlike a residential lease, which is commonly a standard document and about four pages long, commercial leases are often 50 to 60 pages in length, are not standard documents and generally need a solicitor to prepare.
The writer, recently, was mandated to source a reasonable income producing multi-million dollar commercial property and successfully managed the purchasing process, including conducting a thorough Due Diligence on behalf of a client. The client was delighted with the legal and non-legal services provided and consequently, there will be another acquisition for the same client in due course.
If you are interested in or considering investing in Commercial property, we are more than happy to talk to you. Expert advice, satisfied clients and another deal!!!
Tony Kim is in our commercial & property law team. He was admitted in 2004 and practised law in various environments – rural, urban, domestic and international – which enable him to provide practical and result oriented advice. Tony has a keen interest in the area of property, especially property developments – small and large. He has been involved in a number of projects as well as his own property ventures, and knows the A-Z about this area. Tony is fluent in Korean and has a NAATI accredited professional translator qualification. Should you require any assistance in commercial and property law, contact our team at Stephens & Tozer.
5 February 2018