Investing in commercial property
The commercial property market is made up of a wide variety of submarkets including retail (shops and shopping centres), office space and industrial properties like warehouses. It can be easy to assume these types of properties are beyond your budget, but they can be affordable depending on the size, location and type of property.
Commercial property investment 101
When you invest in commercial property, expect to pay the same upfront expenses like stamp duty and legal fees that also apply to a residential place. In addition, goods and services tax (GST) is levied on commercial property. This adds another 10% to the purchase price, and while you can usually claim the cost back as an input tax credit (you’ll need to register for GST with the Tax Office to do this), it’s something you should allow for in your buying budget.
On an ongoing basis, commercial property can offer some very attractive features. Leases are usually much longer than for residential property, often spanning five or more years. And as the tenant (or lessee), rather than the landlord, typically pays for some of the regular costs like rates and insurance, investors have the potential to pocket higher rental yields than with residential property.
Residential vs commercial property investment
Nonetheless, commercial property is generally regarded as a higher risk investment than residential property. That’s because commercial property can experience longer vacancy periods. People always need somewhere to live, but demand for commercial property can often be linked to the state of the economy.
A downturn in the economy can see business confidence fall, potentially leading to the closure of some businesses, which can flow through to demand for commercial properties.
The location factors that make a successful investment also differ between commercial and residential property. Businesses might need access to transport links, a nearby workforce and proximity to other businesses that can meet their supply needs.
Financing a commercial property can work differently too. Investment loans for commercial property often share similar features to residential mortgages, like a choice of fixed or variable rates, and the option to choose between principal plus interest and interest-only repayments. But you may be asked to provide a larger deposit – often around 30% of the property’s value, though in some cases, the lender may offer more favourable terms if you can provide a residential property as security.
One of the golden rules of investing is always to invest in something you understand. That way you can weigh up the risks and rewards and make an informed decision. If commercial property holds appeal for you, it’s wise to do plenty of research on the local market, vacancy rates and even council development plans, all of which could impact the success of your investment.
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- Chapter One : Things to consider before investing in property
- Chapter Two : Determining where to invest
- Chapter Three : Investment properties by dwelling types
- Chapter Four : Finance for your investment property purchase
- Chapter Five : How to invest in property
- Chapter Six : Adding value to your investment property
- Chapter Seven : Positive and negative gearing
- Chapter Eight : Getting your loan
- Chapter Nine : Selling your investment property