Investing in commercial property can benefit not only yourself but also future generations. However, many Australians prefer to invest in residential properties, believing them to be less risky than commercial properties.
This is not always the case as commercial properties often yield higher returns than residential properties, generating better returns. So, there is a strong argument for choosing commercial properties over residential properties.
In this article, let’s explore the finer details of commercial property investment and how you can increase your returns.
Understanding outgoings
Outgoings are all the costs you might incur from owning a commercial property—generally, the expenses related to the maintenance and running of the commercial property.
The biggest difference about commercial properties when compared to residential properties is that the tenant pays all of the outgoings and everything is traded on a net return.
Whether your tenant pays $40,000 rent plus the outgoings or they pay $50,000 with outgoing costs included, everything is sold based on the net rent basis.
The impact of land taxes
Depending on the state you live or invest in, land tax rules will vary.
Queensland, for example, has different thresholds for different entities and you will need to pay taxes if the total taxable value of your property is more than $350,000 after exemptions. In Melbourne, most tenants will end up paying land tax because it’s important and you won’t be able to avoid it. The Australian Capital Territory (ACT), on the other hand, doesn’t levy land tax on commercial properties.
So, you need to consider the land tax requirement in your preferred state before investing in commercial property.
Securing positive cashflow
Investing in commercial property is all about generating positive cashflow. So, you need to understand your expenses, such as management fees, insurance, and land tax, which are usually paid for by your tenants, to understand how to invest in cashflow-positive properties.
The general rule of thumb is that, to secure positive cashflow, you need to recover all of the above-mentioned expenses and the mortgage from the rent and have additional money left over.
For example, let’s say you’re buying a $1 million property with a net rent of $60,000 and you refinance your property for 30%-40% of the total amount needed and approach a bank for a loan with a Loan-to-Value Ratio of 65%-80% on the commercial property investment. Depending on the blended interest rate, the 6% return the property will generate may only result in a neutral hold and not generate any real cashflow.
If you’re thinking of buying a 6% commercial property right now, Melbourne, Adelaide, ACT, and Brisbane are all great options. But keep in mind that it’s not going to generate any positive cashflow for you.
To achieve higher yields of 6.5% to 8%, consider investing in regional areas of Brisbane and Melbourne, as well as larger towns such as Donga, Wagga, Mackay, Townsville, and Rockhampton.
In ACT, fringe areas in South Australia offer around 6.5% yield. But if you want to secure about 7% or more, consider regional Queensland and regional New South Wales, or even Melbourne.
That’s not all. If you’re borrowing 100% at a blended rate of 6%, anything above 6% becomes positive cashflow that goes straight into your pocket. This is after all the outgoing and mortgage has been taken out, giving you immediate cashflow from the day you settle.
The potential for cashflow in regional properties
When investing in regional property, you can expect to clear a 7% yield, which is around $70,000 if your property value is $1 million. With a blended rate of 6%, which is around $60,000, you’ll clear $10,000. This means that you’re clearing about $10,000 for every million you invest in the property.
In single or dual-economy regional areas, you could even get 8% yields and generate $20,000. And if the interest rate goes down, you’re going to generate significant cashflow.
For example, if the interest rate drops by 0.5% from 6% to 5.5%, you’ll clear an extra $5000. Instead of clearing $10,000, you’ll clear $15,000 in positive cashflow.
Even in metro areas with a 6% yield, you can get an extra $5000 if the interest rate goes down. This is why many people are investing in commercial property right now. Even in high interest rate environments, investors know that cashflow can be multiplied in the future as interest rates change.
Why you need a buyer’s agent
When you’re starting your commercial property investment journey, purchasing a tenanted commercial property on a lease is one of the best things you can do as it provides you with a steady stream of rental income from day one.
That said, finding such properties is always a challenge as they are often traded for lower yields, meaning the return on your investment may not be as high as you would like. Buyer’s agents can help you overcome this challenge.
They will have access to off-market deals and can help you find properties that meet your investment criteria and generate positive cashflow. They can also negotiate favourable terms on your behalf, potentially saving you time and money. In addition, a buyer’s agent can provide you with valuable insights and strategies to help you make informed decisions about your investment.
Switch to commercial property investment
Compared to residential property investment, commercial property investment has the potential to give you higher returns.
So, suppose you’re planning to build a positive cashflow property portfolio. In that case, commercial properties can give you the best chance of doing that—especially if you are working with an experienced buyer’s agency that will keep your best interests in mind when helping you select the right investment property.