Real estate is a solid, long-term investment. It will typically provide a property investor with an income as well as capital growth.
Investing in commercial real estate has many benefits that most investors are not aware of and this is a property market first-time and experienced property investors should explore.
Investment opportunity at The Goon Eatery on Main Street Nar Nar Goon
Higher rental yields equal greater cash flow
Commercial properties tend to offer rental yields much higher than those offered by their residential counterparts. This means that many commercial investments are cash-flow positive.
Longer leases
While residential tenants rarely sign lease agreements for terms longer than one year, commercial property leases can stretch on for up to 15 years!
Whilst there is no standard lease term in commercial real estate you will likely find yourself in a scenario of 2 to 3-year commitments from your tenants at a time based on the asset you have on offer.
FOR SALE 426 Princes Highway, Narre Warren
Annual rent increases
It is mostly a commercially standard practice to incorporate fixed rental increases into leases.
This form of commercial lease negotiation typically ensures the asset grows in rental income on an annual basis, typically on the anniversary of the lease.
There are a number of methods of increase including:
- Fixed percentage
- CPI (consumer price index)
- Stepped increases
- market reviews
Most leases will incorporate a combination of the first 3 methods along with market reviews.
Tenant pays outgoings
Most commercial tenants sign what is known as ‘net leases’. This form of lease requires the tenant to pay for most, if not all, of a property’s outgoings.
This can include but is not limited to:
- Council rates
- Water rates
- Insurance(s)
- Owners corporation fees
- and in some instances the single holding component of land tax
Diversification
Investing in commercial real estate confers the benefits of diversification on investors who otherwise would have only invested in residential property.
Owning a combination of both commercial and residential real estate minimises an investor’s exposure to downturns in either market. There is no truer example of this than the market post-COVID, where a number of asset classes are built into the commercial umbrella with some continuing to perform strongly such as industrial and warehousing, while others such as offices and retail were more heavily impacted. We have seen this steady over the past 8-10 months.
A diversified portfolio is highly recommended to minimise the risk of any market that doesn’t perform as anticipated.
Tax-effective ownership structures
A number of entities can be used to buy commercial property:
- Company
- Individuals in partnership
- Trustees of discretionary trusts
- Self-managed super fund
You should seek advice from your accountant who will guide you on the most effective structure for any purchases you intend to make.
First National Commercial Neilson Partners see the benefit of commercial property investment and provide quality management services for all commercial and industrial assets.
