Why more investors are turning to commercial property

Posted on 11/02/2020  

Property investors seeking more than the traditional passive investment of a residential asset are securing higher yields and positive cash flow with commercial property.

More investors are seeking an investment option which offered a “twist” or something extra, according to Terry Ryder of Hotspotting.

“And I think that commercial property certainly has that potential,” he said.

James Dawson of Commercial Investing Academy who runs courses on investing in the sector said it was an asset with the potential to outperform residential property.

He said with commercial property it was possible for an investor to create a passive income of anywhere between $70,000 and $100,000 a year, they just had to select the right property in the right location.

He believed one of the biggest benefits of investing in any property was that it could be highly leveraged.

Institutions would lend between 80 per cent or 90 per cent for a residential property, although the average for a commercial property was 65 per cent and sometimes up to 80 per cent.

Mr Dawson said many investing in residential property were keen on negative gearing, particularly those on higher incomes as it lowered their taxable income, but he preferred to invest in positively geared property.

“To my mind investing is a business and I don’t like businesses that lose or cost money and that is an important point,” he said.

“The sensible thing really is to pay off your loan and reduce your loan.”

This Mr Dawson said would allow you to invest in additional properties.

“I like commercial property because it has got better, higher yields, better cash flow and is genuinely able to be positively geared,” he said.

Also, tenants signed long-term leases from three to five to ten years and these had built in rent increases.

“Commercial property investment is driven by a very powerful document, the commercial lease, and rent increases, terms and conditions are all locked in via that document and it does favour the landlord much more than a residential lease does.”

His advice to commercial property investors was to aim to buy something that would be cash flow positive from day one.

“Secondly if you are able to buy a property that you have been able to identify what I call upsides, you will be able to manufacture some growth in that property and sometimes you could get perhaps five or ten years’ growth in a couple of years if you know what you are doing.”

He said a combination of a cash flow positive property with an upside was the ideal prospect.

Upsides included a zoning change, an opportunity to reconfigure into multiple tenancies or using excess land.

“I have seen people increase their net rent by $30,000 a year just from having a sign on their building on a main road,” Mr Dawson said.

The other benefit of investing in commercial property was the market was not as competitive as it was for residential property.

“Commercial investors make up around 10 per cent of the property investment market,” Mr Dawson said.

“So, you are not in a massive group of people running around competing for one sector of the property market.

“There is still competition, but you are putting yourself a little bit apart from the main group of investors in Australia.

“One of the misconceptions is that they (commercial properties) are far too expensive and the average investor just couldn’t even consider them or consider them early in their investment career.

“(But) You can buy a commercial property well below the price of a residential property, even below $100,000 for a small storage shed and rent it out.

“There certainly are some great properties around that are well below that normally starting price for residential.”

Like residential property it was still important to buy the right property in the right location and it often required more extensive due diligence.

“You really need to pay for quality advice particularly, when it comes to due diligence, you need to engage the right lawyer, town planner, things like that,” Mr Dawson said.

“It’s about buying the right property in the first place and taking your time doing the due diligence, you can really hone down and make sure this is going to be the deal for you and a safe bet.”

For more information: www.commercialinvesting.academy

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