Commercial properties are a hot commodity in 2022 as many new businesses seek to re-enter the physical business world after long stints of working from home. If you are considering investing in property, have you thought about commercial real estate as an option?
At Melbourne Finance, we have helped a few clients diversify their assets by investing in commercial properties.
What is considered a commercial property?
Commercial property is considered real estate that is used for business purposes. It can be anything from an office building to a factory or a restaurant. As a rule of thumb, commercial property is a dwelling where you can operate a business and is usually zoned in a commercial area.
Why should you buy a commercial property?
Steady and secure income
Commercial properties tend to be more cash flow positive and provide leasers with a steady and secure income. In 2021, CoreLogic reported that commercial property owners were on average making a 3.6% profit on their commercial lease but that it also wasn’t uncommon to see profit margins of up to 12%.
Structured rental increases
Commercial property leases have built-in rental increases which are usually 3-4% every fiscal year and this assists commercial property owners with the likes of inflation and increasing interest rates.
Longer lease periods and better tenants
Commercial property leases in Melbourne average between 3-10 years which provides owners with stability, certainty, and flexibility. These longer lease periods also attract better quality tenants as they are often looking for somewhere they can grow and establish their business over time.
In the past, there has been speculation about there being longer vacancy periods between tenants but with the thirst for business in Melbourne’s reopened economy, we are seeing shorter vacancies, longer lease periods and higher rental agreements.
Greater choice of properties
There is a range of commercial property options to choose from which allows you to diversify your investment portfolio. Properties that you may consider as a first-time investor include factory spaces, local offices or hospitality spaces with multiple areas that could be rented out to different tenants.
Commercial loans: common misconceptions
It’s a common myth that only business investors can purchase commercial property. Anyone can invest in this lucrative real estate and our team are here to help get you started. Often when we bring up the conversation of diversifying your assets, there are a couple of common misconceptions brought up, such as: ‘Don’t I have to be a business owner?’, or ‘Do I have to have a bigger deposit to afford that sort of loan?’
Here are some of the most common misconceptions around commercial property loans:
- Commercial property is only for business owners or commercial clients
- The rates are a lot higher for commercial property loans
- The maximum loan term is 15 years
- You need a 35% deposit
- Unable to purchase with a self-managed super fund
1. Commercial property is only for business owners or commercial clients
Commercial property loans are for everyone that can afford them. Typically businesses and business owners are more attracted to them as they have an additional way to source income but at Melbourne Finance, we have seen a growing trend of individuals looking to purchase commercial properties for investment purposes. As a best practice, if you are considering purchasing an investment property for commercial purposes, we recommend talking to your accountant about the best structure and way to purchase this property would be.
2. The rates are a lot higher for commercial property loans
This is a common belief and we’re happy to tell you it is not true. As the RBA cash rate is so low, most brokers will be able to offer an affordable fixed priced variable loan. Current variable rates start as low as 2.99%, which is one of the best rates we have seen in a long time, making it a great time to invest in commercial property.
3. The maximum loan term is 15 years
The truth of the matter is commercial properties can have loan terms as low as 15 years which attracts higher repayment rates and as a successful business, this might not be an issue. As a first-time commercial property investor, you may be able to negotiate the loan term to be up to 30 years which reduces your monthly repayments.
4. You need a 35% deposit
Like any loan term structure, your deposit is not set in stone. While it is preferable that potential commercial property owners have a deposit of 35% (plus stamp duty), you are able to invest in commercial property with as little as 20% (plus stamp duty). This makes it even easier for investors to enter the market and diversify their portfolios.
5. You are unable to purchase with an SMSF (self-managed super fund)
Not true, there are just different requirements to taking out a loan with a self-managed super fund. During the pandemic, we have seen an uptick of people using their self-managed super fund to purchase a commercial property and negatively gear their expenses, making it a cost-effective solution.
Things to consider when purchasing a commercial property
The location and the area
Just like residential property, the location of your commercial property matters. Outside of what suburb your commercial property should be in, potential investors should consider where the building is located and if it is in the public eye. Is it close to cafes, restaurants and specialty retail stores? What about childcare, schools and recreational facilities like parks? More importantly, how easy is it to get to both by car and by public transport? Is there sufficient parking? These considerations make it more attractive for the tenant and make the commercial property more valuable to the investor.
Another aspect to consider when looking at the location of the property is the growth of the local area and any relevant local government plans for the area that may impact the value or accessibility of your commercial property.
When looking for a good commercial property, you should look for attractive, modern and well-maintained properties. An attractive and well maintained building attracts reliable and desirable tenants who can go about their business without additional worries. A more modern building will likely have NBN set up and energy-efficient or sustainable solutions (such as skylights and solar panels). Other things to consider is how tenants may use the space and is there capacity for additional resources such as green spaces. Particularly if you are considering co-working environments, green spaces, huddle rooms and balconies make it easier to establish a micro-business community.
After considering the space and location of your commercial property, you next will need to consider who you want to lease out the space to. Is it a start up? A well-established finance company? A medical clinic? A coffee shop? By considering the tenants you seek, you can then market directly to those people.
Once you have found some potential candidates, do a thorough background check with the help of a property manager. This will give you confidence in them looking after the property.
Additional consideration: Multi-use leases
Something you may also consider when researching commercial properties is multi-use spaces. The most common type of multi-use space is your typical office space or factory building which can be set up in multiple different ways and cater to a variety of different businesses.
Get started with Melbourne Finance
Now is the time to invest in commercial property!
At Melbourne Finance, we have an expert team of commercial property finance specialists who can assist you in finding the best commercial property loan for your space. If you are looking to diversify your portfolio and potentially get into commercial property, give us a call for a confidential chat or contact us online.