Looking to venture into the world of commercial property investment? Investing in commercial properties can differ in select ways from residential property investments.
For this reason, it’s recommended that investors looking to diversify their portfolio with some commercial properties first engage with the unique considerations that need to be made both by commercial property owners and tenants alike, ranging from fitting the property for retail or industrial operations, as well as navigating long-term leases.
As the owner of a commercial property, you can imagine that your responsibilities can take on a different vein to the responsibilities of your commercial tenant. We’ve taken it upon ourselves to outline for you just what you’ll need to know in order to land your first commercial property investment.
Read on for a little overview of these four crucial elements of commercial property investment.
Understanding depreciation
Whilst depreciation of residential properties can be quite straightforward, calculating the depreciation of a commercial building can differ depending on which industry your commercial property is operating within. A retail storefront or a cafe will naturally generate a contrasting tax depreciation report when compared to an industrial warehouse or commercial office space.
Generally speaking, and regardless of what type of commercial building you own, your depreciation report will be made up of two primary figures: the depreciation of your plant and equipment and depreciation of capital allowances. Whilst the depreciation of plant and equipment is relatively straightforward, capital allowances can be trickier to navigate. You can use the ATO’s depreciation and capital allowances tool to help make these calculations, or consult your accountant or quantity surveyor in order to create a detailed depreciation schedule for your commercial property.
Navigating commercial property investment loans
Alongside claiming a tax deduction on the depreciation of your P&E and capital allowances, you can also claim back the interest accrued on your commercial property investment or CRE loan, if you’re looking to be an owner-occupier. Unlike traditional home loans, however, commercial property loans tend to have higher interest rates and a larger deposit is usually required as well, with 30% being the industry standard.
It’s imperative that you have a good understanding of your budget when it comes time to purchase your investment property, especially if you’re looking at commercial buildings. As interest rates are traditionally high for commercial properties, periods of vacancy can be quite a financial burden on commercial property owners, so you should absolutely factor the potential for untenanted periods into your preliminary budget as well.
Zoning and commercial tenants
Speaking of commercial tenants, there are two major elements in any commercial tenancy agreement that can impact which tenants are likely to be best suited to your property: the length of the lease, and the zoning details related to the property itself. For the former, it’s enough just to say that commercial leases tend to be over a year, in fact, they average at around 3-5 years, but it’s not unheard of for established businesses to sign commercial leases that are ten years or higher in length.
In regards to zoning laws, however, it goes without saying that a tenant who’s looking to establish a retail enterprise won’t be able to do so in a property that’s intended for industrial use, but there are in fact more subtleties to zoning than you may believe.
Zoning laws may also restrict potential tenants from being able to make changes to pre-existing elements of your commercial property. For this reason, it’s imperative that you engage with the zoning laws that pertain to any property you’re interested in prior to purchasing, as there is a chance your zoning laws may be too restrictive to allow for diversity in tenancy.
Commercial property management
If you’re wondering at this point how best to find suitable tenants for your commercial property, the answer is to secure yourself a reputable commercial property management team. We recommend going for a dedicated property management agency that has a region-specific understanding of your local council district as well as the zoning laws that pertain to your property.
Your commercial property management team will be able to secure and assess potential tenants for your commercial property as well as manage any technical or industrial requests that your tenant may have.
Takeaway
It’s rare for emerging property investors to turn their eyes towards investing in commercial real estate, but starting your portfolio off with a well-selected commercial investment may provide you with a strong foundation upon which you can build a lucrative career.
As is the case with residential property investments, you should absolutely take time to consult with your accountant to outline your plans for taxation prior to taking on ownership of any potential commercial investment.
