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Thinking about investing in commercial property? Read our tips and learn about the common pitfalls when buying commercial property for investment.
Commercial property leases usually run for longer periods than residential properties – several years rather than 6 to 12 months. This gives you greater certainty of rental income, plus rents tend to be reviewed annually. However, vacancy periods can be longer.
Goods and services tax (GST) applies when you buy a commercial property, so allow an extra 10% on the property’s purchase price. As an investor, you can claim the GST back as an ‘input tax credit’ against GST charged on the property’s rent.
Unlike residential property, the costs of maintenance, rates and repairs on a commercial property are paid by the lessee – not the landlord. This means more of the rent you receive goes towards your profit. However, be sure your commercial lease spells out who is responsible for the property’s ongoing expenses.
It can be harder to secure a lessee on a property that’s designed for a specific purpose. Opting for a property with multi-use appeal can help you attract a broader range of tenants.
As with any property investment, location plays a big role in the success of commercial property. Look for an area offering good transport links, a nearby pool of workers, and surrounding businesses that could offer support to lessees.
Commercial property is usually regarded as a higher risk asset than residential property, and reflecting this, the rental return is usually higher. However, the decision between investing in residential or commercial property is a personal choice that will depend on the investor’s financial circumstances, goals and willingness to take on this higher risk investment.
There are a wide variety of commercial property loans available and most work in much the same way as a residential home loan. As an investor you can choose from a variable rate, fixed rate, combination between variable and fixed rate, principal and interest or interest-only loan, often with useful features available like fee-free additional repayments or an offset facility.
Alternatively, you may prefer a line of credit commercial mortgage. This gives you funding up to a predetermined limit and you only pay interest on the funds drawn down. Your Mortgage Choice broker can explain how each of these loan options works.
You usually need a larger deposit (at least 30% of the purchase price) to secure approval for a commercial mortgage. If you are a home owner, offering your home as collateral (security) for the loan can be a way of securing a lower rate loan.
Your Mortgage Choice broker can help you select a commercial property loan suited to your needs and budget, giving you a clear idea of how much you can afford to borrow and the regular loan repayments.