There are more articles on housing investment in Australia, but knowledge of non-residential (commercial) property is relatively unknown to the average property investor. This article is a beginner's guide to commercial (non-residential) real estate investment.
Most Australian property investors feel comfortable investing in housing because they are familiar with this type of property, be it a detached house, townhouse, or apartment. Many people have had the experience of renting and have learned something about this type of housing investment from the tenant's perspective.
On the other hand, the operation of commercial property in Australia is not well known. Most people are not familiar with the terms of commercial leases, the application of GST, which party is responsible for the expenditure of the property, etc. if they are not dealing with the day-to-day running of a commercial building.
There are three main forms of commercial property, namely office buildings, shops, and industrial premises. Investing in commercial real estate is completely different from residential property.
Australian commercial property has a higher rate of return, but also higher risk.
Return on Investment
Housing investments have relatively low risk and therefore low returns. Commercial real estate has a higher rate of return, but also a higher risk. For example, an average return on an apartment or suite is 5%, while an industrial property such as a warehouse might average 8%.
Commercial real estate investments are riskier because of higher vacancy rates. Taking the warehouse as an example, it can take a while to find a new tenant for the warehouse, a process that can take months or more than a year. In contrast, residential housing typically takes only a week or two to find a new tenant.
Residential housing is often rented for a period of 6 or 12 months. However, commercial properties typically have a longer lease term. It is not uncommon for a lease to start with a five-year term with an option to renew for another five years.
Tenants are clearly an important part of property investment. In commercial property, government or large corporations are considered superior tenants, who are likely to rent the property for a long time and are less likely to default on rent.
As with any form of property investment, the impact of the economy on the financial situation is critical. Consumer and business confidence are currently at an all-time low and many businesses have had to close. If the sole tenant of your property is, unfortunately, one of these businesses, you could be put in a very tough time. On the other hand, there is considerable resilience in the performance of residential housing affected by economic performance. The worst may be an extra week or two to find a new tenant or perhaps a $5 or $10 reduction in weekly rent.
High Entry Cost
Commercial property tends to be much more expensive than residential housing. Downtown office buildings or retail stores are usually the most expensive due to their prime location, and industrial premises on the outskirts can also be expensive depending on size. However, the cost can be minimized by hiring a less expensive property management company.
Residential housing is relatively inexpensive to renovate. Paint jobs, new flooring, kitchen, and bathroom renovations cost only A$20,000 to A$30,000. However, a commercial building can be very expensive to renovate. Installing new air conditioning, building renovations to meet new health and safety standards can sometimes cost tens to hundreds of thousands of dollars. However, the cost is rarely borne by the landlord.
One of the advantages of being a commercial property owner is that the tenant usually covers most of the expenses such as municipal fees, insurance, repairs, and maintenance. Instead, unlike residential housing, the landlord pays for municipal fees, taxes, maintenance, repairs, etc.
All the details of who pays for the expenses, the amount of rent owed, the frequency of rent adjustments, etc. are listed in the lease agreement.
A lease is the most important document in commercial real estate. This is unlike a housing lease, which is usually a standard document, about four pages long, whereas a commercial lease is not a normative document, often 50 to 60 pages long, and usually needs to be drafted by a lawyer.
Read the lease agreement carefully, and call a legal professional for assistance if there is any uncertainty.