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INVESTING IN Commercial properties is not the same as investing in residential property. There is a completely different set of dynamics driving commercial properties, when compared to residential.
Here, we’ll discuss the 11 Benefits of Investing in Commercial Property – among them being those also related to Accounting issues.
1. Rental Returns
The rental return for owning a commercial property is generally better than residential property and is easier to achieve a neutral return.
For example, you can generally achieve a 6% Net annual return, whereas residential properties would only achieve a 2% to 3% Net Return – after deducting all the other costs such as council and water rates, repairs, land tax and so on.
2. Renting an Business location Vs owning one
If you have a business and you are leasing an office, you’d be better off by buying your factory or office through your Self-Managed Superannuation Fund (certain conditions do apply). Instead of paying rent to the landlord, you can effectively pay that rent back to yourself via your SMSF.
3. Taxation Benefits
Rent paid by your company is tax deductible at 30%; and when it goes into your SMSF it’s only taxed at 15%. Capital gains are only taxed at 10%.
4. Contribution Limits
Where there is a limit on how much you can contribute into your SMSF as your Super contribution, there is no limit on how much rent you can pay – as long as the rental price is within market rates.
5. Depreciation value
Commercial properties have much more generous depreciation rates than residential properties. This makes them extremely tax effective.
6. Tax-Free Return
If you want to earn $200,000 a year (completely tax free), just buy a commercial property that has $200,000 in depreciation. Effectively $200,000 of your received rental will become tax free.
7. Leveraging your Commercial properties
The ability to leverage your assets via the use of debt is an extremely effective strategy.
Example: You have $200,000 cash deposit and you could borrow $400,000 at an LVR of 67%. This means you can buy a commercial property at $600,000. You now have $600,000 working for you instead of $200,000.
- capital growth is 5% pa;
- rental return of 6%pa; and
- an interest rate of 5%.
In very broad terms, the rental basically covers interest (neutrally geared in this example); and if you achieve capital growth of 5% ($30,000 pa), you are able to achieve a 15% return on your cash of $200,000. ($200,000/$30,000)
Caution: Some properties do not achieve any capital gain, including some residential properties. It’s all about your property selection.
8. Property Leasing Options
Tenants are generally businesses and they prefer to sign long-term leases such as 5+5 years. Meaning, it’s signed for 5 years with an option for another 5 years.
9. Commercial Property Leasing Terms
Most leases require the tenant to pay all outgoings; so the landlord receives a NET rental.
10. Percentage of Rental increase is tied to the Capital Growth
Many leases have clauses that gives the landlord an automatic rental increase of 4% pa (or CPI) whichever is the higher. This means the capital growth of the property is also tied to the rental increases.
11. Commercial Property Valuations are far more clinical
In the main, they are closely tied to the rent.
- If the rents were $60,000 pa and the market was paying a 6% return on investment, it then simply values the property at $1m ($60,000 divided by 6%).
- However, if demand for the property were strong and investors willing to accept a 5% pa return, the property value would be worth $1.2m ($60,000 divided by 5%).
- If rents reduced to $50,000 pa and assuming a 6% return is expected, then the property would have reduced in value to $833,333 ($50,000 divided by 6%)
- If rents fell to $50,000 and returns dropped to 5% pa, then the property value would increase to $1m ($50,000 divided by 5%).
Bottom Line: As you can see, Commercial property offers you a wide range of benefits. Plus, it is also far less emotional than residential property – which is mainly valued using comparable sales.
Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.