Property analysis #5 - commercial property

Alright, let’s take a break from residential properties for now. Time to move out of my comfort zone and check out some commercial real estate.

There’s an impressive retail suite going for $1.4M at an undisclosed location in the Brisbane CBD, Queensland. It’s a slightly higher purchase price than we’re used to, but it’s to be expected for what appears to be a quality commercial property. The agents suggests a sense of urgency so it may be possible to pick it up for less than asking price, but for fairness of this analysis we’ll assume that our investor pays as requested.

Investing in commercial property is a whole different game, and admittedly a lot of investors will steer clear of it completely due to the complexity and knowledge of contractual law required. However, there are definitely some capital gains to be made, and even more impressive cashflow to be earned. Interestingly, on that note, the capital gains are generally tied to the cashflow for this style of investment.

One benefit of commercial property is that when there is a tenant in place, we’re not too likely to have regular vacancy periods and so we have assumed zero vacancy rate for the annual figures. However, the viability of the investment is often directly related to the viability of the tenant’s business, and so if they go under… there may be no income at all for an extended period whilst you look for another. Likewise if they choose not to extend the lease. This property is a little over six months into a five year contract with an option to extend for another five.

Higher return, yes, but also a higher risk. Our investor should also check out the lease terms very carefully to ensure that all is above board and satisfactory there, too.

So straight up we’re looking at a decent gross yield of about 9.3%.  That won’t be damaged too much by ordinary rental expenses, either. The other massive benefit to commercial investments; the tenant pays most of the outgoings.
After the expenses that the hypothetical investor does have to pay, such as higher property management fees and insurance, this property should still have a net yield of at least 8% before interest. That leaves our investor pocketing just a bit over $14,000 in positive cashflow in the first year alone. These figures are getting me excited!

Now something important to note is that the investor will need to register for GST, as the revenue earned exceeds $75k. This means 1/11 of all revenue and expenses will need to be excluded (which we have done). It also means a quarterly BAS will have to be lodged (and you know who can help you out with that), and the difference paid to the ATO every three months. In this case, the GST will clear out approx $10k per year… but our investor should also talk to us about being eligible to receive a GST refund on the entire purchase price in the first quarter of ownership.

Clearly commercial property is something worth looking into, if these figures are any indication. I may well do more commercial analyses in the future, so make sure you keep reading. Next fortnight though, we’ll be taking a new hypothetical investor and seeing what someone on a low income could achieve.

And if you’ve noticed any interesting commercial investment opportunities, please let me know! I’m very curious to see what else the market has to offer.