This is Part 2 of the 5 part guide on positive cash flow properties. Read Part 1, How to find positive cash flow properties here.
15 reasons why commercial is a winner
- Yields – the annual rent divided by the value of the property – are generally double that of residential property. Sometimes more
- The tenant generally pays all the outgoings such as body corporate fees, rates and water
- Leases for commercial property are generally two to three years, often with one or two further options for two to three years
- There are regular pre-established rental increases built into the lease, usually based on CPI
- There is no Residential Tenancies Tribunal to deal with. Poor tenants can severely complicate a residential lease and the tribunal often favours them
- No 60 days clear notice required
- Directors of the leasing company guarantee the lease
- Leases are not limited by government regulation
- Low maintenance
- No midnight calls to fix a leaky tap
- Rental paid monthly by direct debit
- Simple management
- Less chance of damage by tenants and a much larger bond to cover loss of rent – usually three to six months
- Ability to ‘lock out’ in extreme circumstances
- Continuing capital gains with current boost in economic expansion
There’s a whole other investing world out there and it lies in commercial investing. We show you why you should invest in commercial property and how to go about it
If you’re having difficulties finding positive cash-flow properties in the residential market, you may have a better chance looking into the relatively untapped commercial market.
The truth is there are more opportunities to create positive cash flow in commercial investing than residential in the current market. Nevertheless, these deals can only be unearthed through thorough research.
A positive of investing in commercial property is that unlike residential property where the landlord has to cover maintenance costs and insurance, with commercial property the tenants pay that for you. Adding to this, you generally don’t have to worry as much about the property being damaged because it would be in the tenant’s best interest to maintain it – since they’re in business themselves, they have an image to uphold!
Furthermore, if you lease property to a business, their leases are going to last longer – usually two to three years minimum – which gives you greater security than residential where tenants can move on after six months.
The downside of commercial property is that you usually have to pay a higher interest rate (up to 3%), which can harm your cash flow considerably. However, if you borrow from the equity of your home, this can be reduced.
Types of commercial property
The panel beater, printer, repair shop, wholesaler and many more need warehouses and industrial premises. These properties are often purpose-built and thus tend to have higher yields than other commercial properties. Growth and yields are tied to local and national economic growth. Being in a busy central location has the most tenant appeal.
There has been a large growth in strata offices as home-based businesses move into independent premises. For example, the finance industry is currently enjoying a boom and every mortgage agent, taxation specialist and accounting firm need offices. Strata offices in A-grade buildings generally have more appeal and can cost from $200,000 for 60m². This offers lower-cost entry than many residential opportunities.
Huge shopping complexes have increased the appeal of some local strip shopping centres with a village feel. Finding an area that has perennial appeal like the beachfront or a village-style centre is vital to avoid competing with the complexes.
The fastest growing sector in the US currently is rented storage space – people are taking the clutter out of their lives! Storage units in most capital cities are bought with a management guarantee of 8%-plus return per annum.
Parking spaces in city buildings are snapped up in Sydney. The managing company then rents them back, often at a guaranteed return for a number of years. This is an easy way to hold a lower cost property while waiting for capital gains.
Some houses may be able to be converted into childcare centres. This will require a council development application, however yields are significantly increased.
Houses on main roads don’t always make attractive residences and they usually sell for a lot less than similar houses in the area. However, an application to council for a conversion to a commercial lease will often provide much higher returns. These properties are attractive for dentists, doctors and accountants, and more recently mortgage brokers.