Have you thought about buying commercial property but been swayed by the perceived higher risk or the misconception that only wealthy investors can afford it?
While it may seem daunting to step into the commercial property market, it’s not out of reach - you just need to dig a little deeper into your research.
Arming yourself with as much knowledge as possible before buying a commercial property could save you thousands of dollars and help you eventually grasp positive returns.
For example, what are the differences in investing in commercial property versus residential property? What are the pros and cons of buying commercial property? What factors should you consider before buying commercial property? And what is commercial property depreciation?
To help guide your research, we’ve put together this complete guide to buying commercial property.
While investing in both types of property generally involves renting out the property to receive a rental income, how you approach buying commercial property versus residential property significantly varies.
For example, commercial lease agreements generally span over a more extended period in comparison to residential leases. Where residential leases tend not to run past one year, commercial leases generally extend over a couple of years, with annual rental amount reviews.
Of course, the main difference is that commercial properties are primarily used to carry out businesses, whereas residential properties are used as homes.
Other fundamental distinctions include:
Based on the significant differences, buying commercial property requires investors to have a broader understanding of the economy, so it is generally advised that you conduct extensive research before investing in commercial properties.
Given the exposure to economic shocks (because of a fluctuating market), you may be wondering what the benefits are of commercial property investment.
While many investors may perceive buying commercial property a higher risk because of this fact, that isn’t the only factor to take into account.
There are many benefits too!
For example, the primary benefit of commercial property investment is that it promises higher returns due to:
As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.
The Australian Tax Office (ATO) allows commercial property investors and its tenants to claim depreciation as a tax deduction if the property is used to produce income.
There are two types of commercial property depreciation deductions:
Taking advantage of these commercial property tax depreciation deductions can result in a substantial cash flow benefit and optimised liquidity.
You can do this by ordering a depreciation schedule.
Simply put, a commercial property depreciation schedule is a report that details the tax depreciation deductions you can claim on your investment property. Make sure to check out our guide to why a depreciation schedule is essential for all property investors.
Sean purchased a commercial property in January 2019. The property is best suited as a retail space.
After having a Duo Tax Quantity Surveyor draw up a depreciation schedule, it was determined that the retail property was built in 2006. It had carpeted flooring as well as guest bathrooms equipped with blinds and bathroom accessories.
After purchasing the property, Sean decided to fit-out the property with new timber flooring and one air conditioning unit in the retail space. The total cost amounted to $18,980.
As the landlord of the retail space, Sean can claim a commercial property tax depreciation deduction for the following items:
Although there are plenty of benefits to buying commercial property, you also need to be aware of the price you may have to pay for those higher returns.
As mentioned in the distinctions between investing in commercial property versus residential property, the most significant risk of buying commercial property is the fluctuating market. Commercial properties aren’t in as high of a demand, so you risk higher vacancy periods.
Factors that affect the demand for commercial properties include:
For that same reason, commercial properties are harder to sell, resulting in a lack of liquidity.
Other downfalls of buying commercial property, you should consider:
Other than weighing up the pros and cons of buying an investment property, there a few other factors you should consider, such as:
This is especially crucial because you’ll need a good understanding of the property market and the economy. You can access our top steps to buying an investment property to learn more about the property professionals you should consult with.
The most crucial advice we can give you if you are considering buying commercial property is: do as much research as possible on all aspects of the economy, the market and how it relates back to your potential commercial real estate purchase.
Beyond that, remember to weigh up the pros and cons, speak to an expert and remember those all-important tax deductions - especially depreciation!
Given we’re tax depreciation experts, did you know that 70% of property investors in Australia don’t buy a tax depreciation schedule?
Depreciation schedules are among the most effective but underused tools available for property investors to maximise their returns.
As a team of property investors ourselves, we, at Duo Tax, understand that every dollar counts. We’ve got the expertise to help you maximise the return on your investment.
Are you considering buying a commercial property and need some depreciation advice? Or are you the owner or the tenant of commercial investment property and currently not claiming commercial property depreciation?
If so, fill out this form to get a free estimate from a Duo Tax specialist quantity surveyor on how much you can save each year.