Investing in commercial real estate is a very profitable option and one reason for it is high rental income. If you are looking for diversifying your portfolio by opting for commercial property, you must consider the property’s annual return on investment and its yield property inspections.
As the residential investment property market becomes fierce, many investors are starting to recognise commercial property as a viable investment option. So, don’t put all your eggs in one basket and consider diversifying your investment portfolio by investing in commercial property.
What is Commercial Property?
The term commercial property (also referred to as commercial real estate, investment or income property) refers to building or land intended to generate a profit, either from capital gain or rental income.
What Type of Property is included in Commercial Real Estate?
Commercial real estate is classified as property assets that are primarily used for business purposes. Commercial real estate is commonly divided into the following categories:
- Office buildings
- Industrial property
- Retail/Restaurant
- Multifamily housing buildings and
- Farm/Rural land.
In addition to the above, commercial real estate can include any other non-residential properties, such as:
- Medical centres
- Hotels
- Warehouses
- Malls and
- Self-storage developments.
What are the differences between Commercial Property and Residential Property Investments?
When you invest in commercial property, you still expect to rent out your property and receive rental income from a tenant as you do when you purchase a residential property investment. However, the major difference between investing in commercial property compared to residential property is the Rental Agreement. With commercial real estate, the property is usually leased to a business under a detailed contract for a much longer period (e.g. three, five or ten years).
There are some other important differences such as:
- The Tenant is usually called a Lessee;
- Vacancies between tenancies can be longer;
- Goods and Services Tax applies to commercial property (i.e. to the purchase price, rent received and any expenses in relation to the property); and
- Maintenance costs are usually paid for by the Lessee, which means net rental income tends to be higher.
What is an Annual Return on Investment?
The “annual return on investment” is the amount earned on the investment property. The amount earned, is expressed as a percentage, and it is called the property’s “yield”.
So, if you are considering investing in commercial real estate. You should always ask yourself the following questions:
- What return on investment will you get from this property?
- What is the property’s yield?
How is the Yield calculated?
Yield calculations are worked out by dividing the annual rental income on the property by how much the property costs to buy. For example:
Gross Yield = annual rental income (weekly rental income x 52) / property value x 100
This is best illustrated by using the following example:
- Assuming you buy a commercial property for $950,000; and
- Rent the property out for $2,000 per week ($104,000 annually).
Your Gross Yield will be 10.9%. It will be calculated in the following way:
($104,000/ $950,000) x 100
If you want to invest in a commercial property, you need to keep in mind all the information mentioned here. You can seek help and guidance from a professionally qualified and expert finance broker, who specialises in obtaining the right funding for commercial property investments.
Truly, having an independent and expert finance broker on your behalf can secure your eligibility for a commercial property loan, not to mention get you the best loan deal that suits your individual needs and objectives.