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What are the differences between residential real estate investment and tertiary real estate investment?
Residential and commercial real estate investments work the same way in that you rent out the property and receive rental income. However, there are some major differences:
- Longer term lease – compared to residential lease which typically lasts 6-12 months, commercial lease can go for 3-5 years plus options. This means you can lock in tenants for longer, ensuring guaranteed long-term rental income.
- Potentially longer vacancy – the downside is that it will likely take longer to find a new tenant and you may not receive any rental income for an extended period. You may also need to offer various incentives (such as rent waivers and amenities) to attract tenants, which can be costly.
- Expenses – Unlike residential property, expenses (such as property tax, municipal taxes, building maintenance, etc.) are usually paid for by tenants. So, as long as you have a tenant, you will have few disbursements.
- GST – Unlike residential property, the rent of a commercial property attracts GST. You must ensure that you issue tax invoices and collect GST from your tenant.
In which entity should I buy a commercial property?
It depends on your personal circumstances, but in most cases we recommend that you purchase commercial property in the name of a corporation or trust to protect your personal assets. To add more protection, it is advisable to create a new entity (whether a corporation or a trust) that owns no other assets and is not involved in any other business.
Taxation is another consideration when buying commercial property for investment purposes. Often, a discretionary trust (such as a family trust) can provide a tax advantage if you have adult family members with lower taxable income or no income.
Another popular way to buy commercial property is through a super self-directed fund (SMSF). This can provide significant tax benefits, but will lock in the property and its income for your retirement only.
It is prudent to speak to an accountant to decide which structure is best suited to your situation and to put everything in place BEFORE signing any contract.
What should I pay attention to when buying a commercial property?
As with residential properties, you will need to research rental yields and potential capital appreciation. Location, infrastructure, building age and condition, rental mixes are some of the considerations.
Whether or not there is already a tenant in place is also important as a vacant property will not be an operating sale and will not attract GST, which will need to be paid in addition to the purchase price at time of settlement. . Having a good tenant in place will be a bonus and mean instant cash flow, but can also mean you pay a premium on the sale price.
Be aware that commercial real estate investment is more easily impacted by economic downturns than residential properties. In poor economic conditions, you may not be able to fulfill the lease for months or your tenant may default and you will have to hunt for arrears. You will need to take these issues into account when doing your calculations.
Before signing the contract, make sure that you will have a due diligence condition on the contract. The standard Queensland Real Estate Institute (REIQ) does not automatically contain a due diligence condition, so you will need to add a special condition.
Always have the contract checked by your lawyer
before you sign. A due diligence period is usually at least 14-21 days, but the longer the better. During the due diligence period, research the property as much as possible. Here are some basic tips:
- If there is already a tenant in place, talk to them and see what they look like.
- Check the rental books and find out if there have been any defaults.
- Talk to your accountant and make a forecast of rental income and expenses.
- Talk to your lawyer and get research, including building approvals and permits.
- Have the building inspected by an inspector who specializes in the type of building you are buying.
- If the building is titled condominium, check the corporate records and make sure there are no disputes or disputes.
If you have a due diligence condition in the contract, you can terminate the contract and recoup any deposit if the property is not exactly what you expected.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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