Ten Reasons to invest in Commercial Property

Before the recent changes to tax, and the ability to claim interest against your income, investors have often looked to commercial property for several valid reasons. Depending on the motivation behind the desire to invest in commercial property, it can often be a very good way to diversify your portfolio.

 

Bayleys has an experienced team of Commercial Property Managers and currently manages properties for investors throughout New Zealand. Whether you are a seasoned investor or someone looking to explore your options – contact our team below for a no-obligation consultation.

 

Here are some of the reasons why you should consider investing in commercial property.

 

Cash Flow & Yields are Higher – Commercial property often yields far greater cash flow than term deposits in the bank and the residential property market. Many long-term investors have often looked to diversify their residential investment portfolios with commercial properties. The Residential Tenancy Act has made it trickier for landlords. Investors are increasingly moving their funds into some of those lower-value commercial investments as a starting point. You can pick one up for $500,000 and still get a $30,000 return. We are starting to see a big shift in that happening.

 

Leases can increase the Value – Without changing anything to the property, you can increase the value of a commercial asset by negotiating a good lease. This means you can buy an empty building, get it tenanted (which can potentially double the value of the building), sell the building and pay no tax on the capital gain. An experienced property manager will negotiate terms for their owners that see fair leases set up to lock in income for often decades. As always, seek financial and tax advice from a registered advisor before moving forward.

 

Exempt for Tax Reforms – Unlike the residential market, commercial investment properties did not fall within the recent changes across the residential sector. This includes the extended Brightline test and also the mortgage interest. Furthermore, if applicable to the owner, management fees are 100% tax-deductible.

 

Structuring the Outgoings – With commercial investment properties, the OPEX costs can be structured so that the tenant or tenants pay for most of the outgoings as part of the lease. This can include rates, building WOFs and management fees, to name but a few. Like every other commercial venture, you can claim expenses back, including interest. Also, you have depreciation, which can allow you to deduct a portion of your property's value from your taxable income each year. For many investors, this reduces the total tax burden quite significantly. The depreciation rules need to be discussed with your tax advisor.

 

Post-Covid – Right across provincial New Zealand, we are seeing countless examples of businesses relocating the regions because the residential property is cheaper for their workforce as well. One of the critical sectors any investor should consider before purchasing is the local employment opportunities. As this trend continues, the opportunities for commercial and residential properties continue to grow.

 

Options to enter the Commercial Sector - Another trend on the upswing over the last ten years has been significant growth in the syndication market. People get the benefit of only putting $50,000 or $100,000 into a property, and a professional property manager is engaged to manage it. The rental returns can often be in the range of 5% to 7.5% return, and the entire process can be an excellent way to learn more about the industry.

 

Tenant Responsibilities – At times, tenants' circumstances change, and they may need to move their business. Within the commercial sector, if a lease is in place, the owner has a greater assurance that rent will continue to come in as it becomes the tenant's responsibility to sub-lease the property. Any business that sub-leases a property is subject to the same terms and conditions as the original lease.

 

Business Relationships - Since you're working with business owners, their reputations are essential to protect, and they look at the interaction with the owner and property management through a different lens. This typically results in a more careful and diligent approach with day-to-day interaction and following the rules. It is uncommon for a commercial tenant to leave a property or lease to bad terms as the implications can be significant.

Selling can be easier - When you sell a commercial property, the cosmetic attributes of the asset, such as the colour of the drapes, are not a factor. Commercial Property Investment is an unemotional transaction. The value is in the lease, and the sale process is much more straightforward.

 

More flexibility in negotiating the terms of the lease - A significant advantage to commercial property investments is that negotiating the terms of a lease can be more satisfying if you know what you are doing or use a good commercial property manager. There are fewer regulations. The residential property owner's ability to negotiate is set down in the Residential Tenancies Act. The same is not valid with commercial properties, giving the savvy owner/ manager a huge advantage and a better position in bargaining power when negotiating a lease.