For Scott O’Neill, founder and director of Rethink Investing, a lease is one of the most powerful tools in an investor's arsenal. Commercial leases contrast significantly with residential leases, says O & # 39; Neill. For example, occupied commercial properties include the lease as part of the sale, with the tenant typically covering daily costs – unlike a residential tenant.
"A good commercial building will have a net lease – the tenant pays most, if not all, of your exit expenses," says O’Neill. "This could include rates, strata, maintenance, insurance and sometimes even rental management or property tax. Maintenance blowouts are one of the most significant expenses for residential properties, but for commercial property expense blowouts, they are much less of a concern since the tenant will be responsible for these costs.
With so many advantages over a residential lease, there is another key point of difference: unlike a residential property, which can be bought without a tenant and easily rented, commercial properties are better secured with a tenant locked up. O & # 39; Neill advises to buy with a lease already in place, as it is not only immediately more profitable, but also gives confidence in future rental income.
"A good commercial building will have a net lease – the tenant pays most, if not all, of your exit expenses"
For example, part of the due diligence could include requesting the past 12 months for rental statements to prove that rent and expenses are paid on time by the tenant. Banks also prefer to lend against properties with a secure lease in place.
"When you buy commercial property with a company in place, it is considered an ongoing concern," says O’Neill. "But without a tenant in place, you will be liable for GST. You will also need to find a tenant, which can result in additional costs related to renovations, advertising and, of course, time spent with the property empty."
Commercial leases can last three to ten years – sometimes longer, if it is a large-scale operation. Residential leases are generally only six to 12 months. This is important, notes O’Neill, because in tandem with the other costs covered by the tenant, this allows owners to have more consistency around rental income. This predictability is further enhanced by the integrated rent increases each year, which are generally in the range of 3 to 4%. Residential properties, on the other hand, usually involve a detailed examination of the market before an increase is suggested, which can end up disadvantaging the owner.
This is not to say that there is no risk associated with commercial investments, O’Neill is quick to note, but buying commercial is certainly a way to reduce potential exposure.
"Interest rates can obviously fluctuate and tenants can decide to leave," says O’Neill. "But the truth is, if you have a tenant who pays a fair rate, has a successful business, and is generally satisfied, it is unlikely to move."
Indeed, most businesses will not even consider moving unless their rent is at least 10 to 15 percent cheaper elsewhere, notes O’Neill. Working with the tenant to resolve any potential problems can often lead to a better outcome for everyone.
"Businesses don't normally want to cut and change all the time," he says. “All other incidental expenses related to the move can cancel the advantages of cheaper rent.”
Scott O'Neill is the founder and director of Rethink Investing, a BRW Fast 100 real estate investment company specializing in the search for rare, positively oriented properties throughout Australia (commercial and residential).
Scott is an experienced and active investor who was able to retire at the age of 28. With a current portfolio of 29 properties valued at $ 18.5 million, he is one of Australia's most successful young real estate investors. O’Neill has a passion for all aspects of property, in particular helping others find great deals. Because of this passion, he founded Rethink Investing.
WANT TO LEARN MORE?
Rethinking investment helps everyday Australians to easily enter the commercial real estate market. She also specializes in assisting clients in purchasing high-yield residential properties using the same successful investment strategy. Call 1300 965 551 or visit www.rethinkinvesting.com.au
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