Consider commercial opportunities: Newland

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More residential property investors should consider commercial investments as an alternative, one commentator says.

Thursday, August 21st 2014, 12:00AM 1 Comment

by The Landlord

Olly Newland said he was surprised at how people reacted when he suggested commercial property investment.

While residential property investment tended to be political and subject to interference, commercial property investment was much freer, he said. 

Commercial property investors had the benefit of not being subject to controls from an outside body, could charge whatever they liked and impose any terms they and the tenant agreed on, could ask for any bond they wanted, could evict bad tenants rapidly and could claim higher depreciation levels for fittings and fixtures. Leases were often for long periods so they provided more cashflow security.

“Even more importantly, depending on the lease, your commercial tenant pays for all the out-goings as well, such as rates, water and insurance," Newland said.

Commercial property investment was becoming more popular, he said.

Newland said the traditional return on an average commercial property a few years ago would have been about 10%. But over recent years the return had fallen as low as 5%.  "I suspect it will go even lower for prime properties in the future. In other words, lower and lower yields means that investors are paying more and more to buy a certain income stream."

"Where the net income is $50,000, investors could now well be prepared to pay almost twice as much as before especially if the property was good. At a 5.5% yield the same property would be worth over $900,000. Not a bad return if properly done  - and much easier than trying to extract a profit from of low quality slum properties with  bad tenants."

And those value increases had happened without the headlines that accompanied rises in residential values, he said.

"If residential sales results showed similar rises in values in today’s financial climate the headlines would be very large and the calls would be coming to introduce new taxes and other disincentives for investors who dare make such gains. If you are tired of the stress that residential tenants can give — not to mention poor returns, mounting repairs or vexatious complaints — then the commercial property market is just the right place for you."

He said the trick was to find property that could be improved, so its value would increase.

Care also needed to be taken to ensure that commercial properties had a seismic rating of 34% of the building code requirements.

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