Investing in commercial property is a long-term undertaking which requires a deep understanding of the location, developer, and the edifice. From savvy investors who are fully aware of the nitty-gritty of the industry to first-time buyers who are double-minded about their investment, everyone needs to weigh upon the capital gains. Although commercial properties are considered high-risk assets, they are also high returns generating estates which are more profitable if they are pre-leased. The high yielding ability of these already occupied structures makes them a vital part of the investment portfolios of high-net-worth individuals.
Thus, if you are planning to put your money into commercial real estate in Australia, then you must find pre-leased buildings to enjoy a quick ROI. The rented office spaces, retail shops and warehouses offer a plethora of benefits that a vacant space does not provide to the buyer. So here is a rundown on why it is advantageous to acquire pre-leased commercial real estate.
1. Guaranteed ROI from Day One
The promise of getting returns from the first day may sound like a marketing gimmick, but it is true if you purchase a commercial space which is pre-rented. The most significant benefit of owning a tenanted property is that you do not have to wait to start earning from the investment. It saves all the time spent on looking for tenants and the effort that goes in finding a high-quality lessee. Also, the lease agreement is already in place with options of extension.
Thus, you do not have to get involved in preparing the paperwork and negotiations. You can enjoy a stable income as soon as you become the owner with the advantage of a zero-waiting period. The periodic increase in the rent according to market inflation is pre-set in the agreement.It is also in line with the envisaged capital appreciation of the property.
2. No Maintenance of the Property
It is challenging to maintain a commercial property which is usually much bigger than a residential one. If it is not leased, then you must get it cleaned regularly for displaying purposes to attract tenants. You will have to hire professional cleaners or janitors to keep it sanitised and hygienic. Also, you will have to pay for the electricity and water bills while it is not rented, which adds to the cost of maintenance.
On the other hand, if the property is pre-leased, then you do not have to worry about its maintenance and upkeep. The cleaning and utilities are managed by the tenant. The landlord is only required to conduct restoration in case of damage which does not occur that often. Thus, you end up saving the money which would have been spent on these services.
3. Easy Funding from Banks and Lenders
When you are looking for a loan to purchase a commercial property for sale, you will have to provide all the details of the project. Most moneylenders and financial institutions will be concerned about the returns on investment. They will need a lot of documents to understand the viability of the development and the prices in the location. It may not be easy to get a higher loan amount when the property is still vacant as the moneylender may be sceptical about the rental income.
However, when the property is pre-leased, the moneylender will be assured of quick returns which will mean that the instalments will be paid on time. Thus, the financial institutions will be willing to give a higher loan with a low-interest rate and longer payback timeframes.
4. EffectiveCash Flow Management
With a tenanted commercial property, the landlord has the advantage of calculating the exact monthly income from the investment. It will help him to manage finances accordingly. It will allow him to make effective plans related to repayment of the loan and make an informed decision at the time of purchasing. On the contrary, if it is a vacant property, then the buyer will have to depend on forecasting and projections which might not go as planned. It can make the monthly budget planning go haywire if the property is bought without giving this aspect any thought.
The recent eviction ban due to COVID-19 has also helped landlords to retain tenants and get their loan payments deferred. Thus, tenanted commercial property owners are still in a better position over those whose premises are lying vacant during the pandemic.
5. Claim Tax Deductions
Another advantage of buying a pre-leased commercial property is that you can claim immediate tax deductions for expenses incurred during the period of the lease. These expenses entail the cost of maintenance and management of the property and include the interest on loans. You can also claim expenditures that include depreciation costs of fixtures and furniture with regular use over the years and expenses related to construction.
6. Lower Risk
Commercial tenants become associated with the rented space and get recognised for trading from the same office, shop, or warehouse. They do not plan to move out for a long time because they gain a reputation in the community and their clients identify the address as their physical presence. Most of them stay in the same premises for decades unless they plan to shut shop or expand.
Also, they have a lock-in period in place which means the new landlord can expect continued income for a specific period without any hassles. You can renegotiate the rent and lease terms at the time of renewal to retain the tenants and enjoy stable income from the property. Thus, it is advantageous over residential tenants who keep relocating after every few years to avoid rent increment.
7. Higher Increment in Rental Income
An existing tenant will pay a higher rent after the increment according to the terms mentioned in the lease. If they have been operating from the same building for several years, then they will be paying a higher rent than new tenants who moved in recently. It is obvious because,at the time of finding a new tenant, the landlord does not want to risk losing the prospective lessee and will negotiate at a lower price. On the other hand, after the property has been leased and customised by the tenant to suit his business, the landlord has the upper hand in rent increase negotiations.
It is understandable that pre-leased commercial properties for sale in Australia have the potential of generating quick and higher returns. Thus, if you are planning to invest, then enquire about tenanted properties and examine the credit history of the tenants before making a decision.
Sophie Barrett is an experienced real estate marketing professional with a specialisation in commercial property market. She has a Masters degree in marketing from the esteemed Melbourne Business School and has several property management certificates to her credit. Her shrewd marketing policies and business acumen have led to the most rewarding property deals in the major capital cities of Melbourne, Sydney and Perth. She is a popular name in the real estate market and has been serving the industry for almost two decades now. CommercialProperty2Sell is proud to partner with her for some astute discussions and advice on the booming sector.
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