- My goal is to give you the timely insights and tips
to help you master the game of finance
and ultimately help you achieve your goal.
Hello this is Connie from Prosperity Finance.
The bad news is we are in lockdown again.
I hope your life is going well during the lockdown.
I know there's a lot of inconveniences,
especially the parents who have to work during the lockdown
and look after your kids.
Tell me about it.
I don't know how I'm going to juggle anyway,
but the good news I guess,
is you can spend more time with your loved ones
and maybe do something
that you don't really have time to do normally.
So everything has two sides let's be a graceful.
So today I'm going to talk about Commercial property.
Why choose this topic?
Well recently I have been asked by a few clients about
whether investing in commercial property is a good idea.
I guess the reason they asked is quite obvious.
There's some policies from the government,
from the banks are not really in favor of
residential investment property,
such as a bright-line rule, such as interest deductibility,
policy et cetera, and the LVR rule.
So it made commercial probably more attractive
because they are exempt from these rules
and also the residential property
are getting more expensive.
So if you have limited budget,
maybe you could look at investing commercial properties.
So today I'm going to talk about
the benefit and downside of commercial property
so that we can help you make an informed decision.
Right, so firstly let's start with the benefits.
And let's start with investment aspects
and then I'll cover the owner occupied.
So investment means you purchase a commercial property
and you have a tenants using the property
and you get the rental income.
Just like a residential investments.
So what are the benefits?
Some of the benefits are permanent such as
higher rental yield.
Now let's look at the residential rental yield.
So in Auckland you probably expect 3% on average
this is actually a good deal.
People buy it at 3%,
whereas commercial,
you probably expect five to 6% rental yield.
It's very common.
So if you are after cashflow
commercial property it is a good, very good option.
Now, the second benefit is that
there's actually very little cost
investing in commercial property.
Unlike residential property,
once you own that property,
you probably still need to pay for insurance,
pay the rates, pay water fixed charge,
and ongoing property management fee et cetera,
and maintenance.
So the list just goes on.
Whereas commercial property,
most of these costs are actually shared by your tenants,
not you.
So it's called outgoings.
So if you look at the lease agreements,
so there's a one clause about who going to cover
the outgoings
and the default option is your tenants.
So you don't really need to worry about that.
Even the body corp, they will pay for that.
So it's very good cashflow strategy
to invest in commercial property.
Now the third benefit is that
you can claim depreciation against the commercial building.
That's not applicable with residential property,
so it's more kind of a tax efficient.
And the next benefit is the diversification.
So if you already have a portfolio
of residential investment property,
having a commercial property
help you to balance the asset types,
so kind of minimize the risk of investing.
And now I'm going to cover a few more points
that's actually related to the recent policy change.
So next benefit is the loan to value ratio, LVR.
Now you probably remember last year,
if you purchase a residential investment property,
you only need to provide 20% deposit,
but now is 40% again.
With commercial investment property,
you can provide 35% as minimum deposit.
Sometimes you do need to provide more,
but 30% is definitely possible.
So it requires less deposit than the residential property.
So that's to do with LVR.
The next benefits is to do with the bright-line rule
and interest deduction policy
that was introduced by labor government early this year.
Now if you remember,
they said these rules have commercial property exempt,
therefore commercial property
you can still claim the interest
as part of your investment costs
so that you don't have to pay the same level of tax
as a residential property.
Same as a bright-line rule,
there's no bright-line rule for commercial property.
So that's really good.
Now the next point is with a budget.
So with a residential property in Auckland,
if you want to buy relatively
reasonable, like reasonable land,
then we're going to,
sorry I repeat again.
The next point is to do with the budget.
So with Auckland, for example,
if you're looking to buy a residential property
as investment,
you probably have to expect
over one million kind of budget,
especially if you want to purchase a property
with a reasonable kind of land size,
it probably can easily cost you over 1.5 million.
However with commercial property,
if you have a limited budget,
you can find a really good quality commercial property.
Recently, we had a client bought a
warehouse in south Auckland,
there are multiple offers, a lot of demand
and it was only 600K.
So it's a really good investment
and because there's a demand,
so there's a good chance that
those type of commercial property has a good capital growth.
So it's actually very good deal
if you have a limited budget.
So the budget can be a advantage at the moment
with the commercial property as investment.
And the next point is to do with the property cycle.
Now, normally the residential property
and a commercial property
has a different property cycle.
When the residential property is in the boom stage,
commercial property tend to be flat.
You know in contrast,
when the residential property is in a flat market
commercial property snap
increase in equity.
So it kind of different kind of at a different wave.
So if you have a mix of residential and commercial property,
you kind of have a consistent of capital growth.
So it's very good strategy in terms of investing.
Now, the next point is servicing ability.
So that means how much loan can you afford.
Now you probably have reached the glass ceiling
if you buy a residential investment property,
your bank probably tell you, "Sorry you can't borrow more,
"you already borrowed to the maximum."
However, with the commercial property,
even you have borrowed to the maximum,
potentially you can borrow more to buy a commercial property
because the way they analyze your borrowing capacity
in terms of commercial investments
is quite different from residential.
So as long as you can demonstrate you can cover
the existing residential property loan payments,
commercial property lending
is mainly driven by the commercial rental income.
So you may be able to buy another property
and add it to your property portfolio.
So that's pretty much
all the upsides of investing in commercial property.
Now I'm quickly go over the owner occupied benefits.
What do I mean by owner occupied?
Let's say you have a business and you need a office
or you need a factory et cetera for your own business,
then you can consider instead of renting,
you can have an option of buying
existing commercial property
and you use it yourself for your own business.
So they are true additional benefit if you are
kind of owner occupied.
So firstly if you need kind of specialized built property,
such as if you have a daycare business
or a kind of motel business,
or I have a clients they have swimming schools.
So instead of finding a property with a swimming lane,
they can you know have their own
and build the swimming lane.
So the investments that you built
that purpose built property
can be easily retained rather than
doing for your landlord.
So that's kind of really important reason people buy
the owner occupied commercial property.
Now the second benefit is it kind of prevents you
from paying increased rent over time,
because that's your own property
you don't have to increase rents every year or two,
if you rent it.
But bear in mind there's opportunity cost as well.
Let's say you have the option of buying commercial property
for your own business,
and you also can invest your money into residential property
or other form of investments.
Then there will be an opportunity cost
if you rent the commercial property instead of purchasing,
you may be able to get better capital growth
if you invest in other type of assets.
So you have to consider kind of overall picture,
not just from the rent perspective.
So now I have summarized some of the benefits
of buying commercial property from both investment aspects
and owner occupied aspects.
Now I'm going to quickly go over some weakness
if you're buying commercial property
so that you can make informed decision.
So the first one is to do with the vacancies.
If you have a residential property,
the vacancies are relatively low.
Even your tenants give you short notice,
but because there is a market
residential investment property market,
you kind of expect you can get tenants very quickly,
like within a couple of weeks even.
So the vacancy is very low compared to commercial
for example the building we occupied at the moment
some of the offices has been empty for over a year.
So it can be very long vacancy.
This has become worse after COVID
because a lot of people work from home,
so the demand for offices are much less.
Obviously you have to consider individual cases.
Now recently I had a conversation
with a commercial property expert.
So she taught me
that a lot of people used to work in the CBD,
now they looking for offices in the region,
for example North Shore offices are in a good demand.
So yeah, so it's not always the case,
but overall offices are in
less demands after COVID.
So you need to be aware
especially if you buy a vacant commercial property
or even you have existing tenants there,
but the lease is very short, like only a year or two,
then what if they leave, they don't renew?
Then how long can you replace them?
So you need to be aware of the vacancy time.
Now the second potential downside is the capital growth.
Use office as example,
now the capital growth for commercial property,
one of the big factor is the lease income.
So if you don't have tenants
or the lease income is not increased quickly,
then the capital growth is very limited.
But it's not always the case at the moment, for example,
industrial property are in demand.
So it doesn't matter is vacant or not,
is still grow at a good pace.
So, nothing is kind of one side fit all,
but generally speaking
capital growth for commercial property
is less than residential property.
The next point is the commercial property
require different skill sets and knowledge
from investing in residential property.
If you are going to purchase your first commercial property,
you do need to do some homework
and build your knowledge base
before you go ahead and buy one.
Now the last but not least is,
I just want to emphasize that
if you have a commercial property
and you already settled and you have a loan,
just make sure that if your tenant leave,
you need to quickly replace your tenants
especially you only have one tenant.
Because when the bank lends you the money
for buying commercial property,
their loan term normally align with
your lease finish term.
So if you have one tenants
and the lease term is three years,
even though they give you a 15 year amortization period,
but the loan term is only going to be three years
because they want to review your position
and see how the lease is going to be after three years,
are they going to renew their lease
or are you going to replace them?
They want to know
because the lease income is kind of repayment source.
If they don't have a lease in place,
then that means you can't repay in their eyes.
So that's why they limit their loan term
to the lease finish term.
So we have a real example where the clients
had tenants at a time of placing the commercial loan,
but then the tenants left.
And when the bank reviewed their tenants schedule,
they realized that there's no tenant anymore,
but the client is comfortable
because they have a good cash flow from other sources
from other properties or their job income.
So they thought that's fine,
but banks said, "I give you couple of months
"to find another tenants,
"otherwise you have to repay the loan."
So it's put them into various stressful kind of stage.
So just bear in mind,
that's the bank for commercial loan
they only consider the lease income.
If you don't have lease income,
you are running a risk of repaying the loan
with such short notice.
So that doesn't exist in the
residential investment property loan,
they normally give you 25, 30 years.
So they don't come back and check
if you have tenants or not.
So that's pretty much everything I can think of
in terms of the benefit
and the downside of buying commercial property
and in both investment terms
and owner occupied terms.
So I hope that helps you clear the mind
and help you make decision,
if you are thinking about
investing or buying commercial property.
Thank you so much for watching
and please take care of yourself
and hopefully everything back to normal soon.
Thank you so much,
I will see you next time, bye-bye.