How to get started in commercial property

Hi D
What price bracket are you looking in ?
What geographical area ?
Any industry type preferences? e.g. factory, office, shop, storage, ?
Minimum return required?
Type of deposit or equity as collateral – cash, residential ?
Time period of investment ?
Cheers
thecrest 

There are both gross and net leases. Matt refers to net leases (which are the figures that you must use to calculate your return when comparing different investments (ie other properties or other types of investments eg shares).

Not all leases are net – many retailers (those generally not located in managed shopping centres) and other users are paying a 'gross' rent or possibly a 'semi-gross' rent (where some outgoings are payable. A gross rent is preferred by many tenants as they are only obliged to pay the agreed rent + services whereas  a tenant on a net lease pays an agreed proportion of outgoings (rates, landtax for single holding, water rates, insurance, management fees, maintenance costs etc.

Not necessarily true. I have seen some properties vacant for in excess of 12-18 months and others which have been effectively marketed by an active/effective agent leased before the previous tenant has vacated. The advantage of commercial property is that, unlike residential property, the tenant generally undertakes some fitout, reprints stationery, business goodwill etc (ie has a greater financial commitment to a location), hence the lease term is generally longer than resi, so you may have one tenant for 3-20 years with no vacancy but it may be a long one when they vacate.

Cashflow may be a little more sporadic than residential as there are often incentives payable eg x months rent free, agency fee reflective of lease term, legal costs (dependent upon property type & deal struck). This is reflected both in the yield and the risk/return for each property and why banks will only lend 65% not 90-105% (sometimes at a premium). You will have to be a better financial manager to cover repayments whilst you have vacancies by putting aside sufficient funds to cover outgoings, interest etc.

High returns are indicative of 'higher risk' which may be seen as properties where the tenant is on a short lease, over-rented, or the property may need extensive work. Lower risk may indicate a more stable/better investment grade property eg a suburban shop with KFC or a bank may sell on a 2-3% net yield whereas a similar shop with a 'no name' tenant on an expired lease in a country area may be paying 12% net. (the country property may not have any capital growth or prospect of a replacement tenant compared the security of a long lease  with a quality tenant).

One other thing to mention is that GST is payable unless you are buying a 'going concern' – refer to teh ATO for specific requirements. It will pay to be GST registered as you can't raise a tax invoice & collect gst unless you are.

Visit the property section in your TAFE bookshop or library – great source of info.

Depreciation – yes it is applicable. Depending upon incentives, lessor contributions to fitout etc you may be able to claim more ie over the life of the tenancy rather than building life.

Functional obsolescence – watch out for buildings which may require massive refurbishment as they no longer suit the purpose – eg: lessor's infrastructure is outdated – phone/data, power/switchboard, essential services.

Become acquainted with REAs, valuers, QS, lawyers etc they all play a valuable role in commercial property.

You'd want to have a deed in place to  retain ownership (of your contribution) diminishing over the term of the lease hence decreasing the risk of the tenant removing 'your' fixtures.