Buying commercial property in the $6 million+ price bracket can bring your investment portfolio big gains. The pitfalls of tax liabilities, along with all the risks you’d expect from a significant investment, can be avoided if you seek support from legal, financial and property experts.
Focus on blue-chip spaces and destinations
For many investment-portfolio holders looking for secure and substantial returns, the key to managing risk is to spread investments over a larger portfolio. But when it comes to buying commercial property, a more diverse portfolio comes with higher management, acquisition and holding costs. So it can make a lot more sense to make one or two high-value investments, as long as you’re prepared to do your homework.
If you can secure a property with genuine potential for strong capital gains over time and sustained healthy yield, then you can look forward to steady income, as well as holding an asset that’s sure to fetch a good price if you ever need to sell. You’ll be looking for a blue-chip property; something in an area where there’s an abundant supply of tenants that won’t dry up if the economy takes a dive.
“When you’re looking to acquire a high-value property and want your investment to be relatively safe and bring a good return, it’s all about looking for a location with amenities and infrastructure,” says John Marasco, Managing Director of Capital Markets and Investment Services for Colliers International. “Investing in commercial real estate close to an established retail, education or healthcare hub or a major road or rail network is likely to bring better results for both yield and capital gain over time.”
Due diligence: making sure your prospect isn’t fool’s gold
No matter how gilt-edged a commercial property opportunity may seem, taking steps to ensure it’s a viable, reliable investment is always essential. You’ll need to carry out land registry and statutory authority searches to confirm ownership and identify any planning and development restrictions that apply. Reviewing tenancy documents will demonstrate income potential as well as highlighting ongoing and one-off expenses you’ll need to plan for in the longer term.
To finance your commercial property investment, most lenders will require a certain level of due diligence as part of the loan approval process. However, it may still make sense to seek independent and expert advice about what type of research you should be doing to ensure you’re making a sound investment.
“Managing your risk with any commercial real estate investment comes down to three major areas of due diligence,” says Marasco. “First, there’s the land you’re buying on, which requires a thorough environmental audit and investigation of planning approvals in place.
“Then you’ve got the physical structure and assets associated with your property. You’ll need a very accurate picture of the condition of what you’re buying and whether it’s compliant with the latest regulations and standards for energy efficiency, fire safety, and building codes and practices.”
A third and critical area of due diligence is contracts, not only for purchasing the property, but also for leasing to existing and future tenants.
“Taking a good look at potential leasing arrangements is essential for knowing what you can expect in terms of future cash flow and liabilities,” says Marasco. “A specialist property lawyer should definitely be involved, but it’s also worth engaging a property manager to look at rents and outgoings detailed in the lease, and benchmarking them against other properties you’re considering. This allows you to compare the potential yield offered by different real estate prospects with the same price tag.”
Structuring your investment
So you’ve found a property in the right location, powered through a detailed due diligence process and run the numbers on yield and capital growth to ensure you’re making the most of your investment. Before you sign on the dotted line, you’ll want to establish an ownership structure that will minimise tax liabilities from your investment.
For both domestic and foreign investors, establishing a holding company or unit trust are effective paths to more tax-efficient property ownership. With a trust structure, a trustee holds the real estate for the benefit of one or more beneficiaries. A company structure is somewhat similar, but the company can actually acquire the property in its own right and then distribute profits to shareholders. Some structures use a combined approach, with a company established to act as the trustee.
There are legal, accounting and tax implications for choosing a structure for your property purchase and it’s important to seek advice from an accountant and lawyer with the right expertise before you buy.
Your dream team for commercial investment success
The upside for any investor looking for opportunities in commercial real estate is that Australia has a relatively straightforward legal and regulatory environment. The following websites offer general information for investors, but expert advice from an accountant, lawyer and property manager can help you towards a more secure and profitable outcome from your large-scale commercial investment.
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