The Commercial Lease Advantage Equals Free Money

Australia is in love with property. Even since the dawn of the great Australian dream: The quarter acre block with a house on it.

 

quarter-acre-580x337In the beginning (at the risk of sounding like the bible there was the 14-acre block. Then there was the idea of owning a beach house or a shack at Bonnie Doon so you could enjoy “The serenity”.

 

Over time, as with so many other things, our dreams have gotten bigger. The 3 bedroom house on the 1/4 acre block has turned into larger houses, larger blocks…

 

4 bedroom, 5 bedroom, two living rooms, a theatre room…

 

…and then when the house got large enough to house 10 3rd world families… we started to look to own other homes… investment homes…

 

…First a single investment home… then a second…

 

Dreams keep on getting bigger. But dreams are not reality.

 

The reality is that owning investment homes, while on the surface, or from the outside, look like a great idea, more often than not they can cause more trouble that anything else.

 

If, like most people who have invested in real estate you have bought a house negatively geared to save on tax then every single day you own that property it is costing you money.

Of course, the hope is that you’ll eventually recoup that money and more from the capital growth…

 

But then there’s capital gains tax…

 

Along the way, there’s also maintenance headaches, tenants leaving after 6 or 12 months and it taking a few weeks to find a new one.

 

There’s also the issue of dealing with tenants wrecking your investment property, or wanting the earth after you announce that you want to raise the rent $15 a week… demanding expensive improvements…

 

No… the reality is way less glamorous than the dream.

 

This is one of the reasons why I decided to focus on commercial property so many years ago.

 

There is not a single commercial property that I have bought that has not been completely cash flow positive and paying me money to own it from day 1. From the day of settlement each and every property I have owned has made enough to cover the loan repayments and have a fair amount left over to go into my pocket.

 

If it didn’t fit that criteria, I would never have bought it.

 

It means that every property I buy increases my passive income.

 

The other thing that makes commercial so much easier to manager and keep are the leases.

 

Commercial leases are made to businesses. These are businesses who are investing long term in their enterprise. For that reason, they want to stay there for years.

 

The shortest commercial lease I’ve had is 3 years with a 3 year option to continue.

 

That locks that tenant in for at least 3 years. Having said that I’ve had some tenants in some of my properties for many years… The longest being 22 years… so far (and still going strong)

 

When the leases are drawn up, they have a standard increase every single year… the tenant knows that from day 1 and are happy to sign off on that…They know that’s just part of the deal… it’s the cost of doing business.

 

Commercial tenants are also responsible utilities, rates, even land tax can be written into the leases which, if you were renting out a residential property would be your responsibility to pay out of your rapidly dwindling profits.

 

My tenants are also responsible for maintenance on the property (except for structural building issues) and are responsible for doing their own fit out…

 

Can you image having a residential tenant who makes substantial improvements on your investment property out of their own pocket, and don’t expect anything in return?

 

Unheard of right?

 

Yet, that’s exactly what happens with commercial more often than not. Many times these improvements can actually improve the overall value of your commercial property… equity you can use to buy your next property.

 

All these responsibilities and factors are written into a commercial lease, and commercial leases are 99% of the time written to include 1 or 2 options to extend the lease…

 

For example, a 5+5+5 year lease means a lease that is 5 years but the tenant has the option to renew that lease twice more should they want to stay on.

 

…And why wouldn’t you want them to? After all, they are holding and even improving the value of your property as well as paying you money to own the property.

 

You are actually making money each time you buy a new one…

 

Now… Yes, for all those negatively gear minded people… you will need to pay tax on those earnings… there’s no way around that.

 

But let’s face it, you get an income from the tenants, out of that you pay your loan repayments and some other essential costs, and then you pay your tax… and there’s still money left over…

 

That, to my mind, is what they call “Free Money” and you can really complain about that can you?