There’s one huge advantage that commercial property has over other types of property and allows you huge opportunities to manufacture capital growth if you choose the right property.
If you invest in residential property you don't have as many choices. You can renovate, you can wait, or if you have a big enough block you could split the block and build another place out the back.
…And that second one… waiting, is really only waiting and hoping that prices in your area will go up. It’s not really manufacturing growth it’s just passively hoping and praying that the market will keep growing.
The big advantage with commercial is that the value of a property is not based on factors like comparable sales in the area, how pretty it looks, street appeal and other arbitrary factors like that. It’s based on the rental income.
There are other factors involved, but far and away the biggest factor is the rental income.
This gives you some simple factors to work with… If you can increase the rent you are getting for your commercial property then you are going to increase the equity in the property.
This means that then you start to look for properties to invest in it can be worth looking at potential properties from that point of view. Asking yourself “What could I do with this property to increase the rent?”
I once owned a restaurant and nightclub.Well, I owned the building and I leased it to a restaurant/nightclub tenant. It was reasonably popular but it had no cooling. Being in the Sydney area it meant that on hot days the restaurant became stifling and customers dropped off.
The tenant came to me and said he couldn’t afford to put one in was there anything I could do?
A quick chat to my accountant and I was able to work something out that proved to be a great little win.
The unit was, from memory, around $10k, but the agreement was that I’d pay for it and out it in, in exchange for a small rental increase.
The increase in rent would basically pay for the unit over 3 years, so I ended up getting my money back. But there’s an even better upside…
Remember how a commercial property is valued on the rental income? So when the rental income increases the value of the property increases.
So my $10k investment in reality bought around $30k increase is equity and a year in, year out increase in cashflow. My tenant got the air conditioner he wanted which made his customers more comfortable, he made more money, so it was a win for him as well.
The big lesson for me was that if there are things that your tenant needs or wants, then it can often be worth looking at helping them out. If you can create a win / win type scenario then the long term benefits of that negotiation are manyfold. More rent, more equity, and the one last one I haven’t mentioned yet, and that is the benefit of having a good relationship with a happy tenant.
That one thing is really something that can’t be overlooked as a huge long term commercial property benefit.
I’ve had some tenants for over 20 years which is an amazing long term return free of the headaches of finding new tenants every couple of years. These guys just pay on time, month in, month out, year in, year out.
It’s that kind of cashflow that really is the difference between long term success and living the lifestyle of your dreams, and struggle and stress… which is exactly what you don't want.
Every year the rent goes up… a clause which is built into the lease, which means that based on the purchase price, every year my yield goes up, and because my loan repayments stay the same each year, it also means my cashflow goes up.
This is the reason why it’s so worth making your property really great for your tenants.
The happier they are, I know, in the long run, the happier I’ll be.
If you’ve got a commercial property consider what could be done to make your tenant happier… and because of the improvements you make increase their business and have them happier to pay you more rent.
It’s honestly the easiest capital gain you’ll even make, and the quickest. And sometimes all it takes is a few phone calls.