OWN BUSINESS PREMISES

Owning your own business premises is the best risk-adjusted way of getting exposure to commercial property.

Some of the key risks of investing in commercial property such as vacancy and the tenant going bust are entirely in your control… as you are the tenant!

Owning your own business premises inside a self-managed super fund (SMSF) should also be considered, but only if you have enough money in your SMSF to do this (or outside it that you can transfer in without missing it), along with a SMSF limited recourse property loan – if not, purchasing outside a SMSF is also fine.

It’s also worth noting that business premises held inside a SMSF won’t be entitled to the small business concessions for any capital gains on sale, though capital gains tax (CGT) may be zero when the SMSF is eventually in pension mode anyway.

TENANTED COMMERCIAL PROPERTY

If you don’t own a business (or even if you do), then buying a tenanted commercial property is another alternative.

This should preferably be positively geared, but may be neutrally or negatively geared depending on your financial position and the type of property-specific strategy chosen.

Tenanted commercial property can also be purchased inside a SMSF and can provide you with a good inflation-hedged passive income stream that will be tax-free when your SMSF is in pension mode.

The proviso to buying tenanted commercial property inside a SMSF of course is that you need to have enough money in there in the first place to do this, ie. by making regular deductible and/or non-deductible super contributions – along with any borrowings if required.

Tenanted commercial property can also be purchased outside a SMSF, and once the loans are paid down can also provide you with a good inflation-hedged passive income stream, and potentially allow you to have an early retirement.

VACANT COMMERCIAL PROPERTY

Also, although we have specifically mentioned tenanted commercial property here, purchasing a vacant commercial property or one that is likely to become vacant soon is another option that may be worth considering.

But, the value in doing this is contingent on you being able to ultimately find a tenant who is willing to sign a lease on the property and your ability to manage the financial risks in doing so.

DIRECT VS. INDIRECT COMMERCIAL PROPERTY

Buying commercial property directly certainly requires a significant amount of capital to cover the deposit, stamp duty and initial purchase costs, as well as allowances for potential vacancy risk, holding and fit-out costs.

Initially it will usually also require you to have significant active income from your job and/or business to help satisfy banks’ lending/serviceability criteria and get finance approved.

Therefore, it is not suitable for everyone, however, there are other ways to invest in commercial property such as indirect commercial property investments, eg. commercial property syndicates, unlisted commercial property trusts and Australian-Real Estate Investment Trusts (A-REITs).

Initially though, if you can’t afford to invest directly in leveraged commercial property (either as a business premises or tenanted investment), we suggest you focus on residential property and shares first, rather than these indirect commercial property investments – as earlier on it is better to invest with greater leverage and/or in higher growth assets.

We also prefer to use cash rather than borrowed funds for these indirect commercial property investments as they are often already internally geared.

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