And do the rewards outweigh the costs of a long-term investment into a commercial asset?
You’ve probably heard commercial real estate is a rewarding investment. Talk of high yields and opportunities for massive capital growth tends to attract a hoard of new investors every year. But as long-time commercial property investors we’re consistently asked… ‘How much does it cost to invest in commercial property?’
It’s a loaded question we’ll answer in two parts:
- First, we’ll figure out how much capital you may need to invest in a commercial property – both on your own and in a syndicate.
- And then, we’ll discover the fees.
Keep in mind, rewards should always outweigh the costs of your investments. While there’s no guarantee this will be the case for everyone, a smart investment alongside the right team of professionals can help earn you the prosperity you deserve. Learn more about our commercial property syndicates here.
How much capital do you need to invest in commercial property?
You could Google ‘cheap commercial property for sale’ and realise it’s possible to buy – outright – a commercial asset for the cost of a house deposit. But most often it’ll be a postage stamp-sized office space or shopfront, potentially vacant or already occupied by a low-quality tenant (whose inexperience may soon render the property vacant anyway), on a tight yield and with little room for capital growth.
This isn’t the type of commercial property we’re talking about today.
Most high-yielding commercial real estate opportunities are found north of a $1-million valuation. The higher you go, the more likely you’ll find a reliable tenant (remember, the tenant typically pays all the bills and a vacant premises means you pay them) who’ll sign a long lease agreement at market rates.
Now, most investors will use the bank to help with the purchase. These days you can expect the bank will finance up to 60 per cent of the total commercial property value (providing of course you meet their lending criteria), meaning for a $1 million property, you’ll fork out $400,000 of your hard-earned capital while the bank sorts out the rest.
There are of course fees involved with this – scroll down to see them.
Capital needed to invest in a property syndicate
Australians love commercial property syndicates. You need less to invest; your investment is handled by seasoned professionals; and some syndicators (like us) even invest alongside you. As a syndicator, our most asked question is what is the minimum amount needed to invest?
We’ll invite investors to partake in a commercial property syndicate with a minimum investment of around $200,000. This is higher than some syndicators who’ll accept investments of $20,000, $10,000 or even as low as $5,000. But a larger minimum investment amount means we can build an individual relationship with you, answer your unique queries or concerns, and give you the easiest onboarding experience in the industry.
$200,000 is the deposit on a modest house in an average neighbourhood. But it won’t give you the returns like commercial property typically offers.
(To find out how rewarding commercial property investment can be, check out our most popular blog post: What’s a good return on commercial property?)
Fees for investing in commercial real estate
Arguably the biggest fee in commercial property is the cost to manage the premises. Your tenant is the lifeblood of your property, so ensuring they are managed correctly should be one of your highest priorities.
There are of course fees involved with financing the property purchase. Valuation fees will bolt on another few thousand dollars to your cost base. And don’t forget stamp duty. Costs to transfer land into your name, company or self-managed super fund varies from state to state.
Let’s get to the numbers.
Commercial property management fees
Asset management services in Australia can typically cost anywhere between 4 per cent to 12 per cent of commercial property’s rent. This covers:
- Handling tenant complaints or issues
- Collecting rent
- Facilitating commercial lease negotiations on your behalf
- Leasing campaigns (if the property is vacant)
The costs to advertise for a new tenant may fluctuate depending on the market. They also may be non-existent if your premises is in high demand by the right tenant.
Costs to invest in a property syndicate
Property syndicates will charge you for the privilege of leveraging the fund manager’s expertise and vast network. It makes sense because the time, energy and costs saved by partnering with a syndicator is immeasurable compared to doing things on your own.
Here are a few fees you can expect from investing in a syndicate:
- Establishment Fee: Typically between 3 per cent 5 per cent of the property’s purchase price (divided by your portion of ownership)
- Management Fee: If a syndicator manages the investment themselves, expect to be charged between 0.5 per cent and 1 per cent of the property value. Or, if you invest with a syndicator like us, we’ll charge you 15 per cent against the trust’s net income (divided by your portion of ownership). This is usually far better off for you because if the property is vacant you shouldn’t be charged any fees. Check out our fee structure for more info.
- Success Fee: Anywhere between 1 per cent and 3 per cent of the asset’s sale price. Or calculated on the property’s capital gain (perhaps at approx. 15 per cent).
This post doesn’t cover every fee you’ll see as a commercial property investor. And you’ll need to consider your own financial planner’s fees, as well as legal fees to set up any trusts, and of course the inevitable accounting fees throughout the tax year.
But these outlays will typically fall far below the return you’ll be making from your commercial property investment, particularly when investing smartly – or with an industry-leading commercial real estate firm.
Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.