Could your next investment opportunity be the office?

Financial planning Written by Ben Pauley, Dec 18 2019

Commercial property is a great investment vehicle; however, it can be a hard market to access with shorter repayment terms, higher interest rates and a greater deposit required for lending.

Business owners however have a unique opportunity in this space. I work with many businesses who have strong cash flow and are seeking investment opportunities. I often talk to them about looking no further afield than their office.

Acquiring or developing a commercial property that your business runs from is a great investment. Much like a first home buyer trading rent for loan repayments, it is a great way to funnel cash flow into an asset rather than an expense. Whilst yields are low on commercial property, interest rates have also fallen to the point that in some instances it is cost neutral trading rent payments for loan payments.

In the short term it also provides other benefits ranging from having a property tailored to your business needs, through to the security of a premises for your business (you control the lease). In the long term it can provide you a passive income if you ever sell your business, and access to capital gain (further return on your money).

Beyond all of the above, the lending market also favours owner occupied property. In some instances you can borrow up to 100% of the purchase price of the property through a bank if it is the premises you operate from. In simple terms, this involves leveraging the balance sheet of your business to do so, but gives access to property for those that perhaps don’t quite have the capital but do have the cash flow.

Case study

The below is a simple example of the numbers based on a $1 million purchase of a commercial property for a well traded business if they were to borrow 100%. The below example is on the premise of a blended loan term (combining the secured and ‘unsecured’ portion of lending).

The borrowing would be $1,000,000 over a 10-year repayment term and I have assumed an interest rate of 5% which I believe is conservative. This would equate to total repayments of around $130,000 p.a. (split interest payments of $50,000 p.a. and around $80,000 of principal). It is fair to assume that your current rental would sit somewhere around a 5.5% – 6.5% yield so from a P&L (profit and loss) point of view the above would be cost neutral (interest and rent payments match) in year one, improving over time as your loan balance reduces.

You can also work on the assumption that the asset will increase in value over time. Working on a conservative position of 3%, this would equate to $30,000 for year one (compounding over time). After the 10 years on that premise you would have paid around $1.3 million (and be debt free) with an asset worth approximately $1.3 million (compounding 3% increase in value). Based on that value the rent roll from the property would be around $70,000 p.a. (assuming a 5.5% yield holds). The benefit here is if you sell the business you can retain the rent roll (hold the property) and have a passive income going into the future.

Effectively, on the above, for no cash in you would end up with a freehold $1.3 million asset providing a passive income of $70,000 p.a. If you are looking at ideas of how to put cashflow in your business to use, acquiring a commercial property can be a good avenue.

Give Squirrel Commercial a call today to see if this is an opportunity for you.

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