Some say residential and commercial properties are two “different animals”, like cats and dogs. But really, it’s more like the difference between a cat and tyrannosaurus-rex. The two are so different, a residential investor may need to to re-learn the rules from the ground-up. Here’s how to tell if you’re ready to take over a commercial property:
First, why would you want to take over a commercial property?
There are three reasons:
(1) You want a higher rental yield. Commercial properties tend to have rental yields that beat their residential counterparts by almost two percentage points (around five per cent, rather than residential’s two to three per cent).
(2) You want to avoid stamp duties. The Additional Buyers Stamp Duty (ABSD) on your second property is 12 per cent, or even higher for Permanent Residents and Foreigners. For commercial properties, you just worry about a seven per cent GST.
(3) You’re sick of tenants who trash your property. Commercial property tenants are motivated to care for your property. A tenant who runs a restaurant isn’t inclined to leave it covered in mold and rat corpses. A sloppy residential tenant, however, might do just that.
What are the signs you’re ready to take over a commercial property?
- You’re familiar with the price determinants of that commercial property type
- You’re informed of the different loan requirements and options
- You’re ready for a harder time with maintenance
- You’re braced for potentially higher taxes
- You’re financially prepared for things to go wrong
1. You’re familiar with the price determinants of that commercial property type
For commercial properties, price determinants vary widely by type. A warehousing facility has completely different price determinants from, say, a retail outlet: the warehouse will need a lot of wide, open spaces nearby, with less foot traffic. On the other hand, a retail outlet won’t do well if it’s surrounded by several hundred square kilometers of nothing.
You’re ready to take over a commercial property if you understand its relevant business, and the unique needs of its tenants.
Also, price determinants are deeply tied to the cyclical nature of certain industries. Office rents, for example, tend to fall if the overall economy contracts (companies shrink and hire fewer staff). While residential is also affected by the overall economy, the impact is less direct – people still need housing, whatever the situation.
Bear this in mind before taking over a commercial property: the asset can be much more volatile than, say, a mass market condo.
2. You’re informed of the different loan requirements and options
On paper, banks can finance up to 80 per cent of your commercial property. We say on paper because there are plenty of exceptions, when compared to residential property loans.
For example, most banks won’t give you the full 80 per cent, because they consider some types of commercial property more risky than others. Also, loan quantums are lower for properties that only have 60-year leases (not uncommon in commercial property).
Loan tenures are also shorter – commercial property loans are maxed out at 30 years, and this decreases with factors such as remaining lease. Bear in mind that commercial properties can have leases as short as 60 years.
Don’t be deceived by banks offering “100 per cent” financing for commercial properties. This usually applies to people who buy the commercial asset through a registered business – this allows you to combine the property loan with a working capital loan. While attractive, business loans have a whole slew of restrictions and terms that you need to be well-versed in.
In short, be prepared to spend more time looking for a good loan arrangement. You’ll also need a much bigger down payment.
(In case it needs to be said, don’t even think about using your CPF! That’s only for housing).
3. You’re ready for a harder time with maintenance
A commercial property asset requires you to be more hands-on than a residential unit. There’s also a greater sense of urgency involved: remember that your tenants are running a business. They can’t wait for repairs as long as a residential tenant can.
For example, a residential tenant can tolerate you taking a few days to fix a leak – but a restaurant tenant might need you to fix it today.
Maintenance issues are also more complex – you need to deal with fire alarm systems, pests in communal dumping areas, elevator jams, etc.. This sort of maintenance is more expensive, as well as time consuming.
So take over a commercial property only after checking the monthly maintenance cost (ideally over a period of a few years). Because maintenance costs are so high, they could more than make up for the higher yield.
4. You’re braced for potentially higher taxes
The property tax for a commercial property is 10 per cent of its Annual Valuation (AV). This is a flat rate, unlike residential properties.
In general, this will mean higher taxes compared to most residential properties.
Above all, you should take over a commercial property only if you’re financially prepared for things to go wrong.
Besides the bigger cash outlay, commercial properties take a longer time to sell when things go wrong. It also takes a longer time to find tenants, or even to refinance when interest rates rise.
Make sure you’re financially able to absorb the expenses for up to a year, before you take over a commercial property.
Are you thinking of moving into commercial property? Voice your thoughts in our comments section or on our Facebook community page.
If you enjoyed this article, 99.co recommends 5 Commercial Properties Singaporeans Secretly Wish They Owned, and 5 Reasons Why You Shouldn’t Rule Out Investing in Commercial Property
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