Hot Tips For The Money Bits ─ Understanding Commercial Property Investment FAQ

The commercial property market is tough for first-time investors. Here are Acumen Finance’s Top-10 FAQs to help you on your journey.

Nathan Daly
October 26, 2020
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Hot Tips For The Money Bits ─ Understanding Commercial Property Investment FAQ

Here we are, at the end of our little Hot Tips For The Money Bits saga; it’s been a trek and, hopefully, you now feel more educated when it comes to investing in commercial property. Maybe, you’re even ready to take the leap. If you aren’t and you still feel like you need more information, or that you would like some further detail on specific aspects of the process, get in touch with the team at Acumen Finance, and we’ll gladly provide it. First, though, see if our list of top-10 FAQs for Understanding Commercial Property Investment can help.

Top Ten FAQs

What sort of return should I expect from my retail or multi-family property?

This is a very common question which is very easily answered: the return on your commercial property will be wholly dependent on the demand from the market at any given time. So, if you find yourself leasing at a time of higher demand, cash flow will often correlate with that ─ more demand, more business, more cash. And, on the flip-side, if the markets are on a downward spiral, your rental rates will have to head down-under too, to attract tenants.

As with most investments, in every sector, the market, your strategy, and the risk of investment will all have a direct impact on the return of both a retail and multi-family commercial property.

Can you find a commercial loan fully amortised for 20 to 25 years?

Yes. You can find a fully amortised 20- to 25-year commercial property loan, and you’ll most likely receive from the local Tier 1 banks ─ primarily, the Big Four. However, as we’ve stated before, the traditional banking system is no longer so willing when it comes to lending for commercial property investment or development.

How fast can I get a tenant into my newly acquired property?

Technically, only you can answer that question. However, before you stick your commercial property on boards across the nation, check that it has all of the features that it needs to have to attract the right calibre of client. If it does, it’ll only take a short while to attract tenants ─ assuming the market is in a happy place!

Why does the Net Operating Income (NOI) exclude debt service?

Well, to put it bluntly, acquiring loans from lenders, whether they are Tier 1, 2 or 3 is an entirely biased process. On the other hand, the acquisition of cash used to cover the scheduled repayments of interest and principal on a loan or debt is not. Subsequently, the debt service is excluded from the Net Operating Income calculations.

Are closing costs included in CAP rate NOI calculations?

So, unlike the debt service, the Capitalisation (CAP) Rate does get included in the Net Operating Income calculations. The CAP rate is kept in there because the closing costs on a property are still classed as being part of the initial investment and overall expenses ─ so they’re part of the Net Operating Income.

Absolute net? What is it?

If anybody ever mentions the ‘absolute net’ when talking about commercial property dealings, it just means that your tenant will be paying all of the expenses. With that in mind, when it comes to projections and calculations, the gross value of your investment will be akin to the absolute net.

If a tenant is higher grade, will the lender give lower interest rates?

If your tenant is of a higher grade, the lender will most likely lower the interest rate of a loan, as any financial risks for both yourself and the lender are drastically lowered. That is why you should always look to put a ‘better’ quality of tenant into your property ─ people with proven financial reliability and evidence of reliability and punctuality, in this case.

Who actually manages a Triple Net Lease?

So, as the owner of the commercial property, you will manage any Triple Net Leases (NNN) that you sort. If you don’t want to manage it yourself, you can, at a fairly high cost, hire a property manager to deal with it.

It all depends on how profitable you want your property to be in the end.

Should rising interest rates concern me? Will they be detrimental to my cash flow?

Interest rate fluctuation tends to affect just about everything on the markets ─ your rental return is no exception. You’ll likely find yourself including rental escalations in your leasing contracts before a prospective tenant signs on the dotted line, which accommodate for the potential increase in interest rates as markets and currency bounce around.

The escalation will allow you to keep a steady cash flow coming through your commercial property even if interest rates from the banks rise.

I’m purchasing a commercial property which has existing tenants; can I change the lease(s)?

No. Unless the client is open to it ─ you can’t change existing agreements without first consulting the existing tenant. And, bear in mind… if you plan on changing an existing lease to better line your own pocket, the tenant is very unlikely to accept an offer that is detrimental to their own.

And that’s it! Our top-10 FAQ on the Hot Tips For The Money Bits Pt. I & II. Like we said at the start, if you need any further guidance or assistance when it comes to the commercial property investment game, the team of experts at Acumen Finance has got your back. Drop us a line and let’s see if our specialists can break you into or enhance your Australian commercial property investment journey.