Commercial Property Investment for beginner

[Daddy Ireland]

Hi,

I am a PAYE worker on higher tax rate and together with my wife who is a PAYE higher tax payer with no investments in property.

An opportunity has come up to purchase a commercial property in my thriving town for 70k plus 23% vat. Currently rented for 550 p.m plus vat and lessee pays all rates, management charges, ongoing costs.

Why would vat of 23% have to be paid by me ?

Why under current lease is the lessee paying vat on the rent ?

I would be a cash purchaser and I assume I would have no costs really to write off against the rental income.

What other costs would I have if buying the property ?

With interst rates so poor would I be left with a net yield of 4% ?

As you see I am a rookie in this but if I could get an approx 4% net after all costs I would be very happy with that.

Any help is appreciated.

Thanks.

 

[cremeegg]

A commercial lease is either subject to VAT at inception or not. It is not you that is VAT registered so much as the lease. As the lease is already in existence as a purchaser you buy into the existing VAT set up.

You pay the VAT on the purchase but can claim that back on the vat on the rent. You need proper advice to make sure no issues arise with this.

I calculate the yield at 9.42%, that is before tax.

That is at or a little below the yield you would expect on commercial property. The reason is that voids are fairly common.

As a cash purchaser you can probably weather an occasional void.

The property seems to be local to you. You may be in a good position to judge if there is a good "covenant". In other words are the tenants likely to be able to pay the rent comfortably. If the tenants are struggling, late payments, requests for reductions, etc all become an issue.

You can evict non paying commercial tenants more easily than residential tenants. But you will almost certainly have a void and maybe a rent free period before a new tenant starts paying you.

At first glance this seems like a reasonable opportunity. Its not an obvious bargain, which you may think by comparing 4% after tax with what you get on deposit.

There certainly can be opportunities at this level. Its too small for an institutional investor, and cash buyers with that type of money, €70k, are more familiar with residential property than commercial property.

 

[cremeegg]

As a further point, you should almost certainly borrow part of the purchase price. The interest is deductible in full.

 

[Daddy Ireland]

Thanks for that very helpful advice.

Don't understand what you mean by saying I pay vat on the purchase but can claim vat back on the rent. Do you mean I pay 23% on the 70k purchase and I get to keep the 23% vat on the 550 monthly rent. If so I assume this 23% vat on the rent is not deemed as income for tax purposes.

 

[galway_blow_in]

Hi,

I am a PAYE worker on higher tax rate and together with my wife who is a PAYE higher tax payer with no investments in property.

An opportunity has come up to purchase a commercial property in my thriving town for 70k plus 23% vat. Currently rented for 550 p.m plus vat and lessee pays all rates, management charges, ongoing costs.

Why would vat of 23% have to be paid by me ?

Why under current lease is the lessee paying vat on the rent ?

I would be a cash purchaser and I assume I would have no costs really to write off against the rental income.

What other costs would I have if buying the property ?

With interst rates so poor would I be left with a net yield of 4% ?

As you see I am a rookie in this but if I could get an approx 4% net after all costs I would be very happy with that.

Any help is appreciated.

Thanks.

unless you yourself are registered for vat , you nearly always have to pay 13.5% vat on top of the purchase price of a commercial property , if you yourself are not registered for vat , the current tenant will cease paying vat to you on the rent , it will be a neutral change for him as the tenant while paying vat currently will also be claiming it back , in the event you become the owner , he simply wont pay at all as you are not obliged to charge it , BTW , were you registered for vat , upon purchasing the property , you could claim it back afterwards

you will also have to pay 2% stamp duty upon purchase

just to reiterate , the vat on commercial property is 13.5% , not 23%

 

[galway_blow_in]

As a further point, you should almost certainly borrow part of the purchase price. The interest is deductible in full.

the OP wont get a mortgage interest rate below 5% on this kind of investment , they also wont get it for a duration of over ten years

i was told in no uncertain terms to pay off the mortgage i have on a commercial property , im paying 5.45% on a 50 k loan over ten years , property cost 121 k all in including legal fees and duties , rent is a grand per month

 

[galway_blow_in]

Thanks for that very helpful advice.

Don't understand what you mean by saying I pay vat on the purchase but can claim vat back on the rent. Do you mean I pay 23% on the 70k purchase and I get to keep the 23% vat on the 550 monthly rent. If so I assume this 23% vat on the rent is not deemed as income for tax purposes.

the vat on purchase is 13.5% , not 23% , unless you yourself are registered for vat , you cannot claim back the vat on the purchase price , as for the vat on the rent , unless you are registered for vat yourself , you are not obliged to charge it , the tenant wont care either way about this

vat is chargeable on the sale of the property -, not the lease

in some cases vat is not chargable however on the sale of the property , this was the case with my own and it was only when i employed a tax consultant that this was discovered ( vendor was charging it as they had not done their homework on the status of their own property ) , most solicitors know very little about vat , doesnt stop them taking on jobs however

 

[Daddy Ireland]

Called the auctioneer about this retail unit. They tell me that if I was to purchase the property I would need to register for vat and I would get the vat back on the purchase and pay over the vat on the rent. They say it's 23% vat

 

[Brendan Burgess]

As a further point, you should almost certainly borrow part of the purchase price. The interest is deductible in full.

No, no, no, no, no.

It's never correct to incur an expenditure, just so that you can get tax relief on it. (Unless you are getting a ridiculously cheap rate in the first place or the net rate after tax is less than the rate you are paying on your home loan.)

It would be difficult anyway to get a mortgage for less than €70k. There would be additional legal costs incurred. It's simpler to buy for cash if you have it.

Brendan

 

[cremeegg]

Do you mean I pay 23% on the 70k purchase and I get to keep the 23% vat on the 550 monthly rent. If so I assume this 23% vat on the rent is not deemed as income for tax purposes.

Yes.

the vat on purchase is 13.5% , not 23% ,

I am aware that there has been some confusion and debate on this point and I am not going to say GBI is wrong.

See what you think yourself here. http://www.revenue.ie/en/vat/vat-on-property-and-construction/vat-and-letting-property/index.aspx

unfortunately you may not be any the wiser after reading it.

unless you yourself are registered for vat , you cannot claim back the vat on the purchase price , as for the vat on the rent , unless you are registered for vat yourself , you are not obliged to charge it , the tenant wont care either way about this

My understanding is that as a purchaser you inherit the existing VAT arrangements. This would require you to register for VAT.

The tenant may well care very much, if they are not themselves VAT registered the VAT element becomes a cost to them.

vat is chargeable on the sale of the property -, not the lease

In this case VAT appears to be chargeable on both.

At the end of the day the actual VAT arrangements should not matter. What matters a lot is that you get them right. If you go ahead get proper advice on the VAT aspects.

It's never correct to incur an expenditure, just so that you can get tax relief on it.

Of course.

However if you get on well with this investment you may wish to make another in the future. If all your disposable cash is tied up here that will be more difficult.

It would be difficult anyway to get a mortgage for less than €70k. There would be additional legal costs incurred. It's simpler to buy for cash if you have it.

This is probably true. It is certainly simpler to pay cash if you have it. But if that is all or nearly all the cash you have I suggest that you may wish to borrow to maintain flexibility.

It does explain why commercial properties at this level are perhaps good value. Too small for institutions, difficult to get a mortgage.

 

[Daddy Ireland]

Thanks all. The only thing really that concerns me is this whole vat thing. Who is best to contact on this revenue or a tax consultant ? I assume the auctioneer would hand me a copy of the arrangements already in place to inspect and get advice on.

 

[galway_blow_in]

Yes.



I am aware that there has been some confusion and debate on this point and I am not going to say GBI is wrong.

See what you think yourself here. http://www.revenue.ie/en/vat/vat-on-property-and-construction/vat-and-letting-property/index.aspx

unfortunately you may not be any the wiser after reading it.



My understanding is that as a purchaser you inherit the existing VAT arrangements. This would require you to register for VAT.

The tenant may well care very much, if they are not themselves VAT registered the VAT element becomes a cost to them.




In this case VAT appears to be chargeable on both.

At the end of the day the actual VAT arrangements should not matter. What matters a lot is that you get them right. If you go ahead get proper advice on the VAT aspects.




Of course.

However if you get on well with this investment you may wish to make another in the future. If all your disposable cash is tied up here that will be more difficult.





This is probably true. It is certainly simpler to pay cash if you have it. But if that is all or nearly all the cash you have I suggest that you may wish to borrow to maintain flexibility.

It does explain why commercial properties at this level are perhaps good value. Too small for institutions, difficult to get a mortgage.

you inherit most of the conditions of the lease - tenancy , rent amount , management fees etc , vat is different , the obligation rests with the landlord so if the landlord is not registered for vat , they simply do not have to charge it , it makes no difference to the tenant as even the landlord was registered for vat , the tenant can claim the vat back

the vast vast majority of traders who operate in a commercial sense are vat registered , farmers ( though not all ) are the exception as being vat registered actually penalises them in other areas , crop farmers however usually register for vat due to the huge cost of buying machinery etc , vat on machinery is 23%

add to that , there is no vat on the purchase of farm land , stamp duty is 2% however as with other commercial property

 

[galway_blow_in]

Called the auctioneer about this retail unit. They tell me that if I was to purchase the property I would need to register for vat and I would get the vat back on the purchase and pay over the vat on the rent. They say it's 23% vat

interesting , any commercial property ive ever enquired about ( and there has been a lot ) , the vat rate upon purchase was 13.5%

 

[RedOnion]

you inherit most of the conditions of the lease - tenancy , rent amount , management fees etc , vat is different , the obligation rests with the landlord so if the landlord is not registered for vat , they simply do not have to charge it , it makes no difference to the tenant as even the landlord was registered for vat , the tenant can claim the vat back

It's not quite as simple as that. If the vendor had claimed VAT back on the original build / purchase, they would most likely want to have the sale now subject to VAT. If not, they need to work out a clawback calculation with Revenue to repay the amount of VAT they claimed that they're effectively not now entitled to (capital goods scheme). It's not uncommon to see 2nd hand commercial property being sold subject to VAT for this reason. In particular if the property is being sold by a receiver / liquidator as it passes responsibility to the purchaser rather than the receiver being liable for any VAT issues. As you've said of course if the tenant is VAT registered it really doesn't matter from their point of view as they will be reclaiming the VAT, but it creates extra paperwork as a landlord.

Responsibility for VAT on the purchase rests with the purchaser - make sure you're solicitor is experienced in this, as you need to get a paper trail of all VAT from the time the building was 'new'.

There are a few things to watch out for with VAT on leases, most notably VAT is payable to Revenue on the invoiced rent - even if the tenant stops paying, the VAT still needs to be paid to Revenue (you can claim a bad debt relief later, but only after you've written off the debt).
Definitely not something I'd enter into without having some advice on the VAT element, and factor in potential annual accountant cost for filing VAT returns in working out your net yield.

EDIT: Just to add, VAT on property is an extremely complex area, and specific circumstances which might seem insignificant could have a large bearing on the treatment of a specific transaction.

 

[MrEarl]

Stepping away a little from the VAT discussion (which seems to be well covered at this stage)....

I would be extremely slow to buy a commercial investment property for €70k.

It seems far too cheap to be a property of any substance, or to have a quality covenant (unless the original poster happens to have some very reliable knowledge about the tenant, but even then it's likely to be a very small business so perhaps quite vulnerable to competition, a downturn, the entry of a strong competitor into their market etc.).

While the original poster refers to the property being located in their "thriving town", is there a bias there because the original poster is from that town ? When described as thriving, how many commercial streets in the town ? How does the location of this property compare with the best commercial locations in the town (is it on the busiest street, or a side street adjoining a commercial street etc.) ? Approx how many businesses in the town ? How many vacant commercial properties in the town at present ? How badly was the town hit in the last recession ?

What are the strengths and weaknesses of the tenant's business ? What risk of a competitor coming in and under cutting them, their service or product becoming obsolete at relatively short notice ? Any regulatory, environmental or even social concerns to be mindful of regarding the tenant's business ?

Then there are other considerations such as concentration risk (is the original poster investing too much of their overall wealth in this town, if they already own their home there and don't have considerable other asset types or property assets located elsewhere), or the risk of investing a significant part of their wealth in a single property rather than diversifying into other asset categories etc.

Absolutely no disrespect intended to the original poster, but if this is their first time investing in commercial property then they really need to think carefully as to whether this is the right opportunity (emotions about the locality aside) and whether or not they are putting all of their eggs in one basket (in terms of their overall wealth, cash resources etc.).

 

[galway_blow_in]

while the quality of the tenant is important , unless you are spending near a million , your not going to be having companies which are listed on the stock market as a tenant , ditto if the property is off o connell st in dublin , i would not be concerned that it costs less than 70 k , its unlikely to increase in value at the level residential property might but there should be considerably less hassle , it also miles easier to evict a problem commercial tenant than a residential one

 

[MrEarl]

....there should be considerably less hassle , it also miles easier to evict a problem commercial tenant than a residential one

With due respect, I would not be so quick to make those statements

Perhaps I have seen more difficult or troubled commercial investment property cases than many others posting here, so that may explain why I am more reluctant about the proposed transaction.

Obviously, I take your point in principal about the amount of the investment and the expected location or covenant that comes with that expenditure, but I would hope that you are also aware that there are other options if someone is looking for commercial property exposure (and particularly if the person wants a lower level of risk, or may wish to diversify their investment across a number of properties, locations, tenants etc.).

First time investors who invest in deals like this often end up learning hard and expensive lessons. That's not to say that everyone has difficult experiences and it is not intended to disrespect the original poster, but it is a fact.

Caveat Emptor

 

[galway_blow_in]

With due respect, I would not be so quick to make those statements

Perhaps I have seen more difficult or troubled commercial investment property cases than many others posting here, so that may explain why I am more reluctant about the proposed transaction.

Obviously, I take your point in principal about the amount of the investment and the expected location or covenant that comes with that expenditure, but I would hope that you are also aware that there are other options if someone is looking for commercial property exposure (and particularly if the person wants a lower level of risk, or may wish to diversify their investment across a number of properties, locations, tenants etc.).

First time investors who invest in deals like this often end up learning hard and expensive lessons. That's not to say that everyone has difficult experiences and it is not intended to disrespect the original poster, but it is a fact.

Caveat Emptor

general - traditional warnings are no harm but can be over employed , everything is a risk in some shape or form when it comes to a return on money

added note , was talking to two people today who have quite a bit of experience when it comes to commercial property , one a bank manager , the other an accountant , neither had ever heard of a situation where vat was charged at 23% on the sale of a commercial property , 13.5%

being obliged to charge 23% on the rent is a different matter

 

[Daddy Ireland]

Hi again,

So would a tax consultant or an accountant be the person to deal with on getting tax advice on any vat complications on purchasing say a mixed use of commercial units and apartments ?

Thanks.