Key Post Invest in commercial property or residential property?

spiking

Registered User
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10
hi all,

I'm new to the property investment.

My spouse and I have some cash to invest. We have found a commercial properties with long term leases signed off(the net yield about 9%) and I talked to the Bank, we can borrow 50% of the property value to buy for this commercial property with interest about 4.5+%.

I see most people buy residential property here as an investment, and less on commercial properties.

I think I must have missed something very important to know.

Could someone give me some hint or options on borrow to buy commercial property please?

many thanks in advance
 

MrEarl

Frequent Poster
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1,927
Hello,

I personally think it's down to people being more familiar with residential property, than commercial property, because we all live in residential property.

Notwithstanding the above, residential tenants have certain rights, typically only sign 1 year leases, often relocate so new tenants need to be found at extra cost, the landlord typically needs to cover repairs, decorate the property, register with the PRTB, possibly be subject to rent caps, possibly have a harder time evicting a troublsum tenant even when rent isn't paid and Im sure I'm forgetting other more important things. Also, it's worth keeping in mind that with the current housing problems in Ireland, most future governments are likely to continue to give preference to tenants and potential homebuyers, ahead of landlords.

Commercial properties sometimes need professionals to help manage them, negotiate leases etc. I suspect they property values don't increase at the same rate as good residential properties, but often commercial properties offer a better return (yield). Leases are typically longer term, often ranging from 5 years to 25 years in term. Some leases are Full Repairing and Insuring (so the tenant covers repairs and insurance), but not all. You can potentially secure a very good commercial tenant, which can significantly reduce the potential risk of rent not being paid. Commercial properties are less hands on, in my view, so require less of your time.

Is the commercial property that you are looking at outside of one of the cities, possibly multi-let, and / or on short term leases, possibly specialist in use ? Also, are you intending to acquire the properties in your personal names, rather than through a holding company? There's factors all influence the level of debt on offer. That's not to say that 50% might not be the right amount of debt to take on btw.

If you've not already done so, get some tax advice on how best to acquire and hold the properties - quite a few people are buying properties through companies these days and lenders seem to favour that method too.

Last, but not least, don't foget the golden rule when considering buying property - location, location, location :)
 
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Brendan Burgess

Founder
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40,666
Excellent summary Mr. Earl

I have made this a key post

An auctioneer told me recently that he has noticed a pick up in demand for small commercial properties because people are afraid to invest in residential properties any more.

A couple of other issues.

Stamp duty on commercial property is 7.5% vs. 1% on residential property.

VAT can be a nightmare on commercial property. The rules are very complicated and it's easy to fall foul of them.

I wonder if the default rates are higher for commercial property? Although residential tenants are much better protected, I would guess that they are more responsible and more determined to pay the rent so that they can keep their home. If a business is in trouble, I would say that paying the rent is a lower priority than other creditors.

It's easy to mess up on leases. You might grant a 4 years 9 months lease to a tenant. If you don't kick them out at that stage, then they get rights to renew the lease indefinitely. You can renew the lease with a waiver, but I am not sure how that stands.

And politicians do get involved. Remember the uproar about upward only rent reviews a few years ago.

Brendan
 

Brendan Burgess

Founder
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40,666
quite a few people are buying properties through companies these days
It is better for an individual to buy property in their own name , rather than through a company. It's discussed in other threads.

In summary
  1. If the company sells the property it will have to pay Capital Gains Tax
  2. If the investor then liquidates the company , they will have to pay CGT again.
  3. If you want to do anything legally, you will have to use a solicitor. You will not be able to represent a company in court.
  4. The administrative overhead in terms of accounts, annual returns and tax planning is excessive.
Brendan
 
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spiking

Registered User
Messages
10
Thank you all for your response. very informative and useful.

@Brendan Burgess Do you mean buying commercial property as an individual is not a good idea? or do you mean buying commercial property via individual's company is not a good idea?


I haven't bought it yet, and I am planning to buy as individual. Someone also suggested to buy commercial property via pension, then all the income will be tax free, but it will be locked to pension fund until my retirement. any thoughts on that?
 

Brendan Burgess

Founder
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40,666
Do you mean buying commercial property as an individual is not a good idea?
Clarified now.

Not sure about buying it through a pension. It's administratively difficult.

For example, I am aware of a case where the tenant paid no rent at all, and the beneficiary of the pension was not aware of it. He just assumed that the trustee was looking after it. He had to sue the tenant to get him out which was awkard as he was also suing the trustee.

Brendan
 

MrEarl

Frequent Poster
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1,927
It is better for an individual to buy property in their own name , rather than through a company....
Brendan
Hello,

I'm not a tax expert, but am I correct in thinking that stamp duty on shares, is something like 1%?

If memory serves correctly, I think this was one of the arguements in favour of holding properties in a company - the company would be attractive to a buyer at a later point, given the lower stamp duty, than if the properties were being acquired outside of a company. If accurate, this may help increase the sale price.

If someone is considering putting bank debt on the properties, debt will be to the company, so personal recourse might be avoided. If the properties are held in a person's individual capacity, they'll borrow in their personal names and be on the hook, by default.

Rental income on the properties within a company may be taxed at a lower effective rate, than rent collected by a person in their individual capacity. Its vital to confirm a person's individual tax circumstances here though, but I tgink its relevant for those in the higher tax bracket.

In a situation where someone uses a company to buy properties, and this is their main business, might they be eligible for "Retirement Relief" ?

Holding properties in a company might also offer future opportunity to sell part of the holding, by selling some but not all of the shares. That said, selling or acquiring minority interests in private companies can also create its own challenges (but might suit where bringing your children into the ownership on a staged basis, for example).
 
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RedOnion

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4,458
I'm not a tax expert, but am I correct in thinking that stamp duty on shares, is something like 1%?
Yes, but not if it's a property holding company. There's no loophole there anymore!

A lot of the tax benefits of using companies have been curtailed over the years, so it's probably only in specific circumstances it's of benefit anymore.
 

MrEarl

Frequent Poster
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1,927
Clarified now.

Not sure about buying it through a pension. It's administratively difficult....

Brendan
I've seen it done quite a few times over the years, once quite recently in fact, where a self administered scheme was being used.

IMHO, the key to it is to have a good professional pension trustee, and a good property manager. Obviously, add to that a quality investment property. These don't come cheap, but when done properly and run by professionals, can be very attractive for some people.
 

Itchy

Frequent Poster
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346
Last, but not least, don't foget the golden rule when considering buying property - location, location, location :)
Would location be referring to a main city centre or centrality in a smaller town?!

Looking at sub €200k commercial properties, you are mostly looking at smaller units in the commuter towns. What kind of returns would compensate for I suppose the higher risk of a non-prime (main city) location? A unit with a gross yield of ~10/12% might give a 8% ROE and a 3% cash-on-cash return (assuming 70% LTV). Would this be an expected return? In terms of assessing a commercial property deal, would you consider higher expenses and vacancy allowances compared to residential?
 

cremeegg

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3,282
I think one crucial point has been missed in the discussion.

Residential properties in good locations rarely have any significant voids. Commercial properties can have much longer periods unrented.

If you cannot go 6 months without rent I would steer away from commercial property.
 
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