Commercial Property Investing Part 2: Here’s 3 Key Factors You Need to Look Out For Before Investing


In Part 1 of this article, we talked about why you should consider commercial property over the usual residential property for investment.

Here, we list some of the key considerations investors need to look out for when investing in commercial properties.

Key Considerations

Similar to buying a residential property, there are some key points to look out for that can affect the value of your investment.

1) Location

When buying a residential property for investment, you’d likely consider the location according to what type of tenants you are looking for.

In targeting a single expat who wants to live near the CBD, you got to look at the central region area. The same goes for someone who wants to rent a place for business use.

While CBD is the obvious choice due to the central location, you may want to also consider those in business parks since some companies are increasingly moving in these areas to cut cost.

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2) Rental Income

The type of commercial property you are purchasing can impact your rental income. If you are buying a retail space, then you definitely want somewhere with high human traffic to attract potential tenants.

If you are buying an office unit, you would want to target an area with good transport connection and also close to the CBD or Orchard area.

This is not just for the sake of convenience; some companies also feel that being located in these areas give their company a more prestigious feel. Being located in these areas will probably mean you will be paid a premium.

[image credits: Pixabay]

As with most property investments, you need to set the price right so that it can cover as much of your mortgage and monthly costs as possible.

3) Up-Front Cash & Other Costs

As regulations work differently for residential and commercial properties, you need to take note that there is a greater up-front cash outlay for commercial properties compared to residential properties.

For owner-occupier of commercial property, you’d need to pay a 20% down payment, no matter how many commercial properties you own. For those looking to invest they will need to pay higher as their loan-to-value ratio is at 60 to 70%.

What’s more, you will not be able to utilize your CPF for commercial properties at all. You’d need to factor in a 7% GST as well since most developers are GST-registered companies.

But if you are buying it under your registered company, you may be able to claim back this amount.

On the other hand, unlike residential properties where owners probably need to spend on renovations and buying furnishings, commercial properties are generally rented out empty, thus reducing the costs.

But you may need to invest in the maintenance and daily upkeep of the property.

[image credits: Pixabay]

Property taxes are at a flat rate of 10% for non-residential property; mortgage loans for commercial properties are generally shorter than residential ones, lasting between 15 to 20 years.

Interest rates for commercial properties are also slightly higher.

With shorter tenure and higher interest rates, you need to be prepared for a high monthly repayment and should take these into consideration when setting your rental price.

Other than rental yields, investors obviously are looking for capital gains and even the possibility of en-bloc sales.

Consider your risk appetite and the pros and cons of investing in a commercial unit before making an impulsive acquisition!

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Lynette Tan

Lynette has more than six years of experience in financial analysis and writing, having stepped foot in the financial world as a commodities analyst. With a passion for personal investing and financial literacy, she hopes to help others gain investment knowledge by making investment concepts plain and simple for the man on the street.



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