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Make money from investing in commercial properties
It is widely known that property have proven itself time and time again as a very critical and lucrative part of an investors’ portfolio when invested rightly
Posted Date: Oct 15, 2009
By: Chan Ai Cheng

Commercial Property Jewels

It is widely known that property have proven itself time and time again as a very critical and lucrative part of an investors’ portfolio when invested rightly. The question now is, are there better types of property we can invest in that can bring us better returns. Would it be more costly and complicated?

iProperty.com speaks to Asia’s Queen of Property, Ms. Renesial Leong to get some insights on the ‘BIG’ money in commercial property investment, having achieved a huge amount of wealth through commercial properties herself.

Why do you consider commercial property as the better investment option for you?

The first thing that comes to mind is the speed of its capital appreciation. We can literary see values double in as short a time as three to six years. Most commercial property yield higher rates of return in rental income than residential property as a general rule, yield being calculated based on yearly rent divided by the purchase price of the property.

In terms of the property itself, commercial property really requires very minimal care and management as most matters will be looked after by the tenant. A tenant for commercial property is different to that of a residential. Commercial tenants are renting with a view to operate their business in them. When one needs to operate a business, the property, usually rented as is where is basis, without furnishings, will be renovated according to specific specifications and kept in good state as this is important for business. This makes it all the more blissful for the investor/owner of the property.

Tenant retention is always a concern when it comes to property investment. The less often, the better, as vacancy periods really do eat into your returns. It is much easier to retain tenants of commercial properties as business owners dislike moving their operation as this inevitably affects their business and/or customers negatively, in one way or another. This being the case, rental reviews are also easier with commercial properties.

Depending on the kind of business my tenants are operating, where possible, I always make it a point to support my tenant’s businesses as best as I can. It builds good relationship and that goes a long way.  
With most of my commercial properties, I can practically walk in as a customer to view how well my property is being maintained by the tenant. Monitoring becomes so much easier.

There is also a possibility of savings in taxable income with commercial properties as comparatively it is easier to qualify for business income.  How this works is that when one qualifies to declare one’s rental income as business income, all the administrative expenses incurred in managing your investment property can be deducted from your rental income, which results in the reduction of your taxable income. 

In addition to increased return on investment by maximising usage and higher rental returns in terms of quantum andd frequency, you have the flexibility of using the property for your own business too.

How do residential properties and commercial properties compare?

To invest in property, firstly, you need to understand the similarities and differences, as well as the advantages and disadvantages of owning a commercial property as opposed to owning a residential one.

The major differentiator of commercial property (except for serviced apartments) is that they do not fall within the ambit of the Housing Development (Control and Licensing) Act 1966 (Act 118). As an investor, you must look through the terms and conditions of the Sale and Purchase Agreement (SPA) as well as payment schedule and understand them thoroughly before committing to the purchase.

The other important differences between the SPA of commercial property and residential property are as follows:

 

Commercial

Residential

The defect liability period

Normally 6 months

24 months or even 36 months

Progressive billing claims

Upon commencement of work

Upon completion

Developer’s administrative charges for subsale

1-2% of the selling price

RM50 only

Subsequent assignment

Requires developer’s consent & endorsement

No need

Sale & Purchase

Normally one sided Agreement drafted by Developer

Standard SPA by government under the Act, Schedule G & Schedule H for house, apartment

Completion

3 years from SPA date

Normally 2 years for house & 3 years for apartment

*Note: Item 3 & 4 above are only applicable when the strata title/individual title have not been issued

It is also important to note that the capital outlay for a commercial property is higher than a residential. The reason the capital outlay is higher with commercial property is, firstly, they generally cost more than residential properties and secondly, the margin of financing offered by financial institutions/banks are at least 10 – 15 percent lower, which means you will have to come out more of your own cash in hand to purchase. Having said that, EPF withdrawal is allowed for commercial properties with dwelling units.

In addition to that, she adds, the interest rates of commercial property loans are usually higher than residential property loans and the terms are usually not as flexible. Rates for commercial properties are also higher for quit rent and assessment. You must also take note of service charges which are usually calculated based on a per-square-foot-of-area-owned basis.

On the plus side, tenants of commercial properties are companies or corporations, while the tenants of residential properties are mainly individuals/households. The value of a commercial property is often closely related to the revenue it generates. The rental for commercial properties is easier because tenants look commercial properties as part and parcel of doing business. Not only is the rental they pay tax deductible, the premise they rented helps them to generate profits from their business. As a result the tenancy periods are longer as it is much harder for businesses to move than a household though it is common to allow for rent-free renovation periods which usually range from half to one month depending on the extent of the renovation works. The more works they put into the property, the tendency to stay longer is much higher. Tenants of commercial properties usually take better care of the property as well.

On behalf of iProperty.com, I extend special thanks to Ms. Renesial Leong for sharing her invaluable insights with us.

Brief Profile of Renesial Leong

Popularly known as ‘Asia’s Queen of Property’ Renesial is an extremely successful property investor with more than 20 years of proven investment track record. Bestselling author of “Property Jewels” and “Your Tenants Your Jewels”, she has just released her third book “Commercial Property Jewels”. A columnist, Master Trainer, and a much sought after speaker at international and regional events, Renesial’s greatest joy is having the ability to help people achieve financial freedom. The reason is simple – with financial security comes the ability to live life to the fullest and create great value not only for ourselves but also our loved ones and the less fortunate.

Chan Ai Cheng is general manager of S.K. Brothers Realty (M) Sdn Bhd and a registered real estate agent with the Board of Valuers, Appraisers and Estate Agents Malaysia; a member of the Malaysian Institute of Estate Agents (MIEA); a member of the Institution of Surveyors Malaysia (ISM), and a registered Financial Consultant with the International Association of Registered Financial Consultants (IARFC).  If you have a question or suggestion on property investment, or feedback on this article, please write to aicheng@skbrothers.com

 

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