You are not only get rental income from commercial property, but you also get potential capital gains. The entry level for commercial property is quite high compare to residential property. This is because the bank normally offer the loan that less than 80% while up to 90% for residential property. A wise property investor is always purchase the commercial property at below market prices to enjoy the significant benefits from rental income and potential capital gains.
Here we show you an example;
Current market price: RM 800K
Final purchase price: RM 600K (after bargain with the seller)
Save/ Earn: RM 200K
Or:/
Re-sell the property: RM 800K (current market price)
Final selling price: RM 780K (included all the transaction costs)
Save/ Earn: RM 150K
The real value of a commercial property is based on rental income and useful value of itself. The yield of commercial property is preferably at least twice the fixed deposit rate. Which means the yield is (monthly rental x 12 (one year)) / (purchase price) x 100%.
Here we show you an example;
Purchase price: RM 80K
Rental: RM 5K/ month
Hence, the rental yield would be,
(RM 5,000 x 12/ RM 800,000) x 100%
= 7.5%
A commercial property would be considered as a good value for money if its fixed deposit rate is 3%. Cash flow is originate from rental income while the rental income is depends on the occupancy rate of the commercial property itself. Hence, do remember to only buy the property with occupancy rate at least 90% which mean there is at least 9 out of 10 units of similar property in the same area is occupied. Furthermore, a property will generate a positive cash flow if the monthly rental income is more than the monthly loan instalment.
Here a simple tips for you if you want to rent out your commercial property fast. First, you may need to consider giving a lower rental for the first year and increase gradually in the following year (be sure the rental is follow the market rate).
The main key of survival in commercial property investment is monthly positive cash flow from the property. You may putting up a higher down payment for a commercial property or extend the loan tenure, you can then reduce the monthly repayment to generate positive cash flow from rental yield.
Here we show you an example;
Let say Jinny has bought 2 commercial property and its portfolio as follows;
Interest Rate: 4.5%
Loan tenure: 25 years
In today, shop office X and Y has each positive monthly cash flow as below;
Shop office X: RM 2,454 (positive monthly cash flow)
Shop office Y: RM 2,447 (positive monthly cash flow)
Total monthly cash flow: RM 4,901 (RM 2,447 + RM 2,454)
After 12.5 years, both shop offices has potential capital gains as below;
Shop office X: RM 250K (capital gain)
Shop office Y: RM 350K (capital gain)
Total capital appreciation: RM 600k (RM 250K + RM 350K)
After 25 years, the property net worth will increase to RM 3,300,000 and monthly cash flow will increase to RM 16,000.
If the property loans have been fully paid after 25 years, the properties will generate the capital gains and perpetual cash flow to you.
So, isn’t that sounds good? If you invest in commercial property in the right way, right time and right place, the property itself will then generate a significant profits to you and you are able to retired early with massive wealth after that.
As a smart property investor (since you have read this article), you will always practice to buy in any properties at below market price and sell it off at higher price. Some properties may need some times for appreciation perhaps 5 years or 10 years, in the meantime, you can rent it out to the prospect tenants. And not to forget to do the maintenance work to your property every once year.
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