How to access and unlock rare property assets that create a six-figure passive income

One of the most common questions I’m asked by investors is:

“Is it possible to find an investment property that generates a six-figure income each year?”

(or, more realistically: “where do I get me a six-figure property!?”)

It’s a pretty common question. With the media portraying the Australian property market as a never-ending rain-and-shine rollercoaster, a six-figure-income property may seem like a myth to some investors. However the truth is, yes, it’s possible to earn over $100,000pa from a single investment property. 

Here’s how you do it:

You need to add a commercial property to your portfolio

Under the right lending and tenancy conditions, commercial properties have the potential to provide a very strong positive cash flow to investors – in many cases, over six figures each year. A commercial property acts as an investment vehicle in a way very similar to a residential property, where:

– You purchase the asset using money from the bank

– A tenant pays you rent, which pays the mortgage, rates, etc. 

– You keep the money that’s left over – in this case, over $100,000 per year.

Before I explain the numbers behind this investment type, let’s explore the nature and benefits of commercial properties.  

A commercial property is an asset predominantly used as a place of business, ranging from: 

• Retail Shopfronts 
• Shopping Centres
• Offices
• Small Office Buildings
• High-Rise Offices
• Medical Suites
• Medical Centres
• Warehouses
• Carwashes
• Fuel Stations
• Hotels
• Pubs
• Distribution Centres 
• Cafes
• Sports Facilities
• Apartment Complex
• Hospitals
• Aged Care
• And More 

It’s important to note that lending conditions are also slightly different for commercial properties – in most cases, banks require at least 20% of the purchase price as a deposit… so you’ll need to have cash or freely-available equity ready to allocate to your purchase. 

What are the unique benefits of owning commercial properties?

Commercial properties have rare benefits that can be very attractive to investors, including:

• Great rental yields
• Government incentives
• Flexible lending terms
• Pre-agree rental increases
• Tenant-funded fit outs
• And more

Let’s look at those in more detail:

Benefit: Great Yields

Firstly, the income levels of commercial property assets can be sky high (when compared to residential), from 7-8-9 or even 10%+ net yields (this means that the income from rental agreements is high compared to the outgoings you have to keep the property, eg. a mortgage).

In comparison, residential properties rarely have a yield as high as 7-10%.

Benefit: Government Incentives 

Much like residential properties, purchases of commercial properties can also allow for incentives from the government. Some examples of current incentives are stamp duty waivers (across some states), flexible depreciation rules, and other detailed benefits (for more information about these benefits, please contact us).

Benefit: Flexible Lending Terms

Commercial properties may also incur less-strict lending terms, in comparison to residential property. This makes it easier to get flexible finance options, assuming basic conditions have been met.

Sometimes if the right location, tenant, lease and asset type is selected, with a good deposit down, some lenders can give the loan based on the income from the lease. For those with a solid asset/cash base, this would mean avoiding inconveniences that may normally come with finance process.

Benefit: Pre-Agreed Rental Increases

In most cases, pre-agreed rental increases are woven into tenancy agreements, guaranteeing investors increased income over time. For example, many commercial tenancy agreements are signed with a ~2% rental increase, year on year, for the period of the tenancy. This provides investors/landlords with a guaranteed increase in rental income each year. 

Benefit: Tenant-Funded Fit-Outs

In most cases, tenants are required to fund their own fit outs, which includes shopfronts, retail display areas, signage, stock areas etc. This can add value to the property, without incurring expense from the investor/landlord.

It’s a nice situation when the tenant pays to increase the value of a property

Commercial property numbers explained in detail 

Below is an example of how a six-figure income can be created by owning a commercial investment property. Allow me to unpack the numbers…

Let’s say you purchase a $3,000,000 commercial property purchase with a:

• Yield over 7% NET 
• Healthy long-term lease
• 70% mortgage, paying interest-only

…using funds or equity of $1.1m to cover stamp duty, deposit and other fees.

This will produce you a gross passive income estimate (after paying interest only mortgage and property management) of $102,000 pa! 

Note, this doesn’t include any depreciation benefits (which could provide extra tax benefits). 

Let’s say you wanted to pay principle and interest repayment terms. Here are the numbers:

• 15-year loan term passive income = $5,500 gross passive income even after paying debt down each year
• 20-year loan term passive income = $35,000 gross passive income even after paying debt down each year

Things to note about these figures:

• I recognise that this type of purchase is for high net worth individuals… because having over $1M in cash or equity isn’t an easy task. This example is to show what is possible. Some investors may be able to achieve this in the future with multiple deals in your portfolio.

For more information about the pros & cons of commercial property investing take a look at this short video below:

How do you get the best commercial properties?

Like 99% of markets, there are bad purchase decisions, and good purchase decisions… and the commercial property market is no different. 

When you’re considering the purchase of a commercial property, here are some of the things you need to consider:

• If there are one tenant or multiple tenants 
• Lease conditions 
• Lease history 
• Guarantees 
• Type of tenant and industry 
• Type of property security 
• Location 
• Finance conditions 
• Stamp duty waivers 
• And much more.

If you’re interested in (a) finding and (b) purchasing a commercial property that provides passive income (including properties that pay six-figures), contact the team at InvestorKit. Let us do the leg work for you. 

Ready to get started?

There are a few things you need before you purchase a commercial property:

You need a deposit

As mentioned above, many banks won’t borrow unless at least 20% of the property purchase price is put down as a deposit. If you’re looking for six-figures in passive income… you’ll need to purchase a property of at least $3M (potentially lower, if targeting higher yielding properties)… meaning you need a large deposit. 

Using the equity in your own residential assets as your deposit for these passive income-generating commercial properties can fast-track the large deposit that is usually needed for commercial property purchases. Many of our clients use the equity from one or multiple properties to purchase properties of this scale. For more information about this, please contact us. 

You need the right advice 

Naturally there are no shortages of commercial properties for sale… however it’s important to realise that, much like the residential property market, you buy the RIGHT property that has a strong yield, offers an upside for potential high growth, etc. 

On-market and off-market relationships with key industry professionals and bodies are crucial to getting access to valuable information that will help you achieve this. 

Here are some of the professionals you can network with, to gain access to this valuable information and properties: 

• Builders
• Lawyers
• Developers
• Real estate agents
• Property managers
• Mortgage brokers
• Depreciations agents

Secondly, in-depth due-diligence needs to be completed. Things to analyse when completing due-diligence include, but are not limited to:

• Yield
• Location
• Asset and tenant type
• Lease security
• Lease length
• And more

If you’re time-poor or don’t have the resources to build your own network or complete your own in-depth due-diligence, consider engaging InvestorKit. By doing so, you’ll benefit from our extensive network of property professionals and opportunities… allowing you to find and secure properties that pay you.

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How to access and unlock rare property assets that create a six-figure passive income

Arjun Paliwal, InvestorKit

Last Updated: 23 May 2022 Published: 26 March 2019