12 Essential Expenses to Account for in Commercial Property Investments

When evaluating the potential profitability of a commercial property investment, it's crucial to consider all associated costs and outgoings. By doing so, you'll gain a more accurate understanding of the investment's overall financial viability. While some expenses may seem insignificant, they can quickly accumulate, impacting your bottom line. Therefore, it's essential to be aware of all the costs associated with owning and operating a commercial property.

In this article, we'll explore some of the most common expenses that investors should factor into their calculations, as they can significantly influence the investment's profitability.

*Note: The responsibility for paying certain property outgoings may fall on the owner or tenant, depending on the terms of the lease agreement. Be sure to review the lease carefully.*

1. Council Rates

Council rates are a form of property tax levied by local governments to fund various public and community services, such as:

• Council operations
• Community activities
• Tree and bush management
• Pest control
• Construction and maintenance of roads, bridges, curbs, parks, gardens, and council buildings

To determine the amount each property owner should pay, the council assesses the land's unimproved value, which is the value of the land without considering any buildings or structures on it.

Council rates are typically paid quarterly in advance. Some councils offer discounts for early payment, so it's worth checking if this option is available.

2. Land Tax

Land tax is a state-based tax that investors must pay on their investment properties. Owner-occupiers are exempt from paying land tax on their principal place of residence.

Similar to council rates, land tax is calculated based on the unimproved land value. If the total value exceeds the relevant threshold in the state or territory where the property is located, you'll be required to pay land tax.

3. Property Management Fees

Real estate property managers charge property management fees for overseeing the day-to-day operations of the property. These fees are typically calculated as a percentage of the gross rent, often ranging from 3.5% to 7%, and are negotiable.

The percentage charged may vary based on the rental amount, with higher percentages applied to lower-renting properties since they require the same amount of work as higher-renting properties.

For example, if a tenant pays $300,000 in annual rent, the fee may be closer to 2%. However, if the annual rent is only $30,000, the fee could be closer to 7%.

Most property managers expect to be paid between $1,500 and $5,000 annually. Fortunately, these fees are tax-deductible for the owner.

4. Water and Utility Rates

Water rates are paid to the authority that provides water and sewerage services to the property. These rates are typically paid quarterly in arrears and consist of two components:

- A fixed amount for providing water mains to the property

- A variable amount based on water usage

Utility rates, on the other hand, cover the cost of electricity and gas, which is generally metered based on usage.

Both water and utility rates are usually the tenant's responsibility, but this may vary depending on the lease stipulations.

5. Body Corporate Fees

The body corporate (also known as the owners' corporation) is responsible for managing the common areas of a building or complex. The fees paid to the body corporate cover various expenses, such as:

• Building insurance for common areas
• Maintenance of common areas
• Shared utilities
• Building works or repairs

Body corporate fees are determined by calculating the total amount required to maintain and manage the building for the year and dividing that amount among the owners based on their proportion of ownership. These fees are typically agreed upon by vote at the Annual General Meeting (AGM).

6. Insurance

Insurance is a crucial component of any risk management strategy, as it protects the owner's assets in the event of unexpected occurrences. Owners should consider various insurance protection options, including:

• Building insurance, which covers the physical building against damage
• Landlord insurance, which covers the owner's loss of rent if the property becomes uninhabitable due to damage caused by a natural disaster
• Public liability insurance, which protects the owner from being sued if someone is injured on the property

7. Maintenance Costs

All properties require general maintenance, and these costs should be factored into your financial plan. While real estate agents often exclude these one-off costs from their presentations, it's essential to incorporate them into your outgoings.

It's worth noting that tenants are generally responsible for maintenance inside the premises but may not cover significant capital expenditures, such as replacing an air conditioning unit. Therefore, you should clearly stipulate the tenant's maintenance responsibilities in the lease agreement.

8. Gardens and Landscaping

Depending on the size of the commercial complex, gardening and landscaping costs can vary significantly. For larger or more elaborate complexes, these expenses can be substantial. To avoid unexpected costs, it's advisable to obtain quotes from gardeners to understand the scope of work required and the associated costs.

9. Cleaning

Cleaning expenses are generally the tenant's responsibility. For common areas in larger commercial complexes, the body corporate will typically employ a third-party cleaning service, and the costs will be included in the body corporate fees.

Cleaning fees can quickly add up, so it's essential to research reputable services that offer value for money, as this can help reduce outgoings for both the tenant and the owner.

10. Fire Inspections

Commercial properties must comply with the latest fire regulations, which means factoring in regular fire inspection expenses. Depending on the governing body and local council where your property is located, fire inspections may be required annually, biannually, or quarterly.

To avoid additional penalties, it's crucial to stay on top of the required inspection frequency.

Third-party companies conduct fire inspections and typically include inspections of evacuation plans, exit signs, smoke detectors, extinguishers, fire hoses, fire hydrants, fire doors, and building cladding compliance.

11. Backflow Prevention Testing

Backflow prevention devices are installed on water pipes to prevent potentially polluted water from flowing back into the main supply. Local councils generally have inspection criteria that require property owners to have these devices tested annually by a licensed company.

Similar to fire inspection requirements, failure to have these devices tested can result in non-compliance penalties.

12. Rubbish Removal

It's important to note that local councils do not provide rubbish removal services for commercial premises. In most cases, the tenant or the strata manager will organise rubbish removal. However, it can be a point of contention among tenants in a commercial complex.

As the owner, you'll need to monitor the amount and frequency of rubbish removal to ensure you're not paying for an unnecessary or excessive service.

Key Takeaways

Commercial property owners should carefully track their outgoing expenses to ensure they're getting the most value for their properties. By understanding the costs associated with owning and managing a property, business owners can make informed decisions about where to allocate their money to maximise their return on investment.

If you'd like to learn more about how I've helped thousands of clients successfully source and purchase quality commercial properties across the country, get in touch today.