Owning property is one of the most satisfying and rewarding pleasure to any individual. Whether you buy residential or commercial property you can be sure to reap the fruits of financial gain.
However make sure that you know exactly what costs can be hidden and how future sales value can be determined by numerous factors.
Commercial property can end up being either a burden or a joy. Depending on a few risk factors.
There are 3 different types of commercial property. Retail, offices and industrial.
When looking to buy commercial property do consider the following:
What is the purpose of the purchase?
Are you buying to “owner occupy” or are you buying as an investment (Renting out to tenants)?
Retail property usually secures the owner a good long term income when buying correctly. Good retail property is usually situated in CBD (Central Business District), walking distance from all public transport, taxis and major bus stops. Retail shops with anchor tenants can yield excellent income when buying. These properties are always in great demand by different markets.
These can work for Furniture stores, clothing stores, car sales, doctor’s practices, food stores andmany other retailers. These also usually need to yield an ROI (Return on Investment)of between6 and 10%. The costs of rates and taxes and municipal accounts are for the accounts of the tenants. Insurance, cleaners salary and maintenance is for the account of the owner. Also look at the maintenance needed on the building at time of purchase in comparison to purchase price to be sure you don’t pay too much and still need to spend a fortune to upgrade.
Offices can yield good return on investments, should the property be in a high demand area, well maintained, well located and the price when purchasing gives an income of between 7 and 10% ROI (Return on investment).
Rates and taxes and municipal charges are usually for the account of the tenant while insurance costs and maintenance is for the account of the owner.
When looking at offices do take in consideration the distance from public transport, visibility, maintenance costs, parking availability and tenant interest in the area. Also always make sure before you invest in offices as an investment that there are tenants in the building with a good payment history or that a new prospective tenant will have sustainable income to cover lease payments. Also ensure that there are proper long term leases negotiated with tenants to ensure a steady income.
When the property is owner occupied, one must bear in mind that all fees re, insurance, levies, municipal accounts and rates and taxes is for the owners own cost. This must be taken into consideration when putting in an offer on an office building.
Industrial property is very need specific. When looking at industrial property one should ask oneself the question what is it that needs to be done on the property, will tenants be in the market for that specific property and what term of lease agreements can be secured on these properties. Industrial property also usually incur higher costs due to the capacity of electricity available and the size of the ground. These are specifically designed for heavy machinery, manufacturing, warehousing and fuel depots. When investing in industrial property the owner must consider the risk of his tenants to neighbors. The amount of available electricity for the specific need of the site, accessibility to roads, is there efficient water and parking for machinery etc. Security in Industrial areas also creates quite an expense for an owner or a tenant.
So now that we discussed the basic costs on each of these commercial properties we have to go more in depth as to future costs commercial properties can involve.
Once a contract is signed on a purchase of a commercial property it has to be determined whether VAT ( Value added tax) is payable on top of the purchase price. Once a seller is registered for VAT, it becomes payable by the buyer. Currently VAT is calculated on 15% of the full purchase price.
Should the purchaser be VAT registered as well, the property can be disposed of as a going concern. Giving that the property is income generating and therefore SARS will set it off as a zero rated transaction. In this case VAT is not payable but only transfer fees to the attorneys.
Let’s take a closer look at VAT on Commercial property There are several additional costs payable in order to transfer the purchased property to the new owner.
Aside from Deeds Office fees, administration costs, conveyancing fees and clearance certificates, either transfer fees or VAT will be payable on the deal.
It would be wise to determine which charges apply to your transaction in order to budget for the added finance you may need to cover these costs.
There may also be sufficient grounds to apply to have the deal zero-rated for VAT. Would VAT or transfer fees be the correct fee for your transaction?
When is VAT payable?
Transfer fees are payable on any property transaction where the minimum sale price of the property is R750,001 or more. Transfer fees are calculated on a tiered scale which begins at 3% of the purchase price.
At no stage will the transfer fee exceed 15% of the purchase price. In contrast, VAT requires no minimum price threshold and is always calculated as 15% of the full purchase price. This would be far costlier than transfer fees which are about 8% of the purchase price.
If both parties are registered VAT vendors then VAT will be payable instead.
You, the purchaser, are responsible for paying this additional cost and should budget for this on top of the basic bond when considering a commercial property purchase.