Investing in Commercial Property

Commercial property can be a rewarding and wise investment if it is rented out to a business. It can be applied to a wide range of building types, including offices, retail, parking lots, warehouses, and industrial properties. It is often the case that the yields are higher and that the tenant will sign a full repairing and insuring lease.

There are however a few common pitfalls you should be aware of that can trip up even experienced investors when they purchase commercial property.

What is the difference between residential and commercial properties?

Commercial property is valued differently:

Commercial properties are valued in part based on their income, yield, and covenant strength. In contrast, residential properties are valued based on the amount of utility they provide to homeowners.

Cashflow can be greater on commercial properties:

On an investment basis, a commercial property often yields a higher income per square foot than a residential property. similarly, if you rent a multi-unit commercial property, you will have more tenants to generate income than you would with a single-family let.

Commercial property leases are generally longer: 

This will may help with the bottom line and give you stable and consistent cash flow providing the business doesn’t go bust.

Commercial property can diversify risk:

A large commercial building leased to many businesses only loses a percentage of its income if a tenant leaves, whereas a family house rented out to a single tenant loses the entire rent.

How to decide to invest in commercial property

The building itself may not be a suitable shape or size for the target demographic for a variety of reasons, including the price being set too high or the price being set too low. 

Your investment could sit empty for a long time if your potential business/tenant doesn’t meet the key requirements they need or want for their business. 

Do you have onsite parking and/or access to public transportation that will meet the needs of the tenant, for example? Buyers must analyze the characteristics of competitive commercial properties and how factors like zoning, location, and access may affect the performance of incoming tenants/businesses. This will make it very difficult for you to lease or re-let properties to attract tenants.

It’s a good idea to speak to the storefront business (if occupied) before you invest in commercial property & find out if they plan to renew their lease. What is the state of the business? Has the area seen any signs of businesses relocating or popping up?

Additional costs when investing in commercial property

Buying a property is one thing, but making it work for you is another. Before you occupy the new commercial space, you should have an in-depth and comprehensive checklist that factors in the property’s age and poor services, including heat and air conditioning. 

The property should be investigated by a professional such as a surveyor in this situation. Reports are one thing, but it is your responsibility to ensure you understand what they mean and check the property over yourself or with a trusted builder.

Your builder should walk around with you and you shouldn’t ignore anything you notice; the seller won’t volunteer any information and it will be your responsibility to ask. Every unit should be inspected by your builder/building inspector, including the roof, laundry area, attic, and crawlspace. To determine the property’s physical condition, find a well-qualified surveyor/trusted builder to represent you.

Buying commercial property off plan

It is risky to buy a property off plan, i.e. before it is built, with only the plans available for inspection. The rising market has not added value to the property as it did a few years ago, and to do so now is to base your tactics on luck rather than solid research.

Mark once bought off-plan property in Bansko, Bulgaria, and subsequently made a net loss of 50,000 Euros. What had looked like a great rental market was in fact a total nightmare, because of a load of extra costs Mark couldn’t plan for, dishonest solicitors and rental agents, and an overflow of extra apartments in the area.

Additional costs when investing in commercial property

Anyone can buy a property, but making it work for you is another thing. If the commercial premises you are buying is old and has poor services like heating and new features adding like air conditioning, you will need to have an in-depth and comprehensive checklist to factor these in before the property is occupied again. This is where getting a professional such as a surveyor to investigate the property makes ideal sense. Getting the report is one thing, but it’s your responsibility to make sure you understand the implications and to check the property over yourself or with a trusted builder.

Ensure you walk around with your builder from your power team and don’t ignore anything you spot; the seller won’t volunteer any information and it will be your job to raise them. You must ask your builder/building inspector to inspect every unit, the roofs, the laundry areas, the attics, the crawlspaces, etc. Top tip 3 is to find a well-qualified surveyor/trusted builder to represent you who will provide a detailed report of the physical condition of the property.

Buying commercial property off plan

Buying off plan – i.e. buying the property before it is built, with only the plans available to inspect – is a risky strategy. It is not as lucrative as it was a few years ago when the rising market added value to the property before the building commenced, and doing so now is to base your tactics on luck rather than anything tangible.

New built commercial property

Due to taxes, new premiums, and developers’ margins, any new build property will be overpriced. As with buying a brand new car straight from the showroom, when the car rolls off the forecourt or the house is purchased, its value plummets.

In the past, you could buy a property at the beginning of its development and the rising prices would drive the value up by its second or third phase. This is not the case, so as a general rule, buying new builds does not guarantee a lucrative deal.

The “Magpie Syndrome” – chasing everything that shines in the hopes of changing your life – can do more harm than good in the world of commercial property investment. Many entrepreneurs quickly jump ship after a venture doesn’t produce huge profits immediately or are swayed by “the next big thing” or a tip-off from someone they trust.

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