Part 3: Money talks
Like many people my first move into commercial property was the purchase of our own offices and I would recommend that for anybody running their own business and thinking about commercial property this is almost certainly going to be the best way to get started.
Ours was a 3100 sq ft unit which took me about a year to get through, we were letting a unit in town and I looked at quite a few of the city centre style units that I mentioned earlier that were renting for around £10 or £11 per sq ft and pretty quickly it became obvious they would drop their rents quite considerably to around £5 per sq ft with very little negotiation.
That would have put the monthly rent at around £1300 per month, not a lot but the condition of many of the units was pretty poor and they were insisting that we would have to pay to make any improvements or alterations (at a cost of around £30,000). It dawned on me that the whole market had dropped and that we could probably get something that we could move straight into and perhaps just give a lick of paint, a property that had perhaps been built a bit more recently and we could snap up as they simply weren’t shifting.
We looked at around 15-20 units which gave me a fantastic understanding of what was out there and what the values were. Many of the units I had viewed had been sold pre-credit crunch at around £150 per sq ft, I eventually secured ours at £91 per sq ft a purchase price of £290,000 and the previous owner had bought it new at £470,000.
This owner had suffered on a number of counts, firstly he’d seen an immediate drop in value from buying new pre-crunch, secondly after losing his initial tenant the property had been stood vacant for 2 years until the bank conceded they were prepared to take a hit but the property needed to be sold.
Financing commercial property deals
Commercial property, like any other investment, requires a lot of research and knowledge in order to be successful. This is especially true when it comes to first-time buyers.
And the reason is simple: you’re playing with big money, big potential and big risks. Without due diligence and wise investing, instead of maximising your return and minimising your risk, you might lose it all. Don’t let that happen.
First and foremost, this means understanding the various tips, benefits and pitfalls associated with purchasing commercial properties. But before getting too far ahead of ourselves, it’s vital to go over the basics of commercial property investing.
I have yet to see any commercial finance facilities that are not on capital repayment terms and any finance that you are seeking is going to be on repayment terms. Rob and I have seen many of residential purchases on capital repayment mortgages as traditional buy to let finance was no longer an option for us as we had too many properties. We have already seen that through paying down the capital it’s given us a pleasant surprise when we have come to refinance as we had not really accounted for the capital that we had paid off!
Most commercial lenders will be ok with 25 year repayments terms although some (including Co-op) will insist on 15 year repayment terms which is pretty harsh, however it’s actually a great discipline to abide by as it ensures the deals that you do are great.
Determining your investment budget and return goals
Commercial property investing covers a broad range, from small shops to large corporate headquarters and everything in between. When sitting down to plan your first investment, it’s important that you are sure the exact amount you can afford to invest and, if the worst case scenario arises, lose.
Once you know that, it’s time to start making preliminary plans about what kind of property you can get within your budget and the realistic ROI you can expect. Don’t get too caught up in this yet though, just be wary of the risk and reward involved in commercial property investing at your level. And try to take away a basic grasp of what affects returns—such as location, type of building, infrastructure, socioeconomics and the skill of the available workforce in the area.
You’ll note there that the skill from our residential investing background of buying from motivated sellers transferred directly across into our first commercial property investment. Many agents will give you the usual guff about the energy efficiencies of buying a brand new building but the realities are that for most businesses the savings would be miniscule and yet the discount buying from a slightly distressed seller a resale unit would likely by up to 35% discount in price.
Tax advantages of commercial property
We purchased the property personally getting a whole raft of capital allowances, very broadly speaking around 20% of the purchase price of the property will come off our taxable income for the year, this really was one of the driving forces in making me move into commercial property. We mortgaged the property with Lloyds and the surveyor valued it £365,000 and they leant 70% of the value £255,000.
Understand the current state of the commercial property market
If you want to make an informed commercial property investing decision, it’s absolutely vital that you learn the various ins and outs of the current market. This means examining the latest trends, from property value changes in certain areas to burgeoning technologies changing the commercial property landscape.
Making sure the property is right for your business
Let’s say you’ve located a property that piques your interest. It’s a good sign but don’t jump in straight away. Stay cool, calm and collected and scrutinise whether or not the purchase makes sense for your business in every single way possible. Analyse legalities such as planning laws and building regulations as well as commissioning a professional property inspection. You don’t want your hard earned cash to go to waste because overlooked something.
Set realistic objectives
As with any other investment, having your feet planted firmly on solid ground is essential because, let’s face it, most people go into investing expecting too much, too soon. Don’t fall into this trap. The best plan when buying commercial property is to always keep your goals in mind, know how you’ll finance your purchase, study the market religiously and remain patient. By doing this, when the right opportunity arises, you’ll be ready to pounce and reap the rewards.
Commercial Property is one of the most lucrative investment strategies right now. We are offering this amazing opportunity for you to get in on this trend using little to none of your own money; how to find the best deals, how to find your goldmine area and much, much more.Interested in taking your Commercial Property Investing knowledge and cashflow to the next level? Our Commercial Property Excellence Online Course is perfect for you to discover the Secrets to Commercial Property Success. Our Customer Engagement Team can also be reached at 01733 898557, Monday to Friday, 9 am to 5:30 pm, to answer any of your questions. Take action today! To your success… Cheers.