Part 6: the difference between knowing your sh*t and knowing you’re sh*t
Is commercial property expensive?
If a building costs more than the rent it brings in, then it is a money drain and is not an asset. The basic rule we recommend for a single let is to come under the first level of stamp duty, which currently stands at £125,000. Yields of under 8% gross are likely to cost you money every month, so think hard before you invest.
Do your research
If you’re a first-time commercial property buyer, you will sometimes be in over your head. It’s just the reality of the situation. When this happens, the best thing you can do is put the necessary time and research into understanding all the moving parts of commercial property investing.
But even due diligence occasionally fails. In these situations, don’t be afraid to contact experts and professionals who have years of experience investing in commercial property. They’ll put you on the right track.
Learn the lingo in advance
Like any specialised market, commercial property buying carries its fair share of jargon. To save you some valuable time, we have a great rundown of the most common commercial property terms every first-time buyer should know.
Get your financing in order
Depending on your financial situation, you’ll want to consider strongly whether purchasing or leasing makes sense for you. For most people, leasing will be the more realistic option, which means you’ll need to locate funding options. These can range from banks, credit unions and mortgage companies to more creative funding strategies like earn-outs.
Knowing your tenants & their business
Tenants are much, much more important in commercial investing than in residential. The quality of a tenant will determine the value of a commercial property whereas in residential it has almost no impact whatsoever.
It is very important for owners and property managers of any potential rental property to screen potential tenants, such as getting credit reports and financial information to screen the applicant. But commercial property landlords and property managers need to go the extra mile and research whether the commercial tenant is credit worthy and assess the likelihood of them going bust. Is their business plan viable and will it be able to continue to pay the rent throughout the length of the lease.
Would it be a good idea to rent your commercial premises to a new mini mart or local express when there are three other stores within the same few streets? Is it likely this store would be viable and the business could close costing your thousands in potential rent and costs in re-marketing and reletting the property during the vacant periods? Another thing you could do is ask the check on the VOA website to see what business rates are payable, or did any particular operating expense increase or decrease dramatically last year compared to previous years? How are current businesses doing financially, are there lots of empty space? Be sure to ask for the sellers’ cash flow statements too.
Once you have taken the time to understand the ins & outs of commercial property investing, it can be extremely rewarding both financially and personally.
Leisure and lifestyle
I’m now looking at mixed use commercial opportunities that have perhaps at the moment have offices downstairs a further storey or two of office use above with a view to converting the upper floors to residential. The great thing about mixed use is that commercial properties tend to have far longer void periods so if you don’t have a tenant in place in the commercial premises its offset by the higher occupancy levels in the residential properties. That said commercial properties require a lot less management and whilst tenants are in place there will be very little maintenance to be undertaken.
This mixed use gives you the flexibility and safety net of having multiple exit strategies, without these you may well end up being the owner who sees their property being put back into auction when there is the very real chance that your £500,000 property now may well be worth over £1million in just a few years time.
A solid foundation
Commercial buildings often have gas, water and/or electrical supplies, which are over-specified for residential use. It is therefore often the case that services don’t need to be significantly upgraded, unlike with new build, where services often need to be put in in their entirety. Traffic movements in residential buildings are usually less than in equivalent-sized commercial buildings, removing issues that councils sometimes try and use to stop a development taking place. Almost all offices will, however, require new windows, upgraded thermal, fire and sound proofing to meet current building regulations, which will have significant cost.
Ground works are often also minimal on commercial buildings. They frequently come with large car parks, roads and landscaped areas to varying standards of finish and maintenance. The reality is that you don’t need to spend anywhere near as much on these areas as you would on creating them from scratch for a new build development.
Commercial buildings are also usually designed to take greater loads than residential buildings. In simple terms, most structural engineers will tell you that you can place about 1.5 floors of residential on every floor of commercial. Depending on various factors, including the type of structure or frame and the foundations, this often means that the existing building will support at least one or two extra floors on top, without major changes to the existing structure. This is often where the profit is made on these conversions, and it is frequently an area that is missed by those looking to purchase such buildings.
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.