Part 1: How does commercial property investment work?
Investing in commercial property to let out to a business can be a rewarding and wise decision. It can cover a range of building options such as: office, retail, car parks, warehouses and industrial properties. The yields are often higher and the tenant will often sign a full repairing and insuring lease. However, few investors are familiar with the process of buying commercial property and there are a few common pitfalls you should be mindful of which can trip up even the most experienced investors.
The differences between commercial & residential properties
Commercial property is valued differently:
The capital value that is attributed to a commercial property is directly related to the income, yield and the strength of the covenant. This is not the case with residential property which is valued based on how much utility it offers to a homeowner usually.
Commercial property can diversify risk:
If you own a big office building which is let out to a number of businesses, or you lose one tenant, you only lose a percentage of that income for that building, whereas you lose the entire rent if you let the property to a tenant in a single let family house.
Cashflow can be greater on commercial properties:
Often the income is higher per square foot on an investment basis on a commercial property than on a residential unit. 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 cashflow providing the business doesn’t go bust.
How to decide to invest in commercial property
This can be down to multiple factors such as the price being set is too high or the building itself not being a suitable shape or big enough size for the targeted demographic. If your potential business/tenant is not satisfied with the key requirements they need or want for their business your investment could be sitting empty for a long time. For example does the property meet all of the tenant’s needs, including whether they need onsite parking and or/access to public transport? As a buyer you will need to analyse the attributes of competitive commercial properties and how factors such as zoning or location and access can potentially affect the performance of an incoming tenant/business, and your ability to let or re-let to attract tenants will become very difficult.
A good tip before you invest in a commercial property is to talk to the storefront business (if occupied) & ask if they are planning on renewing their lease & what they like. Is business good? Are there any signs that more businesses are relocating or popping up 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 a comprehensive checklist to factor these in before the property is occupied again. This is where getting an professional such as a surveyor to investigate the property makes ideal sense. Getting the report is one thing, but its 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 building commenced, and doing so now is to base your tactics on luck rather than anything tangible.
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.
New build commercial property
Any new build property will be overpriced because of taxes, new premiums and developers’ margins. That initial dip is just like buying a brand new car straight out of the show room: its value is going to plummet the moment the vehicle rolls off the forecourt or the property is purchased.
While it was once the case that if you bought a property at the start of its development, the rising prices would drag the value up by the 2nd or 3rd phase. Not so, anymore, which means that as a general rule, buying new builds fails to provide any certainty of a lucrative deal anymore.
In the world of commercial property investment, the “Magpie Syndrome” – chasing all that shines, in the hope of it changing your life – is something that I have seen do more damage than serve. When a certain venture or opportunity doesn’t immediately result in vast amounts of wealth, some entrepreneurs are swayed by “the next big thing” or a tip-off from a semi-trusted source, and quickly jump ship.
How does commercial property investment work?
Without putting enough time and energy into property management and investment, you may as well slowly twist the nozzle of a tight tap but then stop before it springs water. While Progressive Property can teach you the fastest way to find success in property management, it is ultimately a long-term game plan, and results will take time to become visible.
So what can you do to help ensure that the path you are on yields results and that you never waste your time? Find out in part 2, next week.
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.