First move into commercial property investment
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.
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.
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.
You already have the skills
Any experienced residential property investor will have already honed many of the skills that are needed to make the switch to the commercial investing. It really is about just learning a few more rules and gaining the confidence to step up and start working with larger numbers.
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.
The unit next door to us has is almost identical to ours but is let on a ten year lease to Clydesdale Bank and the current owners purchased it with Clydesdale in place for £620,000 at around the same time that the previous owner of ours had bought it for £470,000 so you can see that having a quality tenant in place makes a massive difference in the valuation and sale price of a commercial property.
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.
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.
If you are an experienced residential investor looking to break into commercial your first point of call should be to start building relationships with a number of the commercial lenders such as Lloyds, Co-op, Santander, Handelsbanken or a few of the high street lenders. Start by getting them to finance your residential buy to let purchases as it’s a great way to build a relationship with a business development manager or property specialist and you’ll then be able to start talking to them about commercial projects.