01 Feb Investing in Commercial Property – A How to Guide
For the right investor, Commercial Property keeps giving.
Commercial property provides great yields, a solid asset, and someone else picks up the outgoings! If you’ve ever wondered what’s involved in purchasing commercial property – things to think about, what to watch out for and who you should talk to when undertaking your research, then you’re in luck! We break it all down below.
Firstly, what is a Commercial Property?
A commercial property is any non-residential property that generates a return on its own merit.
Service stations, office blocks, industrial warehouses, retail shops, café’s, doctor’s surgeries, car parks, car washes, hotels, shopping centres…..you get the point.
From the tiniest of shopfronts down a dark and quiet alley to the largest of office buildings in the biggest cities in the world, and everything in between.
Types of Commercial Property.
There are 3 main types of commercial property:
Office: Professional tenants, no onsite manufacturing, generally interested in the presentation of the premises and want to present a corporate or professional front. Prestige will often play a part for particular potential tenants.
Retail: Sellers of goods or services to consumers, location and access are critical.
Industrial: Used for the manufacturing, organisation or storage of goods. May require a specialized fit out and have the opportunity for a longer lease and higher yield because of this.
What should I look for in a Commercial Property for investment?
When researching a commercial property there are a few things to keep in mind. It is quite comparable to scouting a residential property, use your common sense and think about who your potential lessee’s might be.
Re-zoning potential – is there the opportunity for the premises to be re-configured down the track if zoning changes? Can the land be used for future residential development?
Accessibility – are there sufficient car parks for staff and clients, ramps, disabled facilities and loading docks or zones?
Street frontage – Particularly for retail premises, is there ample street frontage for passing traffic to be able to enter the store? Is there a footpath? Or ample parking ‘round the back’?
Problem solving – Does the property solve a problem? For example, is it the last servo in town? A bakery away from a supermarket? A spare parts dealer surrounded by mechanics? Who else is operating in the area that is already solving your premises’ problem?
Do your homework. Get advice.
Investing in commercial property isn’t something you do on a whim. You need to understand what the property can achieve and how that fits with your overall investment portfolio.
– Is there a market for a tenant for your property?
– Does it require initial repairs?
– What is the commercial property market like for that suburb? That region?
– What point in the market are you buying?
– What is the local infrastructure like?
– Talk to the locals, find out the history of the property. Who owned it, what was it used for? Does it have a reputation?
– What is the long-term potential of the property to make a return on the investment?
– What is the demographic like in this area?
– Will the property be subject to zoning changes? Can the property be re-purposed to capitalize on this?
– Is there a market for your potential lessee in the area?
– Evaluate the risks and mitigate them.
Speak to your advisers
Find out what the tax implications are as they apply to you. Consider your corporate structure. Will you borrow in a company name, SMSF, Family Trust, your own name etc. Consider the tax implications and liability implications for each. IBN Direct can assist with corporate entity borrowers, including SMSF.
Where there is an existing lease in place, this needs to be reviewed by yourself and your advisers to determine the existing lease terms and conditions.
Form your own views based on your research and speak to your advisers to confirm your position.
What is required from you as a landlord? These may be different from your responsibilities as a residential landlord – it’s important to know what you are signing up for.
Investing in Commercial Property comes with risks and benefits.
It’s important to know your own appetite for risk and how that applies to your investment mix.
- Consistent income and stability from long-term leases
- Higher net return than residential property
- A good opportunity to diversify your portfolio
- The tenant covers the outgoings – rates, insurance, body corporate, electricity etc.
- The landlord retains the improvements to the property at completion of the lease (unless otherwise agreed).
- Higher upfront costs
- Larger deposit required as the lender will want a lower LVR than residential property
- Higher fees and stamp duties
- High borrowing costs, interest rates are higher than residential property
- Valuation costs will be higher and your lender may require a new one every few years
- The risk that it will be vacant for a period, you will still have holding costs
Commercial properties should be thought about from a long-term perspective. Think decades over years. If you can wrangle it, a long-term lease is ideal. Try for 5 + 5 ( + 5! If you can!). This shows commitment from both parties to make the arrangement work, secures your building for a set period and helps you with future planning.
Remember, you aren’t purchasing the property to live in. You are making a commercial decision, think and act commercially. Keep your emotions out of it.
Finally, before you make an offer on a commercial property, do your research on any existing lease arrangement.
Who is the tenant, what business chops do they possess? Is there a long-term relationship on the cards once this lease expires?
Have your solicitor prepare the lease and arrange an agent to act on your behalf in negotiations if you aren’t comfortable.
Be prepared to make a few concessions for the right tenant. These could include rental holiday’s, fit outs or the inclusion of extra car parks.
Do you need to factor in annual rent increases? What’s already included in the agreement?
Who can I talk to?
Always seek independent expert advice from qualified professionals (Financial Planner, Accountant, Solicitor, Real Estate Agents, Valuers and QS’s).
When you have found the commercial property of your dreams, contact us. We know our way around commercial property proposals and can tell you quickly what you’ll need to get started.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.