10 things to know when buying commercial property as an investment
There are all kinds of articles, magazines and even TV shows offering advice on buying residential property, but it’s not so easy finding information about investing in commercial property.
The fact is, buying commercial property – such as retail shops, industrial units, warehouses and offices – and leasing the space to businesses can be a far more lucrative and sound investment than investing in residential property. However, you need to do your homework.
Let’s take a look at 10 things you need to weigh up when considering an investment in commercial property:
The benefits of a commercial property investment
- Longer leases, peace of mind
Unlike a residential rental agreement – which might be as short as 6 or 12 months – commercial leases can be anywhere from three to 20 years long. And they’re usually secured by bank guarantees too.
- Commercial tenants look after the property
Under commercial leases, tenants usually foot the bill for repairs within their owned leased spaces. Plus, they want the property looking in the best possible condition for clients and staff. So not only do commercial tenants save you time and money, in some cases they’ll improve and add value to your property.
- Good ROI
Commercial property returns on invested capital is usually somewhere between 7% and 10% after costs. Deductible rates are also attractive due to high depreciation rates.
- Regular rent increases
Commercial rents are reviewed every year and increase in line with inflation, or by 4%, whichever is more.
- Mix of tenants for financial security
To reduce the risk of being stuck with lots of vacant space in your building, you can have a blend of stable long-term lessees and short-term, less secure tenants on higher rent.
Disadvantages of commercial property investments
- Finding new tenants can take time
For the most part, it’s a much bigger decision to move an entire business than it is to move into a new rental home. So while commercial tenants can be with you for many years, it can take months to find someone new to fill their place. You need to have the money to cover this.
- Prices are usually higher
Generally, commercial premises are bigger than residential properties – and in prime locations – so the price to buy tends to be higher.
- Bigger deposits are required
For a commercial mortgage you are going to need a deposit of at least 30%.
- Ongoing building costs
Even though most commercial tenants look after repairs in their own area, if your building has lifts, air conditioning, etc you’ll need to take care of their repairs and maintenance.
- Strict borrowing criteria
Banks and other lenders are more rigorous in their lending process for a commercial property investment than for residential property investments.
In a nutshell, commercial property is often a better investment than residential property if you:
- don’t have the time or inclination to micromanage your property
- prefer an investment with long term security
- have other sources of income (in case of expenses, vacancies, etc)
- do your research for the right place.
Feel free to contact one of our property finance broker team if you’d like to know more about financing a commercial property as an investment, or to house your own business.