Commercial properties, such as offices, shops, and warehouses, offer the investor strong, long-term growth, potential and diversity to your portfolio. However, like any savvy investor, you will want to keep abreast of the pros and cons. Here are the key points to consider.
You need to be in it for the long haul
Everything about the commercial property process takes a good deal longer than it does with residential investment. The due diligence on properties requires months, as opposed to a week or so. Seeking the right tenants for a commercial lease can take much longer than finding the right renters for a house or apartment. The commercial leases are longer, generally 3-5 years. If required, renovation and upgrades are a more complex undertaking.
That’s why you need to look upon this investment as a marathon rather than a sprint. And over the longer term, the rewards can be much greater. Although commercial properties have a longer sales cycle, they can result in much higher capital growth. There are higher rental yields over the longer lease term, usually 5-10% net, and healthier competition for your leases if your premises are in a sought-after business location.
Be aware of market trends and area demographics
Commercial investments have a greater emphasis on potential business growth in the area. You need to be conversant with the demographics of those businesses who will be your clients. Consider current market trends that will impact those clients. For example, is the area ripe for growth in the customer base of your clients? Are commercial properties in the area topping the list of where businesses want to be located? What are the civil engineering and environmental plans for the region and how are they likely to have a positive or negative effect on your investment? Do you plan to expand or further develop your commercial property and, if so, how does that align with local authorities and with the approval process?
Make certain you consider the type of property in your risk assessment
Residential properties in the same area are often very similar and pose no competitive risk in offering leases. Not necessarily so when it comes to commercial interests. Two office buildings or warehouse-type structures in the same area might pose problems by opening up too many leases in too small a market. It’s essential, therefore, to understand the market and assess the office, shop or building’s viability as part of your risk management.
Seek out tenants with the best long-term survival potential
Research those types of businesses that are more likely than others to close their stores or branches and operate solely online. It’s a very real consideration in today’s business leasing market. Businesses such as bank and insurance branches, specialist retailers and some government service offices are examples of this. Avoid signing leases with businesses that may opt-out early or be less likely to take up an option to renew. It’s also important to structure your insurance so that you’re covered if one of your tenants goes out of business and unavoidably defaults on their lease.
It’s worth noting that commercial tenants tend to be less management-intensive, as they look after the premises in a professional manner and are less likely to make demands over petty issues.
When scouting for a loan, your lender’s expertise in commercial property financing is a vital tool.
You will need a much higher initial capital outlay than you would for a residential property, usually around 30%. A vital part of your pre-planning is in securing the best deal from a lender with both the reputation and experience in commercial loans in Australia.
Low risk, strong returns, stable income, and tax deduction allowances are just some of the benefits for an investor to consider when it comes to commercial properties.