If you are considering investing in commercial property, or in anything, you need to work out what your goals are. Everyone’s different but they might include:
– Diversifying your investments – Perhaps you already have residential property investments or shares and you want to spread your risk by bringing some commercial property into the mix.
– Generating income – You might be aiming to achieve positive cash flow as soon as possible. In this case you’ll want to work out what rental return you need from the property and whether that matches what is currently being achieved in the area.
– Capital growth – Consider how much you want it to increase by, and in what time frame. Does past performance indicate that your chosen property can achieve that; is there a change in the local area that will increase capital growth or are you planning to improve or change the property to meet your goal?
– Tax Benefits – Are you investing in commercial property to claim back the GST? If so, make sure you check with your Accountant.
Goals and Risk
Achieving your goals will involve risk. So how much risk are you comfortable with? This could influence whether you purchase a vacant property or one with a long lease already in place. Do you want a Blue Chip tenant (a large company or government department tenant who tend to stay for longer periods and are unlikely to default on the rent)? How comfortable you are with risk could also influence the type of property and location you choose, and risk will have a big impact on how much money you can borrow to buy the property. You can reduce risk by ensuring you have some funds in reserve for any unexpected costs or vacancies.
Buying Commercial Property – Factors to Consider
Location – look at the access to transport, the nearby businesses and whether they will attract potential customers to the area. Check whether there are other, similar properties in the area because you don’t want an oversupply of similar properties.
Changes in Infrastructure – Check with the local council and talk to real estate agents to find out what developments are under way in the local area and whether there are future developments that will potentially affect your investment.
Your Tenants – Ensure you have a good quality tenant either by using a property manager or checking them thoroughly yourself. You want to be sure that they will be able to make the rental payments. You can do this by checking their annual statements, their resources, business model and trends in their industry.
Type of Building – Does the structure of the property appeal to a wide range of tenants? This can also make it easier to get finance for the purchase.
Misconceptions about commercial property investing
You need to invest more cash – Of course if you are buying a high rise building in the CBD you will need a substantial amount of cash to purchase it, but many commercial investments are very affordable. Offices in good locations can cost less than an apartment, but while the apartment could achieve a yield of 3-4% the office could generate 7-8%.
Commercial loans have a maximum 15 year term – Many commercial property investment loans have a 15 year term but there are also lenders offering up to 25 year loan terms.
You need annual loan reviews and valuations – Annual reviews are only required for business loans, large loans and some specialised property loans. Some commercial property loans require reviews or revaluations, but there are also some that do not require reviews. It’s worth shopping around and asking questions or get a mortgage broker to do it for you!
Managing commercial real estate is expensive – Management fees for commercial properties are actually less than for residential property. Commercial real estate costs 3-5% in management fees while residential properties are around 7%.
Property outside capital cities is more risky – Research is always important but especially in regional areas. If the area has consistent population growth, an involved council, good transport, diversification into more than one industry and major industries that are stable then regional areas may offer good opportunities to purchase less expensive properties with good capital gains growth.
Understanding what your goals are can make it easier to get the right loan because it helps you and your mortgage broker to focus on the things that are really important to you, and not be distracted by shiny (probably more expensive!) things you don’t need.
If you have a lending question let me know below, or email me on email@example.com.