Rather like taking the highest slide or fastest ride at an amusement park there is something a little addictive about investing in the commercial sector. Yes, the risks are higher. So too are the rewards. While property is usually a good long term investment, commercial property – though still a long term thing – can roll far more zeros than most residential investments can ever offer.
And zeros we like. There aren’t that many things that the Other Half and I agree on but this is certainly one of them. And when there is agreement for the taking, I do all I can to encourage it, especially of course when zeros are involved.
So, with friends talking about the real world of commercial investment, and us up for a little dabbling, it was clearly time to get more knowledgeable about the situ. Whether it’s a warehouse, a shopping centre, an office block or a corner café, commercial property certainly has its temptations.
Why commercial property?
The right commercial property can produce far greater returns than any residential property.
Commercial property has long-term lease contracts and fixed escalation rates, which directly contribute to the increase in value of the property.
It is easier to get a bond on commercial property as it is financed on the value and returns of the property and the lease contract, unlike residential property where a bond is determined by the buyer’s income.
Commercial property has a 10-year bond period, which means the investment comes to maturity much sooner than a residential investment.
Commercial property can be refinanced to release equity if suitable lease agreements are in place.
Commercial property owners can negotiate triple net leases where the tenant is responsible for all maintenance to the property.
Tips for investing in commercial property
Get expert advice on the market you are investing in - including the general state of the economy and the market dynamics, as well as the benefits and risks of each specific property.
Vacancy is the single biggest risk in commercial property investment. Limit this by choosing a property with multiple units (and hence multiple tenants) as opposed to a single large unit.
Don’t over extend yourself – keep some capital in reserve for contingencies such as vacancies, leasing commission and new tenant fit-out costs.
Financiers consider security, repayment ability and risk before granting a bond. Consider for yourself the same issues so that you make informed decisions.
Assess, with the help of a specialist, whether there are expansion or redevelopment possibilities for the property and whether there is market demand.