Commercial Property – Everything You Need to Know Before You Buy

Commercial Property - Everything You Need to Know Before You Buy

When you think of a well-known property investor, they may be the rich, famous owner of hotel chains, golf courses or shopping centres. Property can be a lucrative investment if done well and if the investor takes and heeds advice from the experts.

This article will identify some of the different types of commercial property available in Sydney and NSW and examine the pros and cons of this type of investment. We will list some of the things you should be aware of before investing and where you should ask for advice and guidance.

What is commercial property?

What is commercial property?

Commercial property is real estate owned for the purpose of making a profit, whether from rent or capital growth. Residential properties are seen as commercial properties if they have multiple dwelling units.

What are the different types available?

Apartment block
Everybody needs to live somewhere. Multiple units (some investors say five or more) are considered to be commercial property. The easiest commercial property to get into, apartment blocks provide a rental income plus capital growth.

The investor may be able to increase profits by increasing the rents or reducing expenses (the costs of property maintenance or gardening, for example).

Depending on the mortgage arrangements, each mortgage payment should reduce the principal which increases the equity in the property.

The downside of investing in apartments is often the tenants themselves. They may not take good care of the property and may miss rent payments. It may be worthwhile working with professional property managers to make the most of your investment.

Self-storage facility
A self-storage facility is generally a large warehouse-type structure with individual rooms for people to store their possessions.

One of the advantages of investing in Self-storage over apartments is the lack of tenants. If a monthly rental payment is missed at the self-storage facility, your contract may state the goods will be removed from the storage space and dumped or sold to cover your costs.

There is also less maintenance with no need to worry about plumbing or gardening.

Location is vital for your facility. If the locality decreases in value your facility may become less desirable.

It can take some time to fill all of the available units at your facility and, especially if you allow 24-hour access, you will need to have a permanent presence on site. You should consider employing a property manager for your facility.

Shopping Centres (Malls or strips)
The attraction of a shopping centre is the stability of your investment. You should expect tenants to sign a 5 – 20 year lease then you can relax while the rent rolls in!

Of course, this type of property requires a lot of expensive cleaning and maintenance and, if a major tenant leaves, you may have a large gap in your income until you can install another tenant.

Office Buildings
This type of investment can vary from a single tenant in one property to a multi-floor building with dozens of rent-paying tenants. As with a shopping centre, your tenants often sign long leases and, when the economy is booming, they may need to expand to accommodate a growing business.

An office building is hugely dependent on the state of the economy. If the economy suffers, the businesses of your tenants may slow, or fold and you will lose your tenants and probably struggle to replace them.

Caravan Park (long term/residential)

In Australia, a caravan park is NOT a good city centre investment. The land would be too expensive and most caravan owners don’t tend to want to visit cities on their travels!

The best tenants for long-term income and stability are long-term, or permanent, residents. They may live in caravans or mobile homes.

You will need to decide whether to own both the park and the mobile homes or the caravan park alone. It would be better to own only the caravan park because there would be maintenance and other expenses involved in mobile homes.

Your caravan park will most likely have a mix of long-term residents and short-term visitors (tourists). This is another investment where you would be wise to hire a property manager to run your caravan park.

Car parks
A car park is an investment where you can profitably own vacant land in a city centre. The cost of parking can vary enormously depending on the car park location. Office workers leaving a vehicle for a day will pay more than a shopper dashing into the supermarket.

A major benefit of a car park as an investment is there will be little maintenance needed and, if you install pay machines, almost no staff is required.

As with other investments, a car park can suffer if the economy is poor and the usual visitors are staying away from your location.

Industrial premises
Industrial tenants can be long-term and stable but are often hugely dependent on the economy and their own market. Before investing in industrial property you should conduct research and consult with professional commercial real estate agents.

You may find your industrial premises include specialised equipment, such as an overhead crane or moving goods, or a cold-storage room, for food or flowers. This will instantly eliminate a chunk of possible tenants but may give you the opportunity to appeal to a niche market. This could prove lucrative for you if you are offering the only premises with this type of equipment in a particular location.

What are the benefits of investing in commercial property

What are the benefits of investing in commercial property

There are pros and cons to most investments. Some of the benefits of commercial property include:

  • Reliable, stable income
    You should expect to attract tenants wanting a long-term lease. The lease for commercial property should start at around three years or many more. If your tenant is a well-known brand, a corporation or a local or federal government, they may well stay for many years.
  • Lower costs
    The landlord of a commercial property will have lower outgoings than a residential property owner. Contracts with your tenants should specify they are responsible for all their own outgoings including local council rates and any corporation fees.
    A large corporation or branch of government may want to make changes to reflect a brand or corporate colour scheme. They will maintain this themselves and will be expected to “make good” when the lease ends.
  • Higher rent
    The rental return for commercial property in an Australian city can be, on average, more than twice the equivalent of residential properties. Coupled with the longer leases and lower outgoings, commercial properties can offer a better return on your investment.

What are the risks and potential downsides associated with investing in commercial property?

What are the risks and potential downsides associated with investing in commercial property?

Some of the downsides of commercial property as an investment include:

  • Upfront costs
    There is a range of prices for commercial property. You might purchase a strip of land outside of a city, to become a caravan park. Or you may wish to purchase an entire city-centre office building.
    Whatever the value of your investment, banks view a loan for commercial property as a higher risk than, say, a mortgage. This is reflected in the Loan-to-Value-Ratio (LVR) or the percentage amount the bank is prepared to lend you against the value of the property.
    This means you will need a deposit which may be as high as 30-40% of the value of the property you wish to purchase.
  • Extended vacancies
    Hopefully, you will have done your research and purchased a property with sitting long-lease tenants. Of course, businesses can fold and your tenants may need to vacate your premises leaving you with ongoing loan repayments and reduced, or no, income.
    Work with commercial real estate agents to fill your vacant property quickly.
  • Complicated contracts
    The lease for a commercial property may need to cover more than a residential lease. You should work with a lawyer to make sure the lease benefits you as well as your tenant.

What do you need to consider before making an offer

Location is key for a commercial property. You’ll need to be aware of

  • Potential changes in the population or foot traffic for an area
  • Car parking. Location and number of spaces available
  • Council plans for the area, including changes to transport and other infrastructure
  • The location of cafes, shops, transport hubs

Flexible or multiple-usage properties can be a boon, especially if the economy is poor. Industrial units with offices attached are popular or office and apartment buildings with retail or hospitality outlets on the ground floor. A diversity of tenants provides better opportunities for continued rental income.

MGM MARTIN will make sure you get the most from your investment

MGM MARTIN Real Estate, based in Zetland and Mascot have years of experience in commercial real estate.

Equally importantly, our team are local experts. We know the local population and potential for growth or change. We are aware of council plans for change. We can help you decide if you are investing in the right type of property for a particular location.

Get in touch to discuss the commercial properties we have available for you today.

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