Names on annual rich lists often have commercial property portfolios. Does this mean you should invest in commercial property? There are some big differences between owning and managing the residential and commercial property as investments. This article will look at the risks involved and some of the benefits.
Commercial properties have large returns but are high risk. It can be more difficult to find new tenants than with a residential property because commercial tenants don’t often change location.
Businesses are subject to many external factors, such as inflation. In the event of a recession (or a global pandemic!), many businesses may enter liquidation leaving a gap in the commercial rental market. This leads to vacancies in the commercial rental market which can mean long periods with no income for owners of rental commercial properties. It is also hard to sell properties when they are empty in an area with a lot of other vacant buildings.
The benefits of investing in commercial property
Commercial leases tend to be for longer periods than residential leases. Often three to five years as opposed to six to 12 months. This guarantees you security for the duration of the lease. Businesses don’t tend to move as often as residential tenants, often extending their lease for continued stability.
Insurance, taxes and rates are normally paid by the tenant. These outgoings are often covered by the landlords of residential properties. Your tenant will take care of the building, maintain the property and see to minor repairs. Because they are running their business from your property they will often paint the premises, especially if they have a corporate logo and a colour scheme.
You should certainly aim to purchase a commercial property with a tenant already in place. Find out who they are and ask for records of expenses and income. Note any rental arrears and avoid if you can.
Commercial tenants tend to stay in a single location for years. (Think of shops, offices, warehouses, car parks, etc. you know have been there for as long as you can remember!). They tend to take care of problems themselves. A commercial tenant is likely to get a dripping tap fixed themselves whereas a residential tenant would contact the landlord.
Rental income is normally charged by area (square meter, say). Annual rent reviews should be incorporated into the lease agreement. You should expect rent to increase according to the local market rate or the current inflation rate.
Commercial properties tend to have a better return for your investment. Usually between five and ten per cent as opposed to three to four per cent returns for residential properties (and then the landlord has to cover insurance, taxes, rates, too).
There are generous benefits provided with commercial properties. Ask your accountant to make sure you are getting the full benefits from building allowances or depreciation allowances.
What else should you consider if you are thinking of investing in commercial property?
Location is key for commercial property. Offices need to be convenient for commuters. They need to be located near travel hubs such as train stations. They need to be on bus routes and have car parking nearby if not on-site. Retail premises, cafes, restaurants and bars depend on customers and need to be in the areas frequented by the target customer base. They may also require car parks or other transport to be available. Street frontage may be vital for a shop or hospitality venue. Warehouses and industrial units will require transport links. If there are many vacant properties in a location, find out why. Vacancies suggest a poor location for your commercial property. You should probably invest elsewhere! If there are no vacant properties this suggests business in the location is doing well and you would be able to re-let your property more quickly if needed.
The best advice for you?
Investors with a portfolio often have a mix of residential and commercial properties. As with any investment, it’s important to understand the market and acquire property in the right location to maximise returns on your investment.
Ask property experts. Experienced local real estate professionals will know the local market and recognise and understand trends in the commercial property market.
MGM Martin – Commercial property experts
MGM Martin is a leading commercial property specialist in Sydney, NSW. We have been helping businesses find the right premises to suit their needs for over 20 years.
We are local experts. We know the transport hubs and local neighbourhoods. Whether you are seeking office, industrial or retail space, we can help you find the perfect property in the ideal location. With our unparalleled local knowledge and expertise, MGM Martin can ensure your property is in the best possible location to maximise the returns on your investment.
For more information – mgmmartin.com