Investing in Commercial Property
With all of the recent changes in the residential buy-to-let landscape, many property investors are looking to diversify their portfolio by investing in commercial properties such as retail space, industrial lots and offices.
A lot of people think the only ways to get involved in commercial property are through funds and investment trusts or peer-to-peer lending, which usually will only get you shares in a property or portfolio, rather than ownership of the property.
THIS IS NOT TRUE!
It will take more initial cash than a residential property, but direct investment in commercial property is both possible and profitable.
Investing in and managing a commercial property can work a little differently to a residential property, so to help you out I’ve put together this article covering Premier Property’s recommended first steps to get started investing in commercial property.
Why invest in commercial property?
So what is the appeal of commercial property?
There are 3 main advantages to a commercial property investment:
- Greater yields
Semi-commercial properties (such as a shop with an apartment above it) can provide you with an average of 1.6% greater annual gross yield than residential properties in the same area, and the yield of a successful large commercial property such as an office building can be even higher.
- Long tenancies
Relocating a business is a real hassle, and most of your tenants aren’t going to do it unless they really have to. The right tenants will rent the property for many years, giving you a stable income and peace of mind.
Ideally you will be investing in a property that already has tenants, but regardless you also need to think about how to get those long-term tenants.
This is mostly just a case of properly screening your tenants, which in addition to the usual credit checks and references, should also include building an understanding of their business and whether they will be successful in your location:
Is there a market for their products and services in the area?
Is there the right kind of workforce available in the area?
How much competition from similar businesses will they face?
- Less labour-intensive
Your tenants will typically handle maintaining the property themselves, as well as furbishing it to their business’ needs, and particularly in the case of retail space they are well-motivated to do this since their customers will be visiting the property.
While with a residential property you can expect to be repainting and dealing with general wear and tear every 18 months or so in between tenancies, with commercial property not only will this happen less frequently due to the long tenancies, there is also no need for major refurbishment as the next tenant will want to furnish and decorate the property themselves to suit their business.
Where to look and what to look for
Getting a great property in a great location can be one of the biggest challenges of commercial property investment.
ALWAYS consider these 3 points when evaluating ANY commercial property location:
- Transport links
No matter what kind of property or tenant you have, it is vital that the property is easily accessible to nearby residential areas or commuter destinations, as these will be providing your tenants’ workforce and often customers as well.
- Economic growth
While you should focus on areas where property prices are on the rise for any investment, for commercial property this is doubly important, since this is the most obvious indicator that businesses in the area are finding success.
On that note, it is a good idea to investigate how current businesses in the area are doing financially.
- AVOID areas with vacant properties
Lots of vacant properties in a location are a warning sign that businesses may have struggled here recently, and you NEED to know why they struggled and how long the property has been vacant for.
Even if you don’t find a reason not to invest in the area, this could give you some idea of which businesses will and won’t be successful in your property.
The above points apply to any commercial property; however each property type has its own additional needs:
When it comes to retail space, the most important factor is footfall:
How many people will walk past the shop each day?
If your tenant doesn’t get enough people through the door to turn a profit, you won’t make a profit either!
High street properties are the safer if more expensive choice; however there is greater risk and reward to investing in sub-prime locations, which can have better yields. You will find it harder to get viable tenants however; you need someone whose business will attract customers away from more central areas.
Industrial property tenants typically have a large workforce and frequent incoming and outgoing deliveries.
That makes transport networks especially vital, and you also need to think about the available parking space and delivery areas as well as the available workforce in the area.
Office tenants can vary a lot in their requirements, but the one thing every office needs is a high-speed business Internet connection.
You are unlikely to find a property without this these days but it always pays to check, as they can cost £1000s to install in some locations, or may not be possible at all.
When investing in either industrial or commercial property, it is also important to think about what type of business is likely to rent your space and any special requirements they might have.
For example, areas with strong Internet and phone networks tend to see lots of call centre offices. These have much larger workforces than other businesses interested in office space; does your location have the transport links and parking space to accommodate that?
Whether you are investing in commercial or residential property there are 3 key questions you need to ask yourself before settling on a location, read my recent article on this for what you need to know.
Tenanted or untenanted?
First and foremost, you will find it hard to get a mortgage for an untenanted property.
Untenanted properties have more uncertainty attached to them since you still need to find a viable tenant, whereas a tenanted property offers the security of immediate returns.
Lenders prefer to avoid commercial properties tenanted by pubs, restaurants and nightclubs, as these businesses often have relatively short lifespans and so are seen as less secure investments.
Buying a commercial property
Now that you have found a property in a great location, it’s time to buy!
One question I get asked a lot by new property investors buying a property is how big should your portfolio be? We talked about this in my interview with David Wagner which you can watch here, as well as find the full interview on YouTube.
While some commercial properties are sold at auction, most are sold via private treaty much like a residential property.
As with any other property, you need to get a full inspection and survey of the property to identify any structural issues or other problems. If the property is already tenanted then in theory there won’t be any issues here, but you need to check anyway.
The inspection should also cover all of the property’s services such as water, electricity and heating. Again, these should already be in good working order if the property is tenanted but if it is untenanted then it is better to find these problems before you buy in case improvements are needed.
At Premier Property we ALWAYS get answers to these 5 questions:
1. Does the property have valid energy performance, gas safety and electrical safety certificates?
2. When were the last safety checks carried out?
3. What fire safety measures have been installed and are they fully functioning?
4. Does the property require a licence and what are the details?
5. Are there any local council restrictions about the type of let that is permitted?
You should also ask for the seller’s cashflow statements to make sure the property has been profitable for them.
Just starting out on your property investment journey? Make sure to avoid these key mistakes that could stop you from becoming a successful property investor!
Got any commercial property investment tips you’d like to share, or a question you’d like to ask your fellow property investors? Get involved in the discussion in the comments section below!