Attractive returns and long-term rental terms are one of the reasons many investors choose commercial property, but like most investments, buying these assets is not without risk, even first-time buyers should be aware, experts say. These two factors alone are a big part of the interest of first-time investors, but like most things in life, it's not that simple. The benefits of investing in commercial real estate include lease terms of three to five years and up to ten years, depending on the type of property you're buying, the rent increases included in the lease, and the responsible tenant spending. Commercial tenants have an interest in their property being well looked after because it reflects their business, their ability to retain employees, work efficiently, attract customers, and so on. Commercial real estate returns are quite low right now - only 2-3 percent for some streaked retail stores - but generally much more attractive than residential returns.
Here are some pros and cons to consider:
Pros
- High return on invested capital. Commercial properties generally offer a higher return on investment.
- Longer rental periods. On average, the lease for a commercial property is three to ten years (and sometimes longer), while the average lease for a residential property is six months to a year.
- Secure source of income.
- Structured rent increases are generally included in rental agreements.
- Leases are mostly transferable.
- The tenant is generally responsible for the expenses of a property, such as community fees and water use.
- Tenants generally add value. In this way, there is an incentive to make improvements that go hand in hand with increasing the value of your commercial property. This can result in a commercial property owner being able to charge higher prices to future tenants.
- Greater variety of properties for a wide range of budgets.
Cons
- Loss of current income due to vacancies.
- Difficulties in repaying loans due to low income due to vacancies; Extended contributions and concessions (rent-free periods).
- Ten broad economic conditions with effects on tenant rent.
- The biggest hurdle to entering the commercial property market is the need for capital first, sometimes lenders have to double the amount for residential property.
- Modernization of the building requires investment.
- Changes in operating hours rules (such as lockout rules); capital gains tax and transaction costs.
What to look for when buying an investment property?
Location: Just like a home, location is very important. Whether it's public transport or major roads, access to transport can do business or destroy business, which can have a significant impact on tenant demand. Parking is also very important. This is especially true in the retail sector, where customers have to transport their purchases to their cars. Facing highways in established commercial areas can also be critical to business success, as retailers and companies with commercial elements also need exposure.
Vacancy: Take into account the number of vacant stores, offices, warehouses / factories in the enclosure you are looking at. If you have a lot of free units, it can be difficult to find another tenant. If there are no vacancies, it's a good sign that your business on the premises is good and you can probably rent the property right away. Do not buy with vacant property unless you are sure you can find a tenant quickly.
Buildings: Look for modern, attractive and well-maintained properties that require minimal maintenance.
Tenant: Find out who the tenant is. How much occupancy the tenant occupies, what is the latest rent (requires a delinquency statement), and what are the terms of the lease? Are they staggered or grouped?
Area: Learning about the area is essential. Here are some things to consider: What kind of growth forecast do you have? Are there many new buildings on campus? Do you have any government plans for the new infrastructure? Do you have any plans to rejuvenate or revitalize the sector? Residents What are the characteristics of local residents? Is this a relatively affluent demographic with a high discretionary cost profile per capita?
Asset Fundamentals: Understanding the fundamentals of each asset class and associated market is essential. For offices [which includes] proximity to shops, transportation networks, adequate proportion of on-site parking, level of natural lighting, and functional rental areas / areas. For retail, look for good entry and exit, exposure to vehicular and / or pedestrian traffic, rental combination, key tenant, good proportion of customer parking. For manufacturers this means having good access to main arteries, on-site access and manoeuvrability for large vehicles, free warehouse / factory space (low height will limit their market value), having a good office ratio to warehouse and a good site Coverage (there is adequate manoeuvrability on site and hard support).
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