AS YOU WILL APPRECIATE, there is a fair amount of information you need to know about Commercial property. Although fundamentally, all that rests upon just six Pillars.
Once you understand that, everything else starts to make a lot more sense.
So, let’s perhaps take a few moments to briefly explore those Pillars.
1. Ensure your Principal is Safe
You see, most investors appear to be mesmerised by “return ON capital”. And of course, that’s important – because it’s probably the main reason you are investing in Commercial property in the first place.
However, what’s really vital is … safeguarding your return OF capital.
Simply chasing extra income (or growth potential), while possibly putting your hard-earned equity at risk … is not very smart. Therefore, with any investment, your first consideration (as an absolute minimum) … is being satisfied that your initial equity will be returned, when you finally sell.
And if your gut tells you that could be in doubt … then, simply don’t proceed – no matter how appealing the Commercial property may be.
2. Control your Liabilities
There are two schools of thought, but my preference would be to fix your interest rate when borrowing.
Sure, it may cost you an extra 0.5% per annum … but that is tax-deductible and most importantly, you get to sleep at night.
The other suggestion would be to avoid personal guarantees wherever possible – by only borrowing on a non-recourse basis. That will probably limit you to a 65% loan-to-value ratio. But it also helps to reduce your overall exposure.
3. Always Seek to Add Value
Merely buying a property at market value and sitting on it, means your only source of growth is through inflation, or the automatic annual rent increases.
Throughout the period of your ownership, you need to think creatively. Simple things (like a cosmetic upgrade 12 months before a market rent review) could help you extract additional rental, when the review actually takes place.
If the property is reasonably large, you may have the opportunity to subdivide it into one or more smaller titles. This alone can add up to 10% to the value of the property, with minimal outlay on your part.
4. Property is Long Term
As you already know, I recommend a 4-year mandatory review of your Commercial property. However, that doesn’t necessarily mean that you should sell it.
The important thing is that you make a formal decision to retain ownership – based upon the remaining period of the lease, the current Commercial property market and where you are in the economic cycle.
Ideally, the plan is to hold the property for 10 years or more. And that will give you the opportunity to add value; plus you can also use it as collateral to periodically release equity, and acquire further Commercial properties.
5. Never Become Complacent
You need to realise that it only takes one mishap to go broke. Therefore, you should seek to fully protect your property that all times – constantly keeping an eye on the market, while you actively looking to add value.
And also, ensure you maintain your property in ready-to-sell condition.
6. Your Tenants are your Partners
Always be responsive to their requests – and make that clear to your managing agent as well.
Plus, it’s important for you to try and anticipate their needs – because that will create a more-responsive frame of mind, when rent-review time comes around.
However, I can’t tell you how many would-be investors fail to observe these six Pillars; and end up with poorly performing Commercial properties as a result.
Anyway, if you’d like to explore this further … simply click on the eBook image on the right, to download this short report.