Commercial property does require a little more thought than Residential property. But the rewards are solid; and generally, more predictable.
Simply keep these 5 aspects in mind, when it comes to choosing Commercial property.
Where it is?
For Commercial property, location is more than a simple matter of demographics. Each property type requires its own set of unique attributes.
For instance: Retail centres depend upon road access, high foot-traffic and a local population of adequate size to support its tenants. Office buildings benefit from nearby freeways or public transport, coupled with support activities nearby.
Tenants & Leases do matter
When evaluating a Commercial property, pay careful attention to the tenancies.
A good mix of stable tenants means are greater likelihood of you collecting rent in the future. Pay careful attention to the length of each tenant’s initial lease term, as well.
Having long leases is usually better than having short leases. But you shouldn’t have every lease falling due at once — instead you should stagger their expiry dates, to minimise your risk.
Have an Exit Strategy
Property investors typically focus on maximizing the return on their equity.
As you own a property for a period of time, you continue to build equity through both increases in the property’s value as reducing your mortgage. Over time, your growth rate will stabilize — indicating that it could be time to find a replacement property.
When buying a Commercial property, my recommendation would be to undertake a formal review every 4 years.
Make allowance for Capital Expenditure
In marketing Commercial property, the stated net income typically excludes capital expenditure like roof replacement, or any other required upgrades. Your due diligence should flag these; and a preventative maintenance program can also help in preserving your future cash flow.
Liquidity Vs Leverage
Most investors know that leverage (or debt) can help in the hands positive swings in the market, and significantly increase your returns. Unfortunately, the use of leverage can also limit the amount of money that they have available for emergencies.
With this in mind, you should also set aside a pool of funds — to help cover up to 6 months worth of interest, if the need should arise down the track.