From the outside, commercial property assets can look very attractive to first-time investors. Commercial rental yields are higher than residential property, tenants/businesses tend to stay longer, and many maintenance issues are the tenant’s responsibility. However there are a variety of important differences for new investors to this asset class. Here are 5 important things to consider before embarking on your first commercial purchase.
LVR or deposit amounts vary significantly between residential and commercial assets. Your lending capacity will be dictated by other assets and collateral you can provide, as well as anticipated income, building quality, and potential vacancy risk.
Vacancy in residential letting tends to be lower and shorter than commercial property on average. While houses can rent in just days, commercial property vacancy periods can range from weeks to months. This depends on a number of factors including location and quality, not to mention whether a property is generic or unique in the building’s specifics and uses. Having a building that is more “standard” means a broader pool of potential tenants when vacancies arise, which should result in shorter periods of no income.
Tenant quality is another key factor in assessing tenanted buildings, as well as when vacancies arise. While everyone wants an A-grade national tenant, you will pay for them in incentives or rent rates. Consider local long-standing businesses with proven performance, as well as specialty retailers and service providers with a local competitive advantage.
Costs and compliance are often overlooked when weighing up a first purchase. Hidden costs include everything from fire and asbestos compliance, to lease preparation and management fees. Nett leases are an excellent way to ensure these expenses are passed on to tenants, further protecting your return on investment.
Lastly, location and zoning can both be viewed as immediate considerations of exposure and foot traffic, as well as medium/long-term potential in an area to have building heights increased, uses re-zoned or areas gentrified and renewed.
While there may be a few more considerations to get the best out of commercial property, it certainly is a great investment option.
Benn Woods and the team at RWC Bayside are happy to answer any questions you have about commercial property investment opportunities. Feel free to reach out to us at anytime for a confidential discussion about achieving your commercial property goals.
Benn Woods | 0408 689 651
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