If you’ve got some money to invest in real estate, you’ve got quite a few choices for how to make the money work for you.

 

With residential real estate white-hot (and practically spitting lava) it might not be the best choice for more sedate investors. Let’s take a look over the fence into commercial real estate investments.

 

While a residential property is any dwelling for personal occupancy, commercial real estate is any building (or space) used for business purposes, usually to generate income. There are a large number of different industries that fall under the commercial real estate banner including hospitals, warehouses, corporate offices, hotels and shopping centres. 

 

Property investors who choose commercial real estate can gain big profits for the right properties as lease terms tend to be quite long and rates are significantly higher than residential. Properties typically come with tenants too, so you can start earning money as soon as your settlement ticks over.

 

While the capital gains aren’t as big as residential properties commercial investments do make up for it, and then some, with some big benefits that make it a worthwhile investment class including:

 

• Well-diversified portfolio – Commercial real estate is non-correlated, meaning it has stand-alone performance. It typically won’t be knocked by the negative performance of stocks and bonds and you can claim against inflation, which makes it a stable and steady addition to your investment portfolio.

 

• Solid long-term returns – Commercial properties are not the kind you flip, you want to hold onto these to see genuine long-term gains. ​​High occupancies and predictable rents coming in yearly, quarterly or even monthly can provide steady cash flow and predictable returns. 

 

• Tax Advantages  – You can depreciate the value of commercial real estate over time, which helps to reduce yearly taxable income. You can also claim tax deductions on expenses such as loan interest and any fittings or repairs paid for during occupancy.

 

Of course, some care and research need to go into any investment, no matter how sound it may seem. Here are our five suggestions for what to consider before jumping in.

5 factors to consider before investing in commercial real estate

 

Doing your due diligence is just as important, if not more so for commercial property than a residential property investment as there is a lot more that can be hiding behind the scenes. 

 

Even if your property in question looks sound and secure and you are ready to dive in, take the time to get everything checked out.

 

These are the five big items we see people making mistakes with their property purchase so make sure you have these bases covered before you sign on the dotted line.

1. Type of commercial property 

 

Commercial property can include any number of different workplace scenarios. So looking at them all as one thing is difficult. To figure out how to hone your search, think about what size investment you want to make, and not just up front, ongoing as well, as some will require investors with deeper pockets than others.

 

It stands to reason that smaller sized buildings will cost less to purchase and maintain, however, some investors prefer the bigger risk higher gain properties. It really comes down to your investment experience, your current portfolio and how hands-on you want your investment to be to know if your best pathway is a petrol station, a department store or a factory.

 

Here is a quick snapshot of different types of commercial property you can look into investing: 

 

1. Commercial offices – Offices come in a large range of shapes and sizes depending on the company that uses it for their everyday operations. They are not all created equal. Some that are new with flash amenities and floor to ceiling glass in CBDs are first class, while others may be a little older and little out of the way, others still, very old, and very out of the way. The price you pay for these will reflect on their future earnings and resale.
2. Retail – Retail covers individual stores as well as shopping strips and entire shopping complexes. You can expect them to come with lease agreements in place and provide a great cash flow.
3. Industrial – Industrial buildings are typically large and come with a large land lot that can be favourable for capital gain over time. Warehouses and storage facilities used for the manufacturing and assembly of products are similar to retail properties, in that they pay monthly fees to use the property for their business operations but they are usually specific to one industry. So for example it would be difficult to turn a dairy into anything else, but quite simple to refit a nail salon to be a massage parlour.
4. Multifamily – this is residential property but it’s not a single dwelling property. The smallest of these are duplexes (then triplex and quadruplex). While these are for occupancy and even owner-occupiers the usual buy and sell process with these properties is for rental investment, making them predominantly commercial. These are perfect for entry-level investors. Going up from there are garden apartments, mid-rise apartments and highrise apartments that are significant investments and require experienced investors and deep pockets to sustain. 
5. Hotels and hospitality – This includes full-service hotels as well as limited services hotels, pubs (with and without board), restaurants, cafes and eateries.
6. Special purpose buildings – This refers to recreational and entertainment-focused properties like theatres, amusement parks and zoos that earn profit through entrance fees from visitors. It also covers anything that doesn’t fit neatly into any other category.

 

Because each property has its own set of responsibilities and logistics that make it run well, it’s important to be careful with your selection and know your responsibilities (legally and from a business point of view).

 

It’s also important to understand the risks of each and be able to overcome these. For example, a tenant may vacate a retail property and you may need to have it refitted in order to attract a new long-term lease agreement.

 

As an investor, you need to do thorough research and due diligence into the type of commercial properties available to know whether or not they can withstand changes in the economy and prove to be a worthwhile venture. 

1. Budget

 

Before committing to a deposit, know what your budget can handle. Typically commercial investments are best for investors who already have a portfolio to draw on. While commercial property investments can be profitable, downtimes can be costly so having access to finances to see you through if your building is vacant or needs refitting for a new tenant, is important. 

 

Most commercial properties are easy to pay for, especially with the high tenancy payments coming in regularly, it’s the unforeseen costs that can be the catch. Make sure you know what the additional costs might be if things don’t go as planned so you can keep your investment, steady the course and keep the income.

 

To know if you’re ready for an investment of this size, you should budget your finances carefully with this step-by-step process: 

 

1. Analyse your current expenses. Create a spending diary with expenses and income to analyse your finances and assess how well you can adapt to starting capital for a new investment.
2. Assess your finances and review your mortgage options. Before you research your different options for a loan, you need to determine the amount you can afford to repay each month and not just how much a bank will let you borrow. Doing this will give you a realistic view of how you can meet payments and let you narrow down mortgage options that you can afford. 
3. Create a contingency fund for additional expenses. Have a contingency fund for expenses that might arise during the course of your property ownership. 
4. Consider a real estate investment trust (REIT). Rather than buying your own property, a REIT is a highly liquid type of real estate investment that allows you to buy a share in the commercial property market with experienced buyers working with. As well as being less of a commitment financially (you can invest for as little as $1,000 USD (approximately $1,386 AUD), you can sell whenever you need to.

1. Market cycle

 

Just like residential properties, commercial real estate has hot and cold market cycles. They are dependent on the economy, rather than the season. 

• Recovery
• Expansion
• Hyper supply
• Recession

 

Knowing what part of the cycle you are in helps to pinpoint the right time to buy (and sell). While most commercial properties hit the market around peak times, it might increase the prices above your means. 

 

Recovery and expansion are great times to buy although if you can afford it and can hold on, a recession purchase can pay off as well. There are indicators that point to the property market warming up including an increase in the number of commercial investors, an increase of new infrastructure in the area and renovations carried out on existing commercial properties. 

 

Take careful note of the changes in the market before committing to a purchase and remember that different regions have their own growth spurts and downturns depending on the local economy so you need to research in the area you are purchasing. 

1. Market area and supply

 

Every state has a different level of supply and demand when it comes to commercial properties. To know how in demand and profitable commercial properties are in the state considering investing in, you need to research, research and then some more research. 

 

Take note of details like the property’s foot traffic level, location demand for products or services to know the visibility and desirability of the commercial property in question and gauge if it’s a worthwhile investment. Remember, for the tenant to pay you, they need their business to do well.

 

You can also conduct market research on the property location. For this, you will need to identify the different types of commercial properties in the area, research how profitable they are and if there is any risk of market saturation. 

 

Asking for help from a real estate agent who is familiar with the local area and knows commercial property is a solid way to get accurate information on how lucrative the space will be for business-related activities. Many agents have a vast knowledge of the different areas where commercial properties are available and they can guide you towards properties that match your investment criteria. 

1. The time it takes to invest

 

Investing in commercial real estate is no easy task and it will take a large amount of time, money and paperwork before the title of the commercial property is officially transferred to your name. 

 

If you’re looking to buy commercial real estate it’s important not to rush. You’ll need significant time and a healthy bank account to conduct background checks, get the title checked over and have commercial property inspections carried out.

 

To help speed up the process and get your head around the requirements, it helps to have an experienced real estate agent on your side to point out flaws and ask the right questions of the selling agent. You can also use their experience to handle negotiations and assist with streamlining the paperwork side of the sale.

 

Look for an investor-friendly agent or someone who has dealt with commercial property investments before. This will give you the assurance that they have the experience to support your investment and steer you through the documents and contracts with ease.

 

Commercial real estate is definitely an investment worth considering for high returns and a steady, predictable income.

 

Before you set off on your investment journey, take the time to consider everything involved, from finances and budgets to understanding your property choices and the responsibilities that come with ownership. 

 

If you need any help with deciding what commercial property in Melbourne is right for you, give us a call.