A few basic beginner tips might ease some doubts, when deciding if commercial real estate investing is your next move.
The world of commercial real estate is an exciting arena. It can be richly rewarding for those who do their homework and make insightful and informed decisions.
That said, to first time investors unfamiliar with commercial real estate, it can sometimes feel like a code that can’t be deciphered. There are numerous – and sometimes daunting – rules and regulations, not to mention the fact that you have to get your head around all the jargon.
Consequently, many investors feel that they simply can’t get involved in commercial real estate; it’s only for heavily staffed and large corporations, they won’t have the funds to kick-start the investment, or it’s just too much of a mind field to navigate.
However, the market is far more accessible than many people think. Here are a few handy tips to consider.
LOCATION, LOCATION, LOCATION
As with the housing market, location still plays a pivotal role in choosing a good commercial investment property. The first thing to consider is the capacity for growth in the surrounding area.
Look at other businesses and be mindful of whether or not the area is favourable to a smooth flowing business operation. Logistics should play a significant role in your decision-making. The success of your commercial property investment can depend on public transport access or its position relative to major road, sea or rail routes.
In comparison to domestic leases, which range from 6 to 12 months, commercial leases can range from 3 to 5 years. Tenants can also have the automatic option of extending their leases by 5 to 10 years. It’s not uncommon for a commercial tenant to lease for up to 15 years or more, which is very different to that of residential leases.
Obviously, the longevity of a commercial tenant lease is very appealing to investors looking for reliable income and long-term stability. Keep in mind, however, that the flip side can also mean that if a tenant does vacate the premises, or break a lease, then sourcing a replacement may take longer to fill. This is not always the case, but it is something to be mindful of. This is where HKC Property Consultants can help – if you’re looking for long term clients, we can help you secure reliable, stable tenants and keep them for the maximum duration of the lease.
CAREFULLY SELECT TENANTS
Finding trustworthy, reliable and responsible tenants is critical for the success of any commercial property investment. Equally important, however, is to look at the viability of the industry they are in. Look to tenants whose businesses are stable or are in high growth areas. Yoga centres, gyms, restaurants and food outlets are just some of the new wave in commercial real estate property investment. Your tenant’s business may be subject to all sorts of market forces and it pays to understand how their business is going. You don’t want to be left with a tenant who has to shut up shop, leaving you with no rental income for a lengthy period.
The key here is to carefully select tenants operating in a thriving, healthy industry with strong prospects of growth. Avoid tenants in industries that are diminishing or vanishing altogether.
TAKE CARE WITH CONTRACTS
This is not something you want to leave to chance – or take lightly. Read our 5 minute guide to negotiating a property lease. Lease contracts are very detailed and are tailored for the specific property. You will need an experienced lawyer to make sure that the contract is watertight and that all variables have been covered.
It’s not impossible to move quickly when investing in commercial real estate, but more often than not it’s about moving through the gears purposefully with a very deliberate strategy in mind. Everything from sourcing the right location to finding suitable tenants, setting up the contractual negotiations through to maintenance and refurbishment needs, all require time. Stay focused on the long-term goals. The benefits will flow from the due diligence applied in laying strong foundations.
If you think this all sounds too hard, then simply look at the return. Domestic property yields sit around the 3-4% mark, whereas the average yields in the commercial arena sit around 5-7%, and on occasion slightly higher yields can be achieved. Over the long-term, this all ads up to a substantial wealth creation portfolio, making commercial real estate an attractive option for investors.
TENANTS PAY FOR OUTGOINGS
Unlike in the residential market, most commercial tenants pay outgoings which can cover general maintenance, insurance, rates and more. Commercial landlords have far less hassle to deal with. What you collect in rent remains yours to keep.
To discuss these tips and more, talk to the experts at HKC Property Consultants. We’re happy to prepare a strategy for commercial leasing or help you find premises to invest in. Call now 03 9078 4794.