A thoroughly researched and planned commercial property investment has the potential to be very profitable and will not need much attention once it’s been tenanted. Be aware however that you must know all the potential risks so that you’ll be properly prepared.
Risks of Investing in Commercial Property
In general, you must familiarise yourself with the lease terms, commercial property size, supply and demand, and infrastructure changes. The Sentinel Property Group lists some of these terms below:
- Commercial Property Size: Bigger properties may be more difficult to lease than smaller ones and will definitely have higher maintenance costs.
- Terms of the Lease: Lease terms for around three to five years may offer more benefits; however, it may take longer for the property to be leased when it becomes untenanted. Know that you’ll still need to spend for maintenance costs even if your property is vacant.
- Supply and Demand: Changes in the conditions of supply and demand can come with issues. A rise in new properties in the same area and market may threaten currently tenanted properties because tenants may consider expanding or upgrading. Stronger supply may likewise lower potential yields.
- Infrastructure Changes: Major changes or implementations in infrastructure can either positively or negatively impact your returns. Although infrastructure may entice commercial investment, it may draw tenants from other currently tenanted areas. Likewise, while areas near central business districts will always be popular choices, newly developed areas that are farther away are inclined to offer more stable cycles.
Other Crucial Things to Consider
Individuals, trusts and investors’ syndicates, and companies are common buyers of commercial properties. If you’re investing alone or with a group of five people, it’s best to use an SMSF buying property or Self-Managed Super Fund, considering that you won’t require a mortgage, such that your SMSF can outright buy the commercial property. You’ll also be gaining tax advantages.
Additionally, financing commercial property is usually more complicated than financing residential property. There are actually some financiers who choose to specialise in commercial property due to complex issues in specific situations. Banks will typically lend as much as 70% of the property’s value; however, this will likewise be dependent on the property’s potential yields.