The dos and don’ts of commercial property investing
Thursday, March 21, 2019/
After working in the property investment arena as an active investor and advisor for over a decade, I’ve seen almost every strategy out there. From entry-level ‘buy and hold’ residential investments, to blue-chip ‘buy and hold’ investments, right through to the confusing world of commercial property investment.
It’s the latter that really is not for the faint-hearted. Commercial property investment can be one of the most lucrative investments in real estate and I’ve seen clients realise extraordinary capital gains and huge cashflow wins. But I’ve also seen the opposite — two-year vacancies, big drops in market value and people losing it all.
Put simply, commercial property investment is higher risk than residential property investment, and for those not well versed with its nuances or trends, it’s important to avoid costly mistakes.
Here are some dos and don’ts for commercial property investors.
Do have a plan
Before investing your hard-earned cash or equity in a commercial property you must have a plan. Having a proper investment plan better equips you to recognise the right property when it comes along.
Many commercial investors make the mistake of buying a commercial property because it seems like a good deal and then attempt to make it fit into their plan.
But seasoned investors not only have a plan, they understand how a commercial investment can fit into an existing portfolio (typically with a number of residential investments), with a big focus on the long-term strategy, risk mitigation, capital growth, and above all, cashflow.
Don’t believe the hype that you can make money quickly
I’ve seen plenty of first-time investors take the leap into the commercial real-estate space, only to have the tenant go into receivership or liquidation within months of the contract settling, and then having to hold the asset vacant for months and months on end.
Remember, commercial real estate is really only as good as the lease and tenant in place.
Don’t think you can invest in commercial property single-handedly
Successful commercial investors rely on a team of professionals to assist them. From setting a clear strategy, commencing detailed research and choosing the correct property at the correct price with the correct conditions, right through to settlement and property management — your team needs to complement your shortfalls in knowledge.
It might seem obvious, but ‘rookie’ commercial investors often overpay.
Now, I don’t mean if the asking price is $700,000 you shouldn’t be paying $750,000. I’m referring to possibly paying a price per square meter that is 10% or 20% above comparable sales just because there is a ‘long-term tenant’ in place paying 8% net!
You need to know where the value point is and ensure you are fully aware of the comparable prices for the property. Don’t become overly focused on the cashflow and lease structure.
Paying too much for a commercial property locks up your funds in a more rigid way than residential real estate. Banks are far more reluctant to provide equity releases or cash outs for commercial investing.
Do know your property and know the market inside and out
There’s nothing wrong with being cautious when buying property.
Many new investors sign the dotted line without doing enough research on a commercial property. It takes time, resources and market connections to ensure you understand the full picture.
Any field of business requires training and homework and commercial investing is most certainly one of them.
Don’t miscalculate cashflow
Many successful commercial investors buy, hold and rent out properties for the long term ensuring they have enough cashflow for maintenance and other expenses. The savviest investors allocate their budgets so there is sufficient coverage for expenses like the mortgage, taxes, insurance and advertising costs.
When you don’t have enough cashflow your property becomes a liability when it should be an asset.
You can no doubt glean from the above dos and don’ts there is a raft of aspects which need to be considered when investing in commercial real estate.
But the rewards can be huge, you just need to know your numbers.
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