Being an owner-occupier of a commercial property can be an excellent investment that turns your working space into an income generating asset.
The situation has numerous advantages, but also some potential pitfalls. Let’s look at the various pros and cons to determine what prospective owners should look out for and how to best manage the property for smooth occupancy:
Advantages of Owner-Occupied Commercial Property
1. Financing Easier to Secure
Banks and mortgage companies are more likely to approve loans for owner-occupancy properties as there is less risk perceived if tenants are hard to come by or retain. Since you will be occupying as the owner, this gives lenders greater confidence as your business figures will tell them all they need to know about your capacity to meet your repayments. Without the challenges of finding and retaining tenants, financial institutions will gain the impression of a long-term arrangement with greater stability and security that the property will be better cared for.
2. Can Pay for Itself
Purchasing a large commercial property may seem like a daunting undertaking at first. However, when you consider that you can also rent out any excess space, it can make a great deal of economic sense. It’s not unusual for owner-occupiers to have sections or sometimes entire floors of an investment property lying idle. This represents an exceptional opportunity to establish an additional revenue stream that can at least partially offset your loan repayments. Depending on the loan structure, the amount of space available and rental prices, it’s well within the realms of possibility that the property that houses your business could, in fact, be generating positive income. Well-maintained commercial properties in prominent locations are attractive options for tenants. If you manage to get full occupancy with high retention rates you may see a strong return on investment.
3. Easier to Management
The role of a landlord is much easier and more manageable when you also occupy the site. Commercial property management and maintenance can be controlled by you rather than outsourcing to a third party, saving you that expense. You’ll know first-hand what is going on with your property and be able to do regular checks and prevent any issues before they become costly problems.
4. High-Quality Tenants
When you rent a property, you have little say regarding your co-tenants and neighbours. As an owner-occupier, you can be more selective with whom you accept as tenants if any at all! By having high-quality business tenants, your property becomes even more attractive to others, meaning you can set slightly higher rental prices than other commercial properties.
Disadvantages of Owner-Occupied Commercial Property
1. Tenants Reluctant to Share with Landlord
Whether it’s commercial or residential real estate, the relationship between tenant and landlord is a complex one. While landlords have the right to know that their investment is being looked after, there is a certain degree of arms-length that most people appreciate to be able to conduct their day-to-day lives, without the owner watching their every move and breathing down their necks. For this reason, business tenants may be reluctant to rent a space where the owner/landlord is present. If you suspect this might be an issue, you may want to consider sweetening the deal by offering more competitive rental rates or extra value through additional amenities.
2. Additional Ongoing Costs
One major problem with owner-occupied investment property is that you are responsible for taking care of all repairs and maintenance. One of the great benefits of owning commercial property is that tenants are typically responsible for many of the maintenance and upkeep, rates utilities and other running costs of the property. Obviously, if you’re occupying the property, you will be unable to take advantage of this upside, so your budget planning will need to take this into consideration.
3. Conflicts of Interest
Some conflicts of interest may arise conflicts when you work on site with your tenants. If issues such as late rental payments arise, it can be difficult and at times excruciatingly uncomfortable to switch to business mode to resolve issues. Working in proximity can often lead to friendly relationships between individuals that are productive and positive as long as things are going smoothly. However, get chummy, and everyone may be squirming if things turn sour and you have to put your landlord/tenant hats on. This is another way in which overfamiliarity can lead to potential difficulties.
4. Harder to Sell
If you’ve reached the point where you’re looking to sell your commercial property, it’s worth keeping in mind that the investment property sales cycle can be far longer than smaller spaces suitable for a sole occupant. The key is choosing the right property to buy, one that attracts other tenants or one that isn’t so large that it becomes a burden when occupied by only you.
Owner-occupied commercial property can be an outstanding investment. Understanding the pros and cons and having strategies to counteract them is vital to the smooth managing of your investment. With property prices becoming more affordable, now is the perfect time to start thinking about investing in commercial real estate. Whether it’s to owner-occupy or lease out, speak to MCO for the right advice. We’re Melbourne’s experts in commercial real estate, and we can help you find the perfect property to meet your business or investment needs.