Congratulations! You’ve made the decision to investigate whether investing in commercial property in Australia is right for you.
The world of commercial real estate is vibrant, exciting and richly rewarding for investors that do their homework and make smart, informed decisions.
However, for the layperson unfamiliar with this industry, it can often seem like a confusing and impenetrable maze of unfamiliar jargon and intimidating regulations. This can lead to investors making erroneous assumptions that they could never get involved with commercial real estate because you don’t have enough cash, it’s too complicated, or it’s only for large corporate types, all of which are far from accurate. The reality is that commercial property is significantly more accessible than many people consider.
So, for those enterprising souls that have decided, or are contemplating the move into the commercial market, here are some crucial tips to help you prepare for what we’re confident will be a positive and profitable investment choice:
Location
This consideration is nothing new to property investors. However, while those looking for a residential home might look at proximity to good schools, medical facilities and parks, the considerations for commercial are somewhat different. The success of your investment can depend to a large extent on business growth in the surrounding area, access to public transport and/or major road, rail or sea routes and numerous other business and logistics-related factors.
Expert Tip: Put your corporate cap on and look for a location that is conducive to smooth business operations.
Long-Term Leases
Commercial leases are typically longer than in the residential sector. 3-5 year leases are common, and it is not unusual for tenants to have automatic options to extend for a further 5-10 years built into their contract. That’s up to 15 years, compared to the 6-12 months that us standard in residential leases. This is excellent news for owners looking for long-term stability in the form of reliable income rental, especially if you purchase a property that is already tenanted. However, this inherent stability means that turnover is significantly lower than in the residential space. Therefore, if a tenant does vacate or break a lease, the time-horizon for finding a new occupant can be, on average, significantly longer.
Expert Tip: Utilise a professional property manager to help you locate stable, reliable tenants and retain them for as long as possible.
Tenants
It goes without saying that having responsible, reliable tenants is a critical ingredient for the success of any property investment. There is an additional layer of complexity when it comes to commercial real estate, as the businesses that occupy your property are subject to external market forces that can fundamentally impact their organisations, irrespective of how responsible they are. For this reason, it’s not only crucial to look at the reliability of tenants, but also the industry in which they operate. Let’s say you’re considering an office complex that contains a bank. You might think that such a purchase would be as safe as, well, a bank. However, with bank branches closing at a rate of knots, you might find yourself without a tenant and associated rental income for an extended period.
Expert Tip: Look for tenants in stable or growth industries, and avoid those in areas that are waning.
Lease Contract
Your lease contract is the lifeblood of your investment. Residential leases are usually relatively short, formulaic documents that tick a bunch of standard boxes. Commercial leases can frequently read more like 19th-century Russian novels, comprising 50-60 pages of detailed clauses and legal considerations that are highly customised for the specific property in question.
Expert Tip: Procure the services of an experienced, competent property lawyer to ensure your lease is water-tight.
Take it Slow
You’ve been warned: everything takes longer when it comes to commercial property. We’ve already dealt with the process of finding a tenant. However, the same phenomenon applies to pretty much every aspect of the investment. From contractual negotiations and due diligence to maintenance and refurbishment, whatever your experience with real estate to date, expect it to take at least twice as long here, if not more.
Expert Tip: Have patience and focus on the long-term goals
Returns
If you’re starting to ask yourself why you should bother buying commercial real estate at all, as you might expect, it comes down to brass tacks. Average yields in the commercial space sit at around 5-8%, with 10% not unheard of. By contrast, residential property yields are predominantly around the 3-4% mark, with 5% being a stellar result. Over the life of the investment, this adds up to significant wealth generation power and makes commercial a lucrative and attractive options.
Expert Tip: Yields can vary depending on the type of commercial property. Identify your target locations and compare yields for office, retail and industrial properties to determine which is the best fit for your portfolio.
Costs
Another outstanding advantage of commercial real estate is that unlike residential, most maintenance and other outgoings such as rates, insurance, repairs, etc., are borne by the tenant. This means that far more, if not all the rent you collect remains yours. In addition to the financial benefit, as any residential landlord will know, not having to worry about these items will save you enormous amounts of stress and hassle.
Expert Tip: Maintenance and repairs to the building exterior or core structure may be the owner’s responsibility, so look for a property that is structurally sound and in good condition
There are myriad considerations when entering the commercial real estate market. Hopefully, these tips have given you plenty of food for thought as you ponder your options. To help you work through the intricacies, call MCO today. Our incredible staff have the experience and expertise to help you make the right decisions.