Investing in commercial property to let out to a business can be a very rewarding and a wise decision for an investor. It can cover a range of building options such as offices, retail parks, warehouses to industrial properties. The yields are often higher than residential properties, and the tenant will often sign a full repairing and insuring lease.
However, few investors are familiar with the process of buying a commercial property and there are few common pitfalls you should be mindful of, as these can easily be tripped up on, even by the most experienced investors.
Before we cover the key mistakes investors make, here are the key differences between commercial and residential properties:
Commercial properties are valued differently
The capital value that is attached to a commercial property is directly related to the income, yield, and the strength of the agreement. This is not the case with residential property, which is typically valued based on the utilities it offers to the homeowner.
Commercial property can diversify risk
If you own a large office building which is let out to several businesses and you lose one tenant, you only lose a percentage of that income for that building, whereas you lose the entire rent if you let the property to a tenant in a single let family house.
Cashflow can be greater on commercial properties
Often, the income can be higher per square foot on an investment basis for a commercial property than on a residential unit. Similarly, if you rent a multi-unit commercial property, you will have more tenants to generate income than you would with a single family let.
Commercial property leases are generally longer
This can help with the bottom line and give you stable and consistent cashflow, provided the business does not go bust.
So, what are the mistakes investors make? Keep reading to find out more.
1. The tenants do not want the property
This can be down to a variety of reasons such as the price being set too high or that the building itself is not a suitable shape or big enough size for the targeted demographic. If your potential business/ tenant is not satisfied with the key requirements they need or desire for their business, your investment could be sitting empty for a long time.
For example, does your property meet all the tenant’s needs, including whether they need onsite parking and or/access to public transport? As a buyer, you will need to analyse the attributes of competing commercial properties and how factors such as zoning, location, and access can potentially affect the performance of an incoming tenant/business, and your ability to let or re-let.
A good tip before investing in a commercial property is to talk to the storefront business (if occupied) and ask if they are planning on renewing their lease and what they like. Is business good? Are there any telling signs more businesses are relocating or popping up in the area?
2. Getting a place with poor footfall
Although this point ties in to the previous one, when it comes to letting a property to a business, they need as much exposure as they can, especially if it involves marketing to the public. The best properties are usually located where people will flock to but also where they usually frequent, pass by and visit regardless of if they intentionally sought your premises or not.
The better the foot traffic, the higher you put the rent and the less downtime of letting and reletting the premises. Location should always be at the forefront when deciding on whether to purchase a commercial property or not, as these units could be sitting empty for a while along with business rates being applicable too.
3. Not factoring in all the additional costs
Anyone can buy a property, but making it work for you is another thing. If the commercial premises you are buying is old and has poor services like heating or newer features like air conditioning, you will need to have an in depth and comprehensive checklist to factor these in before the property is occupied again. This is where getting a professional in such as a surveyor to investigate the property makes sense. Getting the report is one thing, but it is your responsibility to make sure that you understand the implications and to check the property over yourself or with a trusted builder.
Ensure you walk around with your builder and do not ignore anything that you spot. The seller will not volunteer any information and it will be your job to raise them. You must ask your builder/ building inspector to inspect every unit, the roofs, the laundry areas, the attics, the crawlspaces, etc.
We cannot emphasise enough how important it is to find a well-qualified surveyor to represent you who can provide a detailed report of the physical condition of the property. At BB&J Commercial, we have a team of Chartered Surveyors who can provide professional and clear advice. Get in touch with our team here.
4. Wrong decisions on property choice
This is probably one of the most common mistakes made involving commercial property. You need to find a property that suits your financial goals as well as your appetite for risk.
Remember, the three most common choices for purchasing a commercial property are income, capital growth and strategic purchase. So, letting your emotions get the better of you could lead to a costly mistake. When purchasing a commercial property, you will need to base your decisions on the property’s location, historical performance, yield, and tenant type.
5. Knowing your tenants and their business
It is important that owners and property managers for a rental property screen their potential tenants, including getting credit reports and financial information. However, commercial property landlords and property managers will need to go the extra mile – they must research whether the commercial tenant is credit worthy and assess the likelihood of them going bust. Is their business plan viable and will it be able to continue to pay the rent throughout the length of the lease?
Would it be a good idea to rent the commercial premises to a new mini mart or local express when there are three other stores within the same few streets? Is it likely that the store will be viable, and the business could close, costing thousands in potential rent and costs in re-marketing and reletting the property during the vacant periods?
Another thing you could do is to check on the VOA website and see what business rates are payable, or did any operating expense increase or decrease dramatically last year compared to the previous years? How are current businesses doing financially, are there lots of empty space? Be sure to ask for the sellers’ cash flow statements too.
Once you have taken the time to understand the ins and outs of commercial property investment, it can be extremely rewarding both financially and personally.
If you are looking to invest in properties, why not get in touch with our property professionals today? Give our team a call on 01332 292825.