10 Hot Commercial Property Investing Tips
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#1 – Focus on cash flow postive.
I don’t believe in negative gearing. I believe that even at 100% finance you can find commercial properties that are cash flow positive from day 1.
This means that you are never out of pocket when holding a property like this and the income goes to fund further investments or a better standard of living.
#2 – Commercial property is all based on the numbers
If you are looking at a property that claims a 7% or 8% return and you’re only paying say, 5% interest on your loan then you know that that property is going to be cashflow positive from the day of settlement. It also means that you can very quickly work out brought figures on any property to know whether it’s going to be worth a deeper look.
#3 – Lear the simple formulas that commercial property is based on
The value commercial property is pretty-much based on the amount of rent collected. Obviously there are other factors but knowing the formulas used on calculating commercial property value and cashflow will allow you to know the return on any property well into the future.
This also helps you keep things simple when first searching for properties that could produce a good income for you.
#4 – Look in your local area first.
You probably use commercial property every day, whether it’s the doctors, dentist, local cafe, offices, shops etc. Look for commercial property in your local area. Because it’s close tis will allow you to become an expert in that area with regards to prices sold, rents charged. If it turns out that your area is not all that great to invest in, you can move on to the next, closest area, and start looking at that one.
#5 – Focus on one type of commercial property
Often when people start looking at commercial property they get confused because of the various types of commercial property. (Since there are shops, cafes, offices, industrial and hospitality there are a lot to choose from but keep in mind that the numbers work the same for all of them). Notice if you are drawn to one type in particular and stick with that one type. This will allow you to focus and become more knowledgeable about that type of property so you can make more informed decisions when looking at new properties.
#6 – Do some digging with the agents
Investing in commercial property involves gathering all the numbers and quite often all the numbers you need are not on the listing. You’ll need to talk to the agents and know what to ask them to get the information you need to make a decision. Keep in mind that sometimes agents make mistakes and get these wrong. This means that you should never take those numbers as gospel and double check everything they’ve said – this is part of the due diligence of the property.
#7 – When Searching, quickly focus down on the properties which have a Net Rent that will work
The Net rent on a property is the rent you get after all outgoings and running costs of the property have been paid (council rates, maintenance, insurance etc). Quite often in commercial property the tenant will pay those for you, depending on your lease. Net rent does not factor in your mortgage payments. Knowing this will allow you to not only quickly work out what your surplus after your mortgage payments will be but also will help you decide what you can afford to purchase the property for.
#8 – Get some advice about the entity you’re going to invest in
Whether you are going to use your Super, buy in a company name or set up a trust, you need to get this set up before you start to look for a property as all that needs to be ready to go when you find a property so you can move quickly.
As to which type of entity you use, you need to get that information from your accountant and lawyer based on your circumstances.
#9 – Get help with your Due Diligence
Don’t try to do this all yourself. You’ll need to look at the purchase agreement, the lease the tenant has signed, the building itself. Find the appropriate experts and authorities to help you will this. Have a solicitor on board before you start and make sure you have a rolodex of numbers you can use ahead of time (eg building inspector, surveyors town planner etc). These experts will help you make sure that the property is as it’s represented and you’re buying the property you actually think you’re getting.
#10 – Take the emotional out of the deal
Don’t buy a property based on emotion. Commercial property is very different – it’s all about the numbers. You need to negotiate with ‘ice water’ in your veins and be prepared to walk away from any deal where the numbers are not stacking up. You can always come back to it if things change
One Final Thought – For when you’ve purchased your first commercial (or second, or third) property:
– Use a property manager
Property managers charge a very minimal fee for managing commercial property (less than residential property managers) and this frees up your time for more investing. Let them so all the hard yards while you relax and let them handle it.
Obviously there are a lot more factors to succeeding in commercial property and this is just the tip of the iceberg, but it’s definitely worth getting involved if you like the idea of years of consistent passive income.