If you are a novice to commercial property investment, today is your lucky day. I am going to answer all your questions and give you the low down on getting into the market.
I often write for people who have a fair idea what commercial is all about but occasionally I get people coming to me with the most basic of questions and I feel it only fair to create a springboard to get people started with why I love it so much and how to get started with this incredibly lucrative style of investing.
Firstly, when most people think real estate investment their default is residential!
This is because we all have an emotive experience with houses having grown up in one or wanting to be a billionaire and own the biggest on the street.
What you need to remember is residential and commercial are apples and oranges.
Both can be great but they are very very different types of investments. The main difference between a commercial property and residential property is the relationship between the owner and the occupier. In the case of commercial, the tenant and the cash flow received as a result of the investment
So what should you be looking for in a commercial real estate investment?
Well, before we plunge into a commercial property investment we must ask ourselves a few questions.
1. Can we service the debt if the property is untenanted?
This is all about risk. We want minimum risk. A vacant building will burn a hole in your pocket both with expenses in addition to mortgage repayments.
If the property is vacant, what will cash flow look like over the next 12 months?
Investing in a commercial property has a great advantage of positive cash flow if tenanted but you need to work hard to find the right tenant.
2. Where the property located?
This is all about growth. You need to be looking at growth areas. By growth areas we mean, increasing population, proximity to public infrastructure, transport and amenities.
Protecting cash flow is important. Current and future tenants want a good location close to major infrastructure that will make it easy to commute for themselves and their employees.
3. What is the profile of building?
It is important to think about this investment long term. Will this building be attractive to tenant in the long term? The profile of building and attractiveness to a variety of tenants is very important and overlooked in many investments.
This all sounds easy right? So why do people have difficulty investing into commercial real estate?
There is an emotional relationship with residential real estate. Most people are familiar with the process of buying a residential property. Many novice investors have limited experience with commercial property or how to go about getting that first investment.
So how can a novice investor overcome these barriers?
The key, like everything in life is to become educated.
Your goal is to become an expert on commercial real estate investment by focusing on the fundamentals. It is important to learn about cash flows and how value is determined in commercial real estate.
You will learn about leases. In commercial real estate these are 3, 5, 10 and even 20 year agreements.
The leases may also have option periods for the tenant to extend their agreement for further years.
You will learn about rent reviews. These increase the rent at either 4% or CPI each year.
This is primarily done to increase the cash flow in line with inflation as commercial properties generally have lower capital growth than other forms of property.
You will learn about outgoings. Generally the tenant pays for council rates, water rates, insurance and improvements.
This helps the owner by reducing the burden on paying and maintain all expenses relating to the building.
It is important to get educated in how all these numbers work and how they all fit together. The great thing about commercial property is that there is no emotion involved – it all comes down to the numbers, and you can't fudge those. The numbers either stack up or they don't.
Like anything, you've got to do your research! Go and talk to agents, talk to valuers, talk to town planners and even other commercial property owners in the area you are looking… The due diligence either stacks up or it doesn't.
As a novice you can spend hours reading and searching online to get a feel for prices and competition.
It is worthwhile talking to your bank manager or financial advisor to really understand how much you can borrow and what type of debt service if required to get your investment off the ground.
If you would like to invest through a self-managed super fund, commercial property provides a great avenue to consolidate an investment.
Although you should seek professional advice, it is possible to purchase a property with your super fund if the tenant is your own business.
If you want get further knowledge, dive deeper into expert concepts.
Have a look in metro areas, yields, outlay price, services, entry points,
The great thing about commercial property is ‘information is power’.
The information is publicly accessible to anyone. It is how you use the information… That's what I teach.
Next step, get online or go talk to some experts. Attend my Free commercial property webinar online which will show you how commercial investment works and some of the results that are possible when you understand the numbers and what to look for in the “right” property.Register for the webinar here – It's free.
Focus on building up your knowledge and preparing to pull the trigger when you find the right commercial investment.