While residential property is often the default choice for property investors, you also have the option of investing in a commercial one.
One of the benefits of picking a commercial property is that there are typically longer leasing covenants, lasting anywhere from three to 10 years, with annual increases based on the CPI or at a pre-agreed rate. This means that there is greater assurance of stability and profitability than most residential properties.
In addition, there is also the potential for more significant capital growth in a commercial property than a residential one. This is especially the case for larger premises and with bigger tenants such as corporations and the government.
Types of Commercial Properties You Can Buy
When we talk about commercial properties, you usually have three options: office, retail such as stores, and industrial, which often includes factories and warehouses.
Tenants
As each type of property caters to a different set of tenants, ensure that the property you are going to purchase suits the needs of your ideal tenant. For example, if you’re going to purchase an office space or building, some of its ideal characteristics would be for it to be located near or within the CBD and accessible by public transport. As for retail spaces, ensure that it’s near other stores and is easy to visit. Finally, industrial premises tend to be larger to accommodate warehouses and heavy vehicles.
Risks and How to Avoid Them
Like any other type of investment, there are bigger risks in a commercial property, but these are tempered by the possibility of bigger returns compared to residential property. It is important to understand these risks so you can avoid them or at least minimise your exposure to them.
Vacancy periods may be longer in commercial properties, and it can be difficult to find new tenants when the previous one leaves. Thus, it is ideal to target more stable tenants such as large corporations or the government because they are more likely to stay in the property longer, and are less likely to default on their payments, especially during downturns in the economy.
While not exactly a risk, the costs of buying and maintaining a commercial property are naturally higher than a residential one also. This is often the case if you choose a property in a CBD where the cost of space can be quite expensive. Renovating or refurbishing the property can also come at a hefty sum. However, this is rarely an issue because the tenant will likely shoulder these expenses, since the design and layout will depend on their own specifications and requirements.
Financing Your Purchase
You also have to finance your purchase of a commercial property. You will need to work with a broker just as you would when buying a residential property, and it is important to work with one that has the knowledge, experience, and networks necessary for business financing. This will give you a better set of options that are truly suited to the needs of your own investment strategy.