Investing in commercial property is alluring, no doubt, especially when you see advertisements on websites or at auctions of properties that yield 6-8 percent or even more. Especially at a time when yields on residential properties are hovering only at 3-4 percent or lower.
But beware of the traps, as with a potentially higher reward, come greater risks which is usually in the form of higher vacancy rates.
Commercial property can usually be classified into retail, industrial or office. Each has its pros and cons, but no matter what type, some rules apply to all or most.
According to Angus Raine, executive chairman of the Raine & Horne Group, commercial property is a natural investment “stepping stone” from residential property and a great way to diversify one’s portfolio, create tax benefits and build wealth.
“It’s a more sophisticated form of investing. However like any asset class, there are risks. So aspiring investors should take the time to do plenty of research, seek advice from experts and understand the pros and cons,” he was cited as saying by the Australian Financial Review sometime back.
The first step to investing in commercial property then is to take stock of the risks.
First, finding a new lessee can take time. It’s no good buying a vacant office space at a bargain when you can’t find a tenant for months.
Also, once a tenant moves out, it can take months or even more than a year to find a new one. On the other hand, finding a tenant for an apartment you want to rent out is generally a matter of weeks.
Also, if the sole tenant of your property has to close due to financial problems, it could mean tough times for you too.
If you want to avoid those traps, Fred Nucara, director at Melbourne-based agent, Beller Commercial, has some advice.
Investors would do well to position their property differently in the market, he told Fairfax Media in a previous article.
“You might offer the first month of every year after they renew rent-free or offer them $5000 to help them set up their business,” he suggested.
He also suggested to ramp up the property’s presence on the internet so it appears high on searches. That way, one can get a good number of enquiries.
Also, putting up ads in publications that will attract suitable tenants, such as cafe premises in Epicure magazine or a medical facility in a medical journal.
He has a word of advice for first-time commercial property investors who buy into a vacant property.
“I would not recommend it to first-time investors. We advise our clients to get something that is leased, that has cash flow so you can get a sense of the temperament of the tenant over time and their ability to pay the rent. That way an investor can develop confidence and understanding about the sector,” he adds.