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If you’re thinking about making an investment foray into the commercial real estate market, there are a few things you things you should take into consideration to ensure the success of your investment.
Residential and commercial investments are different
The first factor to take account of is that residential and commercial real estate investments are very different things. Most mum and dad investors are pretty comfortable with residential property – the risks are low, it is familiar, there is little if any legal complexity and, while the potential returns are probably in the order of five per cent or so – much lower than potential commercial returns – they are generally reliable and consistent.
With commercial real estate, by contrast, the legal framework can be very complicated, the property owner is likely to be liable for a considerable component of the outgoings, leases are generally long term but so are wait times between leases and, while top returns are exceptional, if you get the location and investment type wrong, the financial thesis can go south very quickly.
There are different types of commercial real estate
In broad terms, commercial real estate takes three forms: office, retail and industrial. However, there are also significantly different market types for each of these. In retail property, for example, there is a vast difference between suburban strip shops, CBD segregated retail space and shopping centre or mall style retail space. Similarly, a CBD office investment is considerably different to a suburban office property.
The risk and return profile is different
Commercial property returns can be quite volatile and subject to macro-economic factors that you will have no influence over. While top performing investments might easily make double digit returns, that can turn on its ear in the event of a recession or economic downturn.
The higher risk comes in the form of higher vacancy rates. It can take a considerable amount of time to find or replace tenants for a commercial property investment and, while they may be stable for a long time, you are also at the whim of the tenant’s goodwill in terms of taking care of the property.
Other risks relate to the exposure to outgoings, the relatively high cost of entry and the impact of location and demographics.
What type of commercial property should a first time investor consider?
In broad terms, the experts suggest selecting a property based upon an excellent location, strong demand from a range of potential tenants and good physical condition rather than focusing on a high yield.
Many first time commercial real estate investors go for a suburban strip shop investment. They are more often than not more versatile than just a retail store and have the opportunity to include an office space, or even a residential opportunity on the upper floor.
A key consideration is a commercial space that has good exposure and street parking. Consider choosing a space with main-road exposure and easy accessibility for traffic from all directions. Good parking that is easily visible and accessed from the road is important.
Expert advice
Regardless of the type of property you want to invest in, if you are considering entering the commercial real estate market, think seriously about engaging the expert advice of a specialist real estate agent like Just Commercial – it could make the difference between a punt and success.
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