As a new or first-time investor in commercial property, selecting a specific asset class to invest in can feel overwhelming
You know that it makes good sense to diversify a portfolio, but where do you start one?
Commercial property types can be broadly categorised into three main groups: retail, offices, and industrial.
Breaking down the decision into its simplest components and assessing the options from an educated vantage point is the key to getting started.
Be Prepared to Do Your Research
There are a number of factors to consider before you decide which property type will be the best one for your purposes.
There is no right or wrong answer, and each of the three categories has its own risks and rewards.
For a first-time investor it’s wise to examine all three categories, considering what you want to put into the investment and which class will ultimately suit your needs best.
Talk to Your Contacts
As a starting point, it’s helpful to consider which of the three commercial asset classes you are most familiar with.
This will go a long way towards boosting your confidence if you are a first-time investor, giving you a sense of assurance in the investment journey you’re about to embark on.
Talk to family, friends, and acquaintances. They could be of value to you, providing you with useful insights into the running and mechanics of their respective asset class.
Establish what your goals are in making a commercial property investment.
With higher barriers to entry and the reduced number of buyers and sellers in comparison to the residential market, commercial property investment is better suited to a longer-term commitment.
Consider the length of time you are planning to maintain your investment for.
Generally, five years or less is considered short-term, whereas any length of time over five years is longer term.
If you’re able to invest in a fixer-upper, or in a new development in an up-and-coming commercial neighbourhood, you stand to make a good deal of profit in the short term by purchasing a property at a reduced price, revamping it, and flipping the property for a healthy profit.
This however, takes a good deal of capital and the banks are unlikely to finance commercial property purchases up to 100%.
Put thought into the amount of risk you are willing to carry, and for what length of time. Consider the risks that each property type carries.
As with any investment, your exit-strategy should be clear to you. However, shifting or off-loading property in the commercial market is more difficult than the residential market.
Your finances will play a key role in your investment capacity, and in your final investment decision.
Commercial properties are far more expensive than residential properties, and the banks are unlikely to finance a commercial bond application 100%.
It would also be wise to estimate the anticipated cash-flow from your commercial property very conservatively for the first few years.
Tenants leasing your commercial property may request the space be refurbished, and running costs include maintenance, and the recovery of rates, levies, and utilities.
Commercial investments are not liquid, and you should manage your finances to ensure you don’t find yourself having to offload an investment before realising its anticipated profits.
It’s all about Location
Take a good look at the asset you are considering and then at the area it is situated in. Is it adequately suited to the area and its character?
Find out about the area. Ask around to find out whether there has been an increase in industrial businesses moving into the area, or an increased uptake of office space.
Check whether there have been any large retail developments which have recently come onto the market.
Find out about any developments which have been approved but not yet built, and how this could work for or against your investment.
It would be useful to analyse similar competitive commercial properties in your chosen location, to see whether these factors might inhibit or improve your prospective asset’s performance.
Consider your Key Requirements
It is necessary for a profitable commercial property to satisfy all of the key requirements of the respective investment type. Ultimately specific to the asset type, these requirements may include:
- Proximity to public transport
- Passing foot traffic
- Freedom for higher noise levels
- Large space for industrial or warehousing work
Whatever your final choice may be, it must suit the requirements for a particular property type, be in the right location to have a viable chance to become a worthwhile investment.