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In this the third part of our 8-part strategy series we’re going to be looking at the pros and cons of investing in commercial properties and what it takes to be successful with a commercial strategy.
Commercial properties are growing in popularity as they are a great way to diversify an existing portfolio. If you choose the right property it can be a relatively hands-off investment.
What is a Commercial Property Strategy?
The strategy involves buying a commercial or retail property. One of the more popular ways to diversify with a commercial property is to buy a shop with a flat above and to let out the shop to a business and the flat to a tenant. With this strategy you should see a constant rental yield from the commercial property, and it should also appreciate if you buy it in the right area.
Pros of Investing in Commercial Property
Corporate properties tend to be secure investments, especially if you purchase one that already has a business in situ. If you aren’t buying with a business in situ, you’ll need to do some extra research to make this a successful strategy.
Commercial lets don’t involve as much work as a traditional let. Leases tend to span multiple years and are usually fully repairing and insuring. If you’ve got a tenant with a good business the income is quite passive.
If you let on a fully repairing and insuring basis, you’ll save money on insurance and maintenance.
There are tax advantages, for instance you don’t have to pay ‘second property’ SDLT on a commercial property and it can also be owned by a pension, so it is no surprise that commercial lets are rising in popularity.
Cons of Investing in Commercial Property
You need to consider and understand the role of business in the area you’re investing in. For instance, it’s no good buying an empty commercial property in a run-down area where there are a lot of closed businesses and a supermarket at the end of the road.
You’ll need to do your due diligence on the businesses that want to let the property. If you think a business is going to go under quickly, you have to decide if its worth the risk of letting to them short term or whether it is worth holding out for a more robust business.
Commercial property is more subject to the whims of the economy, if you lose a tenant it can take a long time to find a new one. These kinds of properties are hit harder during a recession than residential property.
Void periods are usually longer unless you are renting out property that’s in a high demand area, even then, the voids tend to be longer than traditional residential lets.
Mortgages for commercial properties are always on a repayment basis so may be lower loan to value.
What’s Needed to Make Commercial Property a Successful Investment?
A good eye for business, ability to weather the storm should a recession hit and either buying with cash so that you aren’t as affected in a void period, or savings to get you through unexpected voids.
While commercial lets tend to be more hands-off you do need to know what is going on in your commercial properties. If you allow illegal trade to happen in the premises you can also be held responsible. There has been precedent for this in the courts in the last few years.
When Commercial Properties go Right
You’ll end up with a commercial property that is let out to a strong and growing business in a growing area. If you also have traditional lets, you’ll have succeeded in diversifying your portfolio. If you’ve found a good tenant, then your commercial property should almost take care of itself.
When Commercial Properties go Wrong
You end up with commercial property in area that isn’t growing with businesses that frequently fail. There will be longer void periods and that will impact your income.
If you don’t keep an eye on what’s going on in your properties, you could end up letting to an unscrupulous business owner and you could then be fined or worse.
If you aren’t good at reading the market and staying on top of what’s happening in an area you could end up losing money if the property depreciates.
Who Does Commercial Property Investment Suit?
If you have an eye for business and a strong business acumen and you can do some in-depth research on the area you are investing in, this strategy will suit you nicely.
An ability to understand the rules, regulations and tax implications of renting out a commercial property would be an asset, but if you’re willing to learn these you can still make use of this strategy.
If you want to diversify your portfolio this may be a good strategy to start with.
You’ll need to understand when it’s best to sell or to hold a property and you’ll need to keep an eye on business developments in the area to maximise capital growth.
