6 tips on getting started in commercial investing
Diversifying your investment assets is important in maintaining financial security in case one asset class plummets. If you want to consider dipping your residential property investment toes into commercial investing, here are six tips to get you on your way.
Look for long leases — A three, five or 10-year leases, with an option to renew
Long lease equals more security! Longer leases are also important when getting a valuation of the commercial property. If leases are expiring in a few months, the value can often recognise zero per cent of the revenue value. So the longer the lease is, the more investors will see value in the property.
Make sure the location is viable
For example, if you’re buying a café, it needs to be in an area that gets consistent foot traffic without an oversupply of competitors. Competitor analysis is a very important part of the due diligence for commercial properties. If you were buying, let’s say a gym, you want to make sure there are not too many competitors currently there, and also understand the potential for future competitors to enter the market.
Understand the commercial property market drivers
Make sure the tenant is in a high demand industry; this is essential for growth. For example, you wouldn't want to buy a Blockbuster store when there was evidence that the industry was being replaced by Netflix. Industries such as the medical and fast food industries are on the rise. Buying into a growth industry can lower the chance of a vacancy.
Understand local demographics
As certain segments of the population move to different locations, new opportunities arise. For example, if there is an increasing median age of the people for a suburb, there is more demand for medical-based businesses.
Diversify
I personally like to buy multiple cheaper commercial properties as opposed to buying one high-value property. For example, three properties totalling $1,000,000 gives you a lot more lease security compared to only relying on one tenant for one $1,000,000 property. There is also the argument that smaller commercial properties with lower rent expectations are easier to fill compared to large expensive commercial properties.
Understand how long it would take to find a new tenant if your current one leaves
The best way I have found to work this out is by checking “first listing” to “first listed” dates on online real estate portals. An example: if you were looking at a 250m2 warehouse, you would need check how long it has taken to fill a warehouse between 200–300m2. If the average is below three months, the risk is not great.
Having a great understanding of each of these tips is essential to do well in commercial property. When you get it right, the returns can far exceed the best residential returns.
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