For many investors, commercial real estate can be a highly profitable component of their overall property investment portfolio. Where investors go wrong is to assume the rules for investing are the same as for residential property, or that they can do it all themselves.
There’s a world of difference between commercial property and residential property, and if you don’t understand what it is, then what looks to be a gold mine can quickly turn out to be a black hole, financially.
At Real Estate Buyer’s Agents, we can show you ways to reduce your risk through careful selection and screening, using methods most people don’t know
One of the traps is the assumption that you’ll enjoy a higher cash flow through better rental returns. However, there is also a higher vacancy risk if it’s the wrong property, and this can place added pressure on your cash flow.
What’s absolutely critical is the selection of the commercial property, which requires comprehensive research, due diligence and experience. Then there’s the often complex lease agreement, which needs to be thoroughly investigated in terms of wording, paragraphs, clauses and fine print that can leave you locked in with nowhere to go.
The comparison of residential and commercial properties below may assist you in deciding whether commercial property is right for your individual needs and circumstances.
COMPARISON CHART OF RESIDENTIAL AND COMMERCIAL
| RESIDENTIAL | COMMERCIAL | |
| YIELD | Lower yields | Usually higher yields |
| TENANT ISSUES | Need a good property manager to avoid niggly tenant issues | Need a good property manager to optimise rent and value |
| LEASES | More standardised | More complex and they can affect the property value |
| CASH FLOW | Lower cash flow in exchange for future growth | Better cash flow and tenant pays the outgoings |
| CAPITAL GROWTH | Generally higher but not always | Generally lower but in superior area growth can be high |
| GEARING | 80% plus, so you need less cash | Usually 70% or less and there are higher start-up costs |
| TERM | Loans are normally 30 years | Loans are normally 10 to 15 years |
| TENANTS AND VACANCIES | Generally easier to find tenants | Smaller pool of tenants and vacancies can be costly |
| PRICE | With homework and research, assessing what to pay is easier | Price is affected by lease, tenant quality, comparative yields, etc |
| BUDGET | Can be bought for most budgets, small or large | Possible on a lower budget, but it’s very competitive and there are fewer quality opportunities |
Step 1 – We establish your requirements
As your buyer’s agent, during our initial free consultation we’ll discuss the type of commercial property you’re looking for, whether it’s office, retail or industrial, and what your objectives are.
Step 2 – Commercial Property search
Once you give us the go-ahead, we’ll commence a comprehensive search of commercial properties available for sale in NSW within your agreed criteria. Not only do we have access to every listed commercial property available, but our networking skills also enable us to find many “silent sales” before they come on the market, which often represents exceptional value for money.
Step 3 – A shortlist
We then investigate a ‘shortlist’ of commercial properties on your behalf and prioritise the best candidates.
When assessing the merits of one commercial property over another, we consider:
• The location and its prospects
• The existing tenant and lease
• The likely tenant base
• The current rental yield and likely future prospects
• Potential for capital growth
• Your investment objectives
• Your budget
At each inspection, we take many digital photos to send you that show the good and the bad so you can get a real feel for the commercial property. This step saves time and money as we guide you through the selection process.
Step 4 – Due Diligence
This is where our experience really comes into play. If you are keen to proceed, we evaluate and assess the property in more detail. We look for ‘potential problems’ or expenses to factor in. We also include a range of protective conditions in the Contract of Sale that are in your favour, not the seller’s.
Step 5 – Accurate Pricing
We obtain up-to-date information about the property, the lease and tenant, as well as comparable yields and sales data to assist in assessing its true worth, which ensures you’ll never pay too much. In some cases, we order a valuation of the property.
Step 6 – Acquisition Strategy
Now we’re getting to the pointy end of the process. Once we’re convinced the potential commercial property investment ticks all the boxes for your strategy, and it’s at an attractive price point to begin with, we negotiate with the agent on your behalf, using all our legal tricks of the trade, to ensure that you obtain the property for the lowest possible price. Once purchased, we oversee the conditions inserted in the contract to protect you all the way.