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How to invest in commercial property?

December 17, 2019
Categories: Commercial, Industrial, Investments, Office, Retail

Investing in commercial property can seem complex compared to many other investments. Even if you’ve done it before, no two investments are the same. Here’s a high-level look at how to invest in commercial property.

Commercial property can seem like the golden ticket to some. Putting money into an appreciating asset with 6 per cent to 9 per cent yields, and an opportunity for large capital growth.

But there’s a lot more to it than simply throwing in your money. Even long-term investors will agree, the investment journey is never straight forward.

To shed some light on the process, here’s a very straight forward (and by no means complete) run down on how to invest in commercial property.

9 steps on how to invest in commercial property

  1. Understand why you want to invest
  2. Ensure you can secure finance
  3. Have the right network and team
  4. Research where to invest
  5. Research which type of commercial property to invest in
  6. Understand the market and check your numbers
  7. Negotiate with the vendor
  8. Do your due diligence
  9. Proceed to settlement

Investing in commercial property is a lot different to buying residential real estate. The required research for a big commercial asset seriously outweighs the legwork of purchasing any house.

The national, state and local markets need constant watching, it’s integral to understand lease negotiations and what rent to charge, knowing how to find value is a must, and you need to know how to complete an in-depth due diligence investigation.

Having a high-quality network and team in place is one piece of the puzzle to help your investment in commercial property be a successful one (and to avoid a number of headaches).

Here’s what you can expect on the journey to investing in commercial property:

1.      Understand why you want to invest

Like any good goal setting strategy, you should understand why you are investing in commercial property in the first place.

Perhaps you’re retiring or retired, and the propensity to earn is lower than in your working years. Commercial property is renowned for handing out strong yields. So, if you’re looking for reliable cash flow, it could be a good avenue for you to invest.

However, rarely is commercial property a get rich quick scheme.

It’s less about timing the market, and more about time IN the market. So, you should be prepared for your funds to be tied up for a while.

2.      Ensure you can secure finance

Commercial property is a large investment, so it’s doubtful you’ll be able to afford it without the bank’s help. (Besides, you can still make money over and above the bank’s interest… read more about that HERE)

You won’t get the green light from the bank at this stage. But you should have a fair idea if you will by looking at the rough numbers. There’s no point starting substantial property hunt, coupled with intensive due diligence, if you don’t have the deposit to invest (typically 40 per cent of the total property value), plus additional capital for taxes, property associated costs and a reserve fund.

This is where your networks will come into play. The better links you have at the bank, with relationship and credit managers, the better you’ll understand if you can secure finance.

3.      Have the right network and team

As we pointed out with the bank, your networks will play a big part in your commercial property success. It’s tough to know how to invest in commercial property if you don’t have good relationships in the following areas:

  • Sales agents
  • Leasing agents
  • Property valuers
  • Property managers
  • Legal advisers

As a commercial property syndicator, our team is our best investment. We have in-house valuation experts, property managers, accountants, sales teams and marketing professionals. As we are a commercial property syndicator, we know how to investment in commercial property better than most. Get in touch with us if you’d like to learn more about investing alongside us.

4.      Research where to invest

We invest with a top-down approach. Have a look how we invest in commercial property HERE.

First, start with which state you feel holds the best opportunities. The key is looking at how the state economies and markets have performed yesterday, where they’re at today and where they’re likely to be in the future.

Next, look at the precincts within your chosen state. Core precincts generally hold the more expensive opportunities and can be sophisticated investments. This is also where many great performing assets reside. Secondary precincts are cheaper and easier to invest in, but also are flooded with more investors.

Once you’ve homed in on a location, you can start the hunt for the specific property investment.

5.      Research which type of commercial property to invest in

The major three commercial property types or sectors are:

Each have their own quirks. For example, industrial assets can involve less hassles. Industrial buildings are simple, without the complexity of office or retail premises, so likely have less maintenance. This means the property value won’t be dissolved by a deteriorating building.

6.      Understand the market and check your numbers

Research what each sector is doing in your chosen state and precinct.

Importantly, you should understand whether tenant demand is high or low. Weak tenant demand is not necessarily bad, as the property cycle may be putting your chosen market in good stead again soon. This is called counter-cyclical investment and can be a very smart investment strategy.

Your research should show what sort of rents you’re likely to receive. This means you can plug your figures into your forecasting and ensure they match up with the bank’s minimum requirements to fund the purchase.

7.      Negotiate with the vendor

Once you’ve found the property and understood the high-level challenges you may face (like upcoming lease expiries or vacancies), it’s time to negotiate with the vendor.

Firstly, know how much you can afford. Secondly, know how much the property is worth today and how much it should be worth in several years’ time. And crucial, is to understand whether the rental income you would receive is acceptable.

Also, understand your bargaining power. Try to discover the vendor’s reason for selling and use that to your advantage if possible.

8.      Do your due diligence

With the contract signed, your due diligence period begins.

The due diligence phase is absolutely the most crucial when learning how to invest in commercial property.

The “DD” period is typically 30 days (sometimes less). There is a long list of items to follow, but loosely they include:

  1. Talking to existing tenants
  2. Researching market threats or opportunities
  3. Auditing the lease documents
  4. Understanding zoning restrictions
  5. Check the correct property title
  6. Understand what you own and what the tenant’s own

9.      Proceed to settlement

You should be prepared to walk away from your ‘golden ticket’ investment. If the challenges are too large, if the lease agreements aren’t what they appeared, or if the valuation or building inspection uncovered too many nasties, then be prepared to move on.

Otherwise, it’s time to move to settlement. You’ll take ownership of the property and importantly, begin generating an income.

You’ll notice by now that commercial property investment is a far cry from buying residential property. It can be a very complex journey – but it’s not impossible.

For more information on how to invest in commercial property, get in touch with Properties & Pathways today.

Or if you’re not ready to invest, why not check out some of our other blog posts.