6 Things to Consider Before Buying Commercial Property

Are you thinking about buying commercial property as an investment? Investing can be an excellent way to earn passive income, and nothing quite beats earning money without any labour or input. Traditionally, commercial property has had higher returns than residential property, but several factors mean that this is not an investment decision you should rush into. No investment comes without risk factors, and commercial property does have risks to consider. Like all investment decisions, it pays to be informed and up to date on all the aspects of the investment, which is why we’ve prepared this helpful article, which will share six things to consider before you purchase commercial property. Read on to learn more.

1. Strata Fee Costs

There are almost always strata management costs associated with commercial property. This is when you own a floor, unit or building within a larger commercial property, such as a high-rise building or shopping centre. Due to the nature of these buildings, there are responsibilities and costs associated with maintenance, cleaning and ongoing management. Typically, a strata management company will deal with this by charging a quarterly fee to commercial property owners. These fees can range into the thousands a quarter, so when investigating potential commercial property purchases, you should query what the strata fee expenses are.

2. Rental Yield

Rental yield is the term used to describe the % of return on investment the commercial property will yield to a landlord. It is the difference between the amount of rent paid to you by the tenant and the purchase price of the property. Typically commercial property offers a 5-10% yield, compared to the 3-5% of a residential property. This may seem appealing, but it’s worth mentioning that commercial property is typically more expensive than residential property and has higher insurance costs and strata fees, as we’ve mentioned. This means that overhead costs may absorb some of the yield. It’s worth figuring out if the yield is worth it for you.

3. Stricter Lending Requirements

When it comes to banks lending money for property investment, there is typically a tier, from residential to commercial to industrial. It is harder to get a loan for a commercial property than a residential rental property. This is because they cost more and have a higher risk profile. You may find it difficult to secure finance, and the bank will often have stricter lending requirements, including a higher deposit and proof of serviceability - your capacity to pay back the loan based on your income. Those with an existing healthy property portfolio and several streams of income will find it easier to secure finance compared to those without. 

4. Higher Risk

Commercial property as an investment is typically riskier than residential property. The main reason for this is due to vacancy rates. You are not guaranteed a tenant, even if you choose a plum location and a fantastic property that can be fit out to suit a variety of business tenants. Every month the property sits vacant is a month without income to pay back the property loan and represents red on your balance sheet. 

Other risks include vandalism, fire, flood, and other natural disaster damage and expenses such as cladding or significant capital works that some older commercial properties require. 

5. Location

Like all real estate purchases, location is key here. Ideally, you’ll want to buy commercial property in a populated, high-traffic location, especially if you’re investing in retail or even office space. This is due to the vacancy risk we’ve described above. You need tenants to make a commercial investment viable. Do some due diligence and ensure the property you buy is in a viable, populated area that will attract good-quality tenants.

6. Buying Office Space - Be Wary

One type of commercial property investment is buying a floor or space in an office building. However, with the rising popularity of hybrid work, this can pose a risk. While some companies are mandating a return to the office, others offer hybrid working approaches where staff can split their time between home and the office. This means that some office spaces remain vacant or under-utilised, representing a risk for commercial property investors. If you buy office space, you’ll want to ensure that you can find a tenant that will demand office time from their workforce. Otherwise, you may find yourself with a dud investment on your hands.

A Commercial Property Conclusion

This helpful article has shared six things to consider before buying commercial property. Remember that property investment carries risks like all investments, so the onus is on you to make an informed decision with the correct due diligence. Good luck in your investment journey.