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Can “mum and dad” investors buy commercial property?

By Greg Bell

Even experienced "mum and dad" investors who have had smashing success with residential properties can find themselves in a bind when it comes to their first foray into the world of commercial real estate. While there is always a demand for residential rentals due to the strength of the housing market, commercial properties should rarely stay vacant for any significant length of time, and if this happens, owners' ROI will plummet. However, low net returns on residential rental properties (currently only 2-3%) make many "seasoned" investors think about making an investment in commercial property.

Advantages of commercial property investment

Mum and dad investors may be intrigued by the chance to enter the commercial property market, especially since there is the opportunity to hold such property in a self-managed super. They can also enjoy net returns of double or triple the residential rate – averaging 7-15%. They can also depend more readily on tenants, with the typical commercial lease written for 5-10 years or longer. However, care must be taken to avoid pitfalls.

Challenges of the commercial property market

If a property isn't tenanted, finding a quality tenant can take months. In the meantime, the mortgage is still due, even if no rents are forthcoming. This can be harder for mum and dad investors to manage. In addition, bigger deposits – around 30% – are required, and commercial lending criteria can be far stricter than what you see with residential mortgages. Finally, upgrades may be needed on the building before it is suitable for leasing. The bottom line here is that commercial investors need significant capital before the purchase and after it, to deal with issues like these.

Tips for mum and dad investors

When it comes to making your first investment in a commercial space, due diligence is key.

  • Is there a tenant in place?
  • If so, what are their lease terms?
  • If not, will you be able to find a tenant?
  • Can you manage the financing requirements?
  • Do you have funds to weather a period of non-tenancy?
  • Does the property need upgrades?

For first-time commercial investors, finding something that is leased and has stable cash flow is an ideal way to get your feet wet and learn about the sector. You may even consider starting with a small commercial space like a parking area or some storage units, either of which can be effectively managed by a third party for a reasonable price.

If you're ready to dip your toe into the pond of commercial property investment, call on the team at Ray Whites Surfers Paradise. We have a wide range of commercial properties to show you.

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