Are you wondering how to create stability when managing your commercial property? Commercial properties can be either the easiest and most lucrative investment option, or a money pit where dreams go to die.
If you can secure a long-term, high-value tenant for your commercial property, you can basically sit back and watch revenues roll in while the tenant does all of the maintenance and upkeep and pays the majority of the bills. But if you end up with a vacant property that need renovations, you could be forced to keep paying your mortgage on a property that is standing empty and sucking down your cash without returns for an extended period of time.
Avoiding pitfalls with commercial properties
To prevent being left holding the bag on a property that turns out to be non-viable or requires tremendous outlay or ongoing maintenance while tenantless, perform your due diligence before buying into a commercial space.
- Investigate the area that your prospective property is located in and figure out if there is a local demand. Also look into property values, so you don't overpay.
- Calculate the cost of holding the commercial property on a monthly basis. This can help you determine how fast losses add up during periods of non-tenancy.
- Decide what amenities to add to make the property more attractive to tenants, such as installing common areas, renovating stairwells or making the building bike-friendly.
- Get a loan with the most favourable interest rate you can, and be prepared to put down 30% or more. Hold some cash in reserve if possible to help you get through times of non-tenancy.
- Find a fantastic property manager and let them do their job. This can be invaluable and keep you from sinking time as well as money into your commercial property.
Generating a stable income from your commercial property
The best way to guarantee a stable income from a commercial property is to find and install a high-quality tenant. It may be tempting to simply take anyone just to get revenues coming in, but this can cost you long-term – and long-term is where the real money is in commercial property investments.
Remember, as a commercial property owner, you have distinct advantages when it comes to tenancy. It may take longer to find just the right tenant, but then you can enjoy:
- Lower maintenance bills, as your tenants will be responsible for the installation and service of their commercial fitout, including outgoings like council rates, water rates and body corporate fees. This alone can provide significant comfort to you as a landlord of a commercial property over residential leasing.
- Higher cash flow compared to residential leasing. Residential properties can return an average of 3.6%, while commercial properties can bring in gross annual returns of 8-12%. Plus, you can build annual lease increases into the contract and it will usually be accepted without a fight (or breaking the lease).
- Longer term leases than with residential properties; while most residences lease in 1-3 year contracts, it's not uncommon for a commercial lease to be written in increments of five years and expanded with options for 10-15 years or even longer. This means long-term peace of mind for you as a landlord once you have installed a quality tenant and signed the lease.
- Lower initial investment, even though the percentage you may be required to come up with for financing is higher. With commercial property investment, you can buy anything form a parking space to a storage shed while a residential investment is almost always more expensive overall.
Find the right property, install the best tenant you can, maintain a great relationship so they keep picking up the next five year option, and watch your investment yield long-term fruit. For help finding your commercial property, contact the team at Ray White Surfers Paradise.