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What kind of ROI is expected for commercial property investments?

By Greg Bell

Unlike investing in a private property where you plan to live, most real estate investors buy commercial properties with the explicit purpose of achieving a successful return on investment (ROI). If you’re considering investing in a commercial property for the first time, you’re probably wondering just how much ROI you can expect. While there’s no simple answer, there are some factors to consider when deciding on where and how to invest.

Location and risk impact ROI

It’s no secret location is important in real estate. Doubly so for commercial properties, where you need to consider a number of factors. What kind of tenants and businesses will you attract? How convenient would it be for a business’ employees or customers to get to your building? Commercial real estate tends to come with greater risks than private property, where you’re more likely to attract tenants or live in the residence yourself.

However, greater risks can bring greater rewards. Commercial properties tend to reap between 5 per cent to 12 per cent in rental yields, far greater than the 3 per cent to 4 per cent you can expect when renting out a private property. The difference between that 5 and 12 per cent depends greatly on location, the commercial market as it stands at time of purchase, as well as the type of tenants you work with.

Tenants

Stable ROI at a commercial property depends on the type of tenants you attract as well as their ability and desire to continue renting your space. Commercial leases tend to be longer than residential leases, which can help keep ROI steady and growing throughout the length of the lease and as tenants renew their rental agreement.

That long lease cycle, however, can also have a negative impact on your ROI if you have high turnover rates among renters. It’s important to seek out and attract tenants with a business you see as a stable one, and tenants who are interested in staying in one property for years at a time. Even better, look for a commercial property that already has stable tenants using the building, and those who have already signed or are willing to sign a lease with incremental rent increases in place.

The quality of tenants is an important factor in increasing ROI on a commercial property, and can make the difference between that 5 and 12 per cent yield.

For answers to questions about a certain property, investment, or potential loan, contact one of the mortgage brokers at Ray White Surfers Paradise today.

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