If you’re already an owner of residential property for investment purposes then a natural next step is to look at commercial property as an addition or even replacement in your property portfolio. With increasing pressure in the residential market to make investments like buy-to-let more challenging to say the least, delving into commercial property is a viable option to be seriously considered.
In particular the government seems set on burdening the individual residential property investor with increased tax liabilities, more red-tape with property and tenant compliance, and only slowly addressing the housing crisis and taking pressure off the competition. Although residential property investment is still a good strategy, with evolving models like AirBnB, it does take time and effort in uncertain times, and therefore at least diversifying your portfolio into other sectors like commercial property could be a wise move.
How Commercial Property Investment Looks
Rather than completely jumping in the deep end with, say, large and complicated commercial redevelopment schemes, a natural progression from residential property is more smaller and straight forward commercial investments to whet your appetite and fine-tune your property investment and management skills. This might be a small office or industrial unit on a well-established estate, or a good roadside opportunity; the old saying of location, location, location is of course always true, even though there is a premium to pay for this.
The two ways you tend to see commercial properties grouped are firstly through location and therefore subsequent value, and secondly through the nature of the use. So in the former you have prime locations like city centres, to more secondary ones on say arterial roads, to tertiary areas in less popular locations.
With the later use, retail, office, and industrial are the main bread-and-butter ones, although there are others like leisure and licenced, and any unusual ones like public use properties.
One particularly good example of a starter-niche commercial property is secondary retail properties in smaller market towns. These can be a good stable investment in a small market that has steady local and even tourist demands, and popular commuter-belt interest.
There can be signs of local trading tenants as well as interest from national brands looking to dominate smaller markets, whether that’s a new Tesco Express or a Costa Coffee. Picking up a tidy High Street retail property with a good-paying and well-behaved commercial tenant can therefore prove a good stable long term property investment strategy.
10 Property Management Factors For Commercial Property
So as you delve into your first or next commercial property investment, here are 10 property management factors to be aware of. These are particularly focused from a residential property management experience bias, and the differences you need to note as you move more into commercial property, in addition to the perspective of it being for investment purposes and so your eye quite rightly being on the market.
1. The Right Holding Vehicle
Although this often comes up afterwards, it’s worth considering right at the beginning – what legal entity you want to hold the property in. Existing residential properties may be in our own or spouse’s name, whereas moving into the bigger-figures and longer-term world of commercial property may require a new company, or other legal entity and perhaps pension-vehicle being formed.
Other factors will of course affect this, namely financial and tax issues and how this impacts you personally over time, and also how you raise monies and involve other investors.
2. Long Term Stability
This is the beauty of commercial property, once it’s set-up right, it is good long term stability for your investment goals.
The rents and capital values tend to be steady and seeing slow gradual growth, whereas residential can be fast and furious. So if you join the current band-wagon of short term AirBnb type residential occupation, there may be good short term income and yields, but if you take a 5 to 20 year long term view then it won’t compete with a good commercial investment.
Therefore prepare for the long term, and the true holding return you’ll see; not just the current high yields and tasty rents. Once you find the right well-located and well-occupied commercial property then you’re on the right tracks.
3. Prepare for Different Emotions
The text book answer of course is that emotions should not get involved with property investment, as it should always be down to the hard figures and performance. In reality though there is some form of attachment, and as you move into a different property type it’s worth mentioning the slight changes you might see here.
On one level, you will find less emotional involvement. You’re dealing with more business-focused occupiers, who tend to take on more responsibility themselves - therefore you generally have less involvement. Your value is also less driven by how pretty things may look like with residential, to the bottom-line income figures.
On the other side though, there can be a sense of pride and significance with commercial property, particularly your first property and the reality of literally moving into bigger bricks and mortar, particularly when it’s in your neck of the woods.
4. Financial Arrangements
This is more on the financial side, but worth a mention as it will determine the decision to first move into commercial property and then possibly the nature of how you stay there.
You’ll need specialist mortgage facilities, often with greater equity requirements, and it will be prudent to allows monies for one off costs and set-up fees in order to make sure you don’t spend more than what you can afford.
5. Good Cashflow
This is linked with the above financial aspect, but worth a separate mention to prepare you for the good news about how you tend to deal with monies with commercial property.
The norm is to still pay money in advance just like residential, but usually every 3 months instead, technically known as ‘quarterly in advance’, with the usual set dates being the end of March, June, September, and December. Although some can still be monthly, the advantage of every three months in advance is much larger amounts of money being paid earlier to any landlord.
In addition, other expenditure costs of a landlord tend to be covered by the tenant through the lease somehow, whether that’s separate annual insurance premium or a service charge of communal costs. With residential the landlord tends to have to absorb these.
6. Geographical Spread
It will be tempting for you to just focus on your local area and town, which for the right property and deal makes sense of course. You will tend to know the market better, be local and able to be hands on, and enjoy the property-ownership role right on your doorstep.
Commercial property investments though work better than residential spread around the country. This means you’re spreading your risk, and focusing on only the best ones in the right areas without any geographical limitations. With commercial property needing less hands-on management, then this can work out a treat.
7. Additional Works & Value
Although you may need deeper pockets and more funding than residential with bigger figures at hand, this can be both more straightforward to procure and have better and cleaner returns over the year.
So you may be able to get your teeth into some asset-enhancing works and refurbishment like conversion of upper floors to flats, or an extension to the building, or use of additional land as car parking.
With commercial property, you often have less compliance issues to wade through, and you may be able to easily rentalise it back to a tenant. So an operating business may easily pay more rent for that extra use of space, or even pay you to take space away for your benefit.
8. Simpler Compliance
In many respects, the compliance and documentation side of things with commercial properties is just a lot simpler. There is more legislation with residential interests to do certain things, like an automatic gas safety check every year, whereas with commercial it can be only when reasonable, or even better the liability passed straight to the business tenant to adhere to.
This has a knock on effect with other non-building-construction matters, such as a service charges, where again there is less black-and-white obligations and set notices and procedures for a commercial landlord to go through than a residential one.
9. Better Leases
Commercial property leases are more robust and black and white, often giving the tenant the end responsibilities.
They are often what they call ‘full repairing (and insuring)’ leases where the tenant is liable for the whole premise, and even for those that they are not directly liable for then there is a service charge to cover indirectly.
The length of leases also tend to be longer, with less procedures for renewing them, meaning good long term longevity for landlords.
10. Better Tenants
Finally, commercial tenants also tend to be easier to handle. However, you do still need to take care, particularly at the smaller-tenant end of the spectrum and making sure that they can afford the space they are taking and you’re not left short. This ‘covenant strength’ of the tenant, and basically how good a payer they are is key to deriving value for your property investment.
But generally they are established businesses where they know the property liabilities due, and you can involve other interests such as deposits, guarantors, and even previous tenants still being on the hook.
The Natural Progression
Moving into commercial property investment and management from residential is a natural progression that can pay huge dividends over the long term, particularly important in these turbulent times and tightening residential market. Once you have the right property, location, and tenant ticking along, then there is less day-to-day involvement and a steady income and capital-appreciating asset.
Of course the detail counts, and going into things open-eyed is not just important but essential. All it takes is a couple of twists and turns, and things can start seriously costing you money and time – if you’re well clued up and patient though, the winnings are on the table for grabs.