Before deciding to buy a commercial  property, it’s important to know what can help you succeed with your investment. Here’s what you should know before finalising the deal. 

When it comes to building wealth, real estate is still perceived by most Aussies as one of the best long-term investments. 

Investing in bricks and mortar may sound like a promising financial opportunity, but there are things you should know before parking your money in real estate, particularly in commercial properties. 

Buying a commercial property can be a little more intimidating due to its complex nature. Compared with residential properties, there is a lot more you need to consider before acquiring commercial real estate. It requires an understanding of the various market factors at work, unique financing requirements, property management options, leasing arrangements and a good grasp of the potential risks involved in commercial investing.

But the promise of lucrative returns generated from commercial properties makes it an attractive investment option for a lot of Aussies, especially those who are building a retirement nest egg for the future. 

To help familiarise you with the ins and outs of the commercial property market, here are some of the things you should know before you embark on a commercial investment journey. 

What is commercial property? 

Commercial property is a real estate property that is mainly used for business activities. There are three main types of commercial properties: Office, retail and industrial. Compared with residential properties, commercial properties are occupied or leased for a generally longer period of time.

The longer lease term on commercial properties gives investors greater rental certainty compared with residential investors. Outgoing expenses to maintain a commercial property (e.g. council rates, insurance, repairs and maintenance) are also shouldered by commercial tenants, resulting in a higher net income. But the higher return also comes with higher risks. To learn more about commercial property investments, read here. 

What do you need to know before purchasing a commercial property? 

Before you buy commercial real estate, you must exercise extensive due diligence. It will not only help you avoid potential mistakes, but it will also pave the way to lucrative financial rewards in the long run. 

Here is what you should know about your commercial property ahead of finalising a deal:  

1. The lease and the tenant

One of the first things to evaluate is the lease and potential tenant of your prospect commercial property. Looking at the prospective tenants for your commercial property is one of the greatest considerations for your investment as it is the key to your success.

The ideal scenario is buying a property that comes with a tenant – one that has recently signed or renewed a long-term lease with stated annual rent increases. However, if the property is vacant, you need to ensure that it has enough features and qualities that makes it available to valuable tenants. 

The most sought-after tenants are often referred to as “blue-chip” commercial tenants. These are recognised, well established and financially sound companies or organisations. But you shouldn’t limit your target market to these entities. 

Be on the lookout for a business that matches the location and operates in a sector or industry with solid long-term prospects. This includes businesses that are under the technology and health industries. While traditional retail and manufacturing tenants are also viable, you should check their references and business history to make sure that they are capable of leasing your property for a long time. 

2. Location

As with residential properties, location is an important factor in estimating the value of commercial property. One difference when considering a location for your commercial property is its proximity to desirable amenities.

When selecting the location of your commercial property, you should also check its accessibility to transportation hubs and surrounding business enterprises that could boost your tenant’s business. Connectivity via road, rail or water transport are also some of the amenities needed to run a business successfully. Other services like parking, lift, security, etc must also be carefully evaluated while finalising the commercial real estate purchase.  

For example, if you are buying a warehouse, it is very important to consider distance from the end user and suppliers. It should also be close to major roads, airports and ports, as these major transport hubs make the transportation of goods easier. Meanwhile, if you purchase a retail store, you will need to assess the demographics of the area before choosing a suitable tenant. If the businesses’ target market only makes up a small portion of the local community, it may be better to lease your space to another business. 

 You never know if a hotspot location today can be an unwanted or stagnant area tomorrow, in the following months or even next year. As with any other investment,you cannot predict how the property market’s performance will play out. Reviewing past trends of the businesses in the area you are scouting can help you build a bigger picture. Also, be sure to check on the uniqueness of your property to ensure that there is not an oversupply of commercial properties. 

3. Growth potential from future developments

When assessing the location and strength of the local market, it’s important to have foresight. Infrastructure development in the local area can affect a commercial property’s value both positively and negatively. It will all come down to how you will use these developments to your advantage. 

For example, you are aware of several infrastructure projects in the pipeline in a certain part of a suburb. However, estimates show these projects will be completed in the next five or 10 years.  While the growth potential is high in this area, it will be difficult to convince businesses to rent your area when there are good spaces already equipped and supported by improved infrastructure. 

On the other hand, if the suburb in which you are considering buying a commercial property will experience a high number of infrastructure projects sooner, rather than later, property prices will likely surge in the near future. In this scenario, it may be worth pushing through with your purchase to avoid paying an inflated purchase price. 

4. Physical condition of the property

Before purchasing a commercial real estate, you must know how and for what purpose the property was used. This information will give you an idea of the wear and tear the property has experienced and which future improvements and repairs you should look out for. This would also help you estimate its resale value or the rental income that you could earn in the future. 

To have a better idea of a property’s current physical condition, make sure to visit your prospects. Even if you do not plan on managing the property yourself, it is still a good idea to picture what the building will be like. Visiting properties can even help you narrow down your options if you are looking at several listings. 

5.  Property and its allowable purposes

Every kind of business you would lease your investment property to would use it for a different purpose. For example, an IT firm would need an office space while a restaurant will put in kitchen equipment. With this, it is vital to know the limitations to modify or expand the property before buying it. It’s important to adhere to the applicable laws that properties have regarding restrictions on modifying the exteriors and interiors of the property. Make sure to study the law in great detail and to complete the necessary requirements. You should also be aware of the maintenance costs the spaces will have. 

6. Economic conditions 

Unlike residential tenants, commercial tenants are more vulnerable to economic downturns. During economic shocks, people will always need a place to live, while demand for certain products or services is far more flexible. 

As a result, economic factors such as consumer spending, unemployment rate and migration patterns affect the demand for commercial property, which means even a slight economic decline can make it difficult for you to find a tenant. 

If you want to succeed in property investing, make sure to stay up to date with important economic development to ensure that you will lease your property to a tenant that is capable of paying rent on time. 

Conclusion  

To sidestep all potential risks and have a smooth-sailing experience when buying a commercial property, do your research before closing a deal. While it might require a lot of legwork and paperwork, it will help you identify issues with a potential property and choose one that will best fit with your investment strategy and capabilities. 

Whether you’re new to investing or a seasoned investor, nestegg can provide you with online resources that can help you succeed in your investment journey. Explore our website for more up-to-date news, investment insights and tips on how you can invest your money effectively.