Combining business and property can mean big money: commercial property can be an exciting and rewarding way to invest your money.
One big advantage? You can choose your level of risk and commitment, from an instant share trade to owning your own factories. The rewards tend to reflect the risk; its big potential payoffs make commercial property one of the favourite asset classes for the super rich worldwide.
Hands-off, stress free
Arguably the best, and definitely the easiest, way to invest in commercial property is via the sharemarket.
Buying shares in listed property companies across a range of industries gives you diversity and allows you to own have a share in hundreds of millions of dollars in prime commercial real estate.
You can have tiny portions of ownership in shopping malls, warehouses, huge office buildings, hospitals and retirement homes – locally or globally.
Shares in listed property companies are stress free and easy to sell. The returns tend to be reliable, vacancies are not your problem, and if the tenants trash the building nobody will phone you at night to sort it out.
Higher risk, higher reward
If you have enough cash, you could join a property syndicate, either informally with other investors you know, or via a publically offered syndicate. These have become more popular in recent years and syndicates have proliferated.
A syndicate gives you a larger chunk of a single building, which reduces your diversity and increases your risk, but also your potential returns. They are hands-off, because you’re not involved in managing the tenants or the premises at all.
But with a single building or complex, vacancies are more of an issue, and it can be hard to sell your investment if you want out. (Read more about how syndicates work.)
DIY, cash cow potential
Direct commercial property investment is taking your own money and buying a commercial premises, then collecting rent on it from your tenants.
This can go brilliantly: providing higher returns than residential property and excellent ongoing cashflow without ever having to hear the words ‘Tenancy Tribunal’.
It can also go badly: the main problem is vacancies. In the worst-case scenario these can last for years, while the mortgage still needs to be paid.
Owning your own building can be suited to residential property investors who are looking to take the next step – bearing in mind that this may leave your investments lacking diversity.
Serious about buying a commercial building? Before you charge out and start bidding, you’ll need to do your research:
Get to know the basics – values of commercial properties are set in part by ‘cap’ (capitalisation) rates, so understand how these are calculated, how to add value to commercial properties and how to find a good deal. Do you want to buy an industrial, retail or office building?
Find out about finance – your choice of property will partly depend on what conditions your lender puts on your purchase. How much can you borrow and what are the buying restrictions?
Be in touch with your local market – read the listings, go to auctions, get to know values and rents. Talk to specialist commercial agents and subscribe to their mailing lists. You’ll also need a good knowledge of zoning in your local market so you know what usage is possible for properties you’re considering.
Know the lease – commercial leases are completely different from residential tenancy agreements. You have considerable leeway, so make sure you know how to set conditions that will suit both you and your tenants.
Consider the structure itself – do you know your way around the New Building Standard (NBS) rating system for earthquake strength? The strength and rating of a building will change its value.
As with any investment, learning as much as you can before committing your cash helps you to reduce your risk and avoid pitfalls. Talk to your financial adviser for guidance that will work for you individual situation.