Commercial property is one means that a property investor can use to diversify their portfolio. Property that is commercial includes anything from blocks of offices to retail premises. Also known as lots, commercial properties usually come with a higher rental cost than residential properties.
Commercial properties are only used for the purposes of business. But like residential properties, a commercial property will require occupants if the goal is to generate income.
Reasons to invest in Commercial Property
Investing in commercial property has several advantages. One of the main advantages is the money that can be saved. A commercial property doesn’t cost as much to maintain as a residential one, as the occupants are responsible for maintenance costs. As well, commercial properties cost less to operate.
In addition to cost savings, a commercial property offers reliability in terms of rent. This is because in a commercial setting, a corporation pays this expense. As well, commercial properties have far longer leases than residential properties – up to 20 years – making it unnecessary to have to seek out tenants every few years.
Commercial Property Investment Methods
There are three methods used to invest in commercial properties. These are property funds, indirect and direct investment.
Property funds are a method most commonly employed by first time or small investors. They allow an individual to get started with investment into commercial property. Property funds are a collective investment, much like unit trusts and Oeic.
Indirect investment involves investing not in the commercial property itself, but in the shares of that property. This is akin to investing in the stock market, as the money you make will be from the property’s value.
Direct investment involves the full purchase of either the share of a commercial property, or the entire commercial property itself. Although risky, this method can yield the largest amount of income if successful.
What to look for
The location and type of property are two important characteristics. However, the property type will determine whether or not the potential investment’s location is a good one. Perhaps accessibility should be another factor as any properties that exist in ‘business hubs’ or which are located near business centres are ideal.
Type of property will be a definite deciding factor. Which type you choose will depend on what you want from the property. Office buildings tend to be the best option where the securing of reliable tenants is concerned. They are also the most likely to be occupied regardless of economic climate. Other options like industrial, healthcare and retail properties can also have many advantages.
Before investing in any property, it’s important to take note of their income generating potential. To do this properly, you must look at several things, including industry, historical averages and financial projections to find the property that’s most likely to produce a steady income over the long term.
Whichever type and location of building you choose, another important thing to keep in mind is the nature of property investment. It is a cyclical venture which will see a number of changes in terms of interest rates and market stability, among other factors.