Tip 1: Look for long leases. A three, five or 10-year lease, with an option to renew. Long lease = more security!
Tip 2: Make sure the location is viable. For example, if you’re buying a café, it needs to be in an area that gets consistent foot traffic without an oversupply of competitors.
Tip 3: Understand the commercial property market drivers. Make sure the tenant is in a high demand industry, as this is essential for growth. For example, you wouldn’t want to buy a Blockbuster store when there was evidence that the industry was being replaced by Netflix. Buying into a growth industry can lower the chance of a vacancy, for instance, medical and fast food industries are on the rise.
Tip 4: Understand local demographics. As certain segments of the population move to different locations, new opportunities arise. For example, If there is an increasing median age of the people in a suburb, there is more demand for medical-based businesses.
Tip 5: Diversify. I personally have preferred to buy multiple cheaper commercial properties as opposed to buying one high-value property. For example, three properties totalling $1,000,000 gives you a lot more lease security compared to only relying on one tenant for one $1,000,000 property. There is also the argument that smaller commercial properties with lower rent expectations are easier to fill compared to large expensive commercial properties.
Tip 6: Understand how long it would take to find a new tenant if your current one leaves. The best way I have found to work this out is by checking ‘first listing’ to ‘first listed’ dates on online real estate portals. For example, if you were looking at a 250m2 warehouse, you would need to check how long it has taken to fill a warehouse between 200-300m2. If the average is below three months, the risk is not great.
Understanding each of these tips is essential to succeeding in commercial property investing. When you get it right, the returns can far exceed even the best residential returns.
If you would prefer to have an expert to find you a secure commercial asset, please give us a call on 1300 965 551 or email firstname.lastname@example.org
Director – Rethink Investing