Factors to consider when Buying Commercial Real Estate

Like any investment in property, commercial real estate can be risky unless you have a clear understanding of what is involved and what is required. Due diligence is critical as it is not as simple as making a purchase and then sitting back and watching the money roll in.

You need to work out why you are buying commercial real estate, research the type of commercial real estate you are interested in, understand how it sits in the marketplace and its future potential. Making the purchase does not end your research as you will also need to continually update the information that you have attained to ensure that you are maximizing the potential of your investment.

Before any purchase, seek the help of industry experts such as commercial agents, commercial property managers and long term commercial real estate owners. Obtain advice from industry experts such as accountants and mortgage brokers to guide you through the financial process of setting up your portfolio, risk reduction and reviewing tax benefits that will assist in the long-term.


Types of commercial real estate

As I stated in a previous post, commercial real estate is essentially an umbrella term encompassing many and varied types of property. Properties such as retail shops, commercial buildings, medical centres, factory units, farms and service stations are classified as commercial. Sometimes it can include mixed used dwellings or feature multi streamed income.

The very first question you need to ask after deciding to go down the commercial property path is:

“What are my investment requirements / goals?”

Answering this question will allow a more strategic approach to the type of property you should be searching for.

It you are going to owner occupy the property, then the type and of property is set. However, for another purchaser seeking offsets to their taxable income, they should be looking at those properties that offer the greatest amount on depreciation on plant and equipment.


Location / Demographics

Like all property investing, the choice of location for your investment should be strategic. However it should be noted that there are variables that can alter over time. Some may increase your equity, others will decrease its value. Variables such as transport links, accessibility by and for potential tenants, population numbers and zoning are critical. Check the zoning laws with the local council to confirm what types of business is permitted in the location and review if there are any future development plans or changes to the council/state planning that might also affect the property.

Review past, current and future demographics that surround the property in detail to gain an understanding of the environment.

Think about service stations and retail strips that once where located on a busy freeway that are now struggling due to a bypass. Or a town such as Wollongong that has changed its primary income from mining to tourism, health and education.

When considering location, pay particular attention to the properties highest and best use rather than focus on its current use.

Remember to always undertake a title search to ensure that the property is not affected by a pre-existing agreement.


Tenancy

If the property is for owner occupancy, then you have this one already worked out. If not, read on.

Leverage should be considered as purchasing a commercial property with only one tenant may be riskier than purchasing one with multiple tenancies such as a shopping centre. Whilst this can be dependent on the tenant, a savvy purchaser will be mindful that if a single tenanted property is vacant, then there is 100% vacancy and no income achieved from that property. A multi-tenanted property that loses a tenancy will have a reduced cash flow, but you will still derive an income.

The financial strength of the tenant is also important which is why government and multinational tenants are favoured as the belief is that these types of tenant have an ability to pay the rent and all future rental increases.



Vacancy Risk

Again if the property is to be owner occupied, skip this point. If not, consider the vacancy risk of the commercial property. What is the length of the current leases term, what are the options, what are the renewal terms?

Whilst a current financial return on investment from an in situ commercial tenant may look great on paper, this may change if the tenant is able to vacate the premises soon after the purchase, leaving you with a vacancy period whilst a new tenant is found.


Establishment of Your Team of Experts

Like any good business, when investing in commercial real estate you should create a team of experts who specialize in commercial real estate to advise you during your journey. You will need:

• An accountant who can discuss all financial aspects and options pertaining to your own situation
  
  
• A solicitor who can review any sale contract as well draw up leases and advise on all legal matters
  
  
• A mortgage broker who is able to assess your situation and obtain funding suitable to your terms and requirements and can work with you in regards to refinancing
  
  
• A real estate manager who can alert and assess viable commercial real estate of the style and in the area that you are seeking as well as to locate and manage a tenant for the property

Please note when reading these posts, you should always seek your own independent legal and financial advice.