Commercial properties offer big benefits over residential ones, making them an attractive option for investors willing to explore the sector.
But it’s an area of real estate investment that can be daunting. When you compare it with residential property investment – which is complex enough – the commercial sector can seem a potential minefield.
Nery Alaev is an Austrian and German real estate expert who says “With the right know-how and experience it is an area that offers investors both a steady rental income and great resale potential.”
He’s sharing 10 things you need to know about investing in commercial property.
- Commercial property comes with greater responsibilities
One of the areas that many investors overlook in commercial property is the extent to which landlords are responsible for their tenant’s actions.
A great example is in disposing toxic waste created on your site. Imagine there is a leak of toxic waste that requires an expensive clean up operation. As the owner, you are potentially liable for the costs of that clean up. Build these potential risks and liabilities into your decision-making process.
- Due diligence is always worth the investment
It could be paying for extra environmental reports to assess any potential risks on the property. Or it might simply be doing the groundwork on occupancy rates in the area before you sign.
Whatever research you do, in my experience it is always worth it. The potential losses you face in the event of things going wrong will far outweigh any initial outlay.
- Don’t forget that you are doing this to increase your wealth
Commercial property is an investment, just in the same way that buying shares in a stock market listed company is. You are doing it to make money.
This sounds obvious, but many commercial real estate investors lose sight of this in pursuit of expanding their property portfolio. So, if you aren’t getting a regular income (or worse, you’re losing money), then it is no longer an investment – it is a burden you need to shed.
- Follow the money
More than any other type of real estate investment, commercial real estate is deeply linked to the economic health of the area it is in.
So, where are the major employers in the area you are looking at? Where do people spend their money in the area? How close are the units you are looking at to public transport hubs?
And what other developments are in the pipeline that might directly impact the footfall of any businesses that rent your commercial space? Know the economic health of the area – past, present and future – intimately.
- You are only as good as the team around you
We all need expert help from time to time. The extent to which you do depends on your own experience, of course. But even if you want to have a hands-on relationship with the commercial properties you own, you still need a lot of specialist support.
You’ll need legal experts who understand all the rules and regulations you and your tenants need to follow. You’ll need local commercial real estate agents who know the area better than anyone and who will help you to identify an opportunity. And you’ll need an experienced mentor: but more of that later.
- Always look at where you can add the most value
Make occupancy rates, footfall data and yield figures your friend before you purchase or invest in a commercial property. By having a clear understanding of which areas are over-valued, and which ones aren’t, you’ll be able to focus on where you can generate the best returns for the minimum initial outlay.
Always look for undervalued units in areas on the up, where you can invest in improvements in time to take advantage as the market improves.
- Accept that with greater footfall, comes greater risks
Your commercial units will (hopefully) have thousands of people passing through them every month. Which is great – but it also significantly raises the likelihood of someone being injured on your property and leaving you open to litigation.
So, know your rights and your legal obligations in the event of the worst happening. Or, at the very least, pay for someone who does.
- Always give yourself more time than you think you will need to sell
One of the perceived disadvantages of investing in real estate is that it takes a long time to sell and realise your investment. This is certainly the case with commercial properties. Compared with the relatively short amount of time it takes to cash in shares on the stock market.
My advice is always build in some extra time for contract agreement redrafts, extra environmental reports or other unexpected delays. At the very worst, you can always use it to do more of your own due diligence.
- Don’t build your business plan on everything going well
Investors are, by their very nature, optimists. The assumption is always that the investment you’ve made will grow over time, either by adding value or through market appreciation.
But be careful: this natural tendency can also blind you to potential risks.
So, don’t assume the renovation you’re paying for will be completed on time for you to sell the unit on quickly. Don’t assume that the legal agreements you’ve paid to have drawn up won’t be amended.
Build these considerations and risks into your plans. And always have a clear understanding of what you can afford to lose if things don’t work out.
- Find yourself someone who has been there and done it all before
A mentor is such an important part of making commercial real estate investment a success. It’s a tough and complex business and having someone who has been through it all before is invaluable.
So, find someone you admire in the industry, with demonstrable success and don’t be afraid to ask them how you can emulate their success.
Hopefully my tips will give you a solid start.
Nery Alaev is the Director of ESN Investments GmbH, which engages in the acquisition and development of commercial and residential property in Germany and Austria.