7 Steps to a Profitable Rental Commercial Property

“Large apartment complex, California.”

Commercial real estate as an investment opportunity is an interesting proposition. However, before you embark on a property search, there are several things to think about – from the type of commercial building you want to invest in to whether you want to make the purchase solely as an investor, or as an owner-occupier. Other important considerations are location, condition of the property and flexibility for potential change of use.

While investing in commercial property is a growing trend that can undoubtedly offer good returns, it certainly doesn’t come without risk. That’s why it pays to carefully evaluate all aspects of a potential property to ensure the space is worth your time and money and you’ll get a decent return on your investment.

Here are seven essential things to pay close attention to:

1. Know the Use and Purpose of the Property

Don’t just buy a property because it looks like a good deal and then try to figure out what to do with it afterwards. It makes much more sense to purchase a commercial property with a purpose. Here are just the majority of commercial property types: offices, retail (shops, supermarkets, retail warehouses), industrial (warehouses, factories), leisure (restaurants, pubs, gyms, hotels) and alternative properties (petrol stations, schools). Always purchase with a plan for what the building is going to be used for.

2. Decide if the Location Works

Location is one of the most important factors to consider when purchasing an investment property. For example, a shopfront business will fare better in a central location. If the operation is geared around remote transactions, out-of-town options are more practical. Think about how the commercial property will suit business needs, be it yours or those of your tenants. For example:

  • Type of property: retail, offices, leisure or industrial.
  • Type of investment: freehold or leasehold.
  • Transport: air, sea, rail and road links.
  • Parking facilities and restrictions.
  • Delivery facilities and restrictions.
  • Congestion charges.
  • Local amenities for staff.
  • Proximity to pool of potential employees, including colleges and universities.
  • Closeness to other businesses, suppliers or clients.
  • Space configuration.

3. Check the Condition of the Building

Always get a full structural survey. Not only will hiring a structural surveyor act as a precaution from poor property purchases, it will also prevent any defects from arising in the near future.

4. Define Your Investment Budget

Set a budget and include hidden costs. Along with the mortgage – mortgage lenders tend to ask for a deposit of 20% of the value of a commercial property, sometimes more – there are several costs you’ll face at the outset including:

  • Construction and repair costs.
  • Environmental compliance costs.
  • Decorating and refurbishment.
  • Buying and fitting out the space with furniture and equipment.
  • Setting up facilities, including establishing IT.
  • Professional fees.

Then there are ongoing costs to factor in, such as:

  • Insurance.
  • Maintenance and repairs.
  • Services, including security and cleaning.
  • Local authority charges, including waste collection.
  • Retaining a commercial property estate agent to manage the building.
  • Business rates, which are worked out by multiplying the ratable value of the commercial property.
  • Energy costs.

5. Estimate Projected Growth

It’s wise to choose a property in a location where the demographics are stable or growing, and you should also check out which new businesses are moving into the area. If there are any anticipated changes to the road systems, it’s smart to be aware of those as well, as property values may change when roads are diverted or modified.

Get familiar with the current and forecasted trends of the area around the property. Is it undergoing redevelopment? Not only can this provide a direct boost to the local economy, for example, when a local district becomes a food hub for a new university, it could also mean you’re eligible for relief allowances.

6. Research the Current Tenants

Investors often look for properties with tenants already in place. This is in contrast to residential property investments where the responsibility for building maintenance and repairs usually falls to the landlord. When choosing commercial tenants, seek out those with a good reputation and strong, reliable finances to minimize the risk of their defaulting on financial or other obligations during the lease term.

7. Decide if It’s Flexible Enough To Face Future Challenges

Choose a property that provides you with flexibility in the event that a tenant defaults, the surrounding area changes or something else doesn’t go to plan. In these situations, you’ll want to have the ability to change the property’s use or reconfigure the space to attract different tenants. Always remember that commercial properties are more sensitive to the economy, so the property you choose should be adaptable to shifting market trends. If you plan to redevelop the building or alter its intended use, you may require planning permission.

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