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REDDITIf you are hoping to create a passive income and have dreams of retiring early, then you may have already considered the prospect of property investment. Acquiring property is one of the best investments to make since there are various options to choose from when it comes to gaining a return, such as letting the property to tenants or renovating it to sell it on for a profit. However, whilst most people think of residential properties when considering investing in real estate, there are more and more investors who are turning to commercial properties instead, such as shops and offices.
So, why should you invest in commercial properties rather than going down the traditional route of becoming a residential landlord or property renovator? Since commercial real estate is a specialist market, there are many serious considerations to be taken before you invest, even though it has a high potential for very profitable returns. We’ve listed some helpful tips on what to consider when you are looking to invest in commercial properties, rather than residential homes.
Tip #1. Consider the Property Location:
No matter what type of property you are planning to invest in, the location is a key factor to consider before making a final decision. However, when you are investing in commercial real estate, the location is arguably even more important. Whilst residential property investors tend to look at factors such as crime rates, proximity to local amenities and transport links and the various other factors that either encourage or discourage individuals who are looking for a home, commercial landlords have a whole new set of things to think about. For example, if you are planning to invest in office space, then you’ll need to think about the type of people who are expected to be working there. For example, is it easy to reach by public transport? Is parking space available? Is the office space large enough to accommodate the number of workers that your potential tenants are expected to employ? On the other hand, if you are planning to invest in a retail space, you’ll need to think about what your potential tenants want for their customers.
Tip #2. Consider the Future:
Another main factor that you’ll need to consider when investing in commercial property is the potential for future growth. Unlike individuals and families who would be your audience when investing in residential property, you’ll need to consider how far the businesses that you will be renting to want to grow in the future. Does your property offer the space and other factors needed to facilitate and maintain this growth? If not, then you could quickly find yourself in the market for a new tenant.
Whilst renting out a residential property is often expected to be on more of a short-term basis, commercial properties tend to be let over the long-term, with many businesses taking on a lifetime lease, since their location is important to both their employees and customers. Because of this, the building itself should be carefully considered before you make the decision to invest. A professional building survey is an absolute must, since this will help you to unearth any hidden or potential issues with the building that could cause a problem for your tenants in the future.
Tip #3. Understand the Rules and Regulations:
Whilst any kind of property investment is regulated by various rules and guidelines, those for investing in commercial property are often stricter, since many commercial properties, particularly shops and retail outlets, are frequented by the general public on a regular basis. Along with the typical regulations for fire hazards, asbestos, and other health and safety factors, commercial property investors should also thoroughly research the energy status of any property that they are considering investing in to make sure that it adheres to the regulations placed on energy use.
In addition, the eco-friendliness of a commercial property can also be a key selling point to potential tenants; making sure that your property will help the business owner in their bid to keep costs as low as possible will help ensure that your investment is a success.
Tip #4. Consider Lease Terms:
Along with keeping in mind the potential for earning a passive income from your commercial property over time, you should also bear in mind that the lease terms drawn up between you and any tenants will influence the value of the property in the long term, and on the value of the tenancy. You should make sure that all lease agreements are meticulously reviewed and double checked; it’s a good idea to hire a legal professional or specialized financial advisor to go over this for you and contribute their feedback.
Keep in mind the various ways in which the lease terms agreed will affect the business and its management; for example, the frequency of rent reviews, tenant liability for repairs and restorations, and any restrictions which may be put in place.
Tip #5. Conduct Stringent Tenant Checks:
Once you have purchased and invested a significant amount of money into a commercial property, then getting your first potential interested tenant is a very exciting experience. However, it’s important that you don’t rush into getting a tenancy agreement signed and drawn up; since any property that is let on a long term basis should produce a secure income for the owner, it’s important to conduct meticulous checks on potential tenants to ensure that they are financially able to uphold their commitments.
For example, a tenant that is prone to financial difficulties, such as a business that is currently struggling, will put you at a higher risk of missed payments along with often high costs to regain possession of the property and restore it to a state that allows it to be re-let to another. Before you draw up a lease agreement, it’s vital to determine the covenant strength of your potential tenant by obtaining business financial records, copies of their filed accounts, and by having a professional financial assessment carried out.
Did these tips help? We’d love to hear from you in the comments.
Success in commercial real estate investments requires the willingness to spend a lot of time and effort upfront in researching, developing the right relationships and identifying the right type of investment.
Understand the local real estate market
Consult an accountant
Get your financing in order
Plan your layout well
Choose the right builders
Look for quality builders who have a good reputation and are responsive to your needs. Key traits of good builders include experience, timeliness and knowledge of your industry.