Residential investors often perceive buying commercial property as the ‘next step up’. Commercial property can be lucrative but it’s far more complex than you may realise.
There are a number of important considerations to bear in mind before taking the plunge! First-time commercial property investors need to be aware of the risks and make sure they give themselves sufficient time to carry out proper due diligence.
Things to consider
FINANCE
If you have signed an agreement for sale and purchase ensure that you have given yourself enough time for your due diligence which will most likely include obtaining bank finance approval. Banks are stricter on their lending for commercial property and typically only lend 65% of the property’s value. Commercial interest rates are higher than residential ones.
As part of the bank’s lending conditions you may be asked to obtain a registered valuation, a builder’s and/or engineer’s report or even a seismic strength report.
LEASE/TITLE/LIM
Get your solicitor to check the title and LIM report for the property to ensure there are no underlying issues and that the property has the necessary consents for all its building work. You may need to check what zoning it has and to ensure your intended use is a permitted activity. It is common for commercial buildings to be part of a body corporate under the Unit Titles Act 2010. If this is the case, you as the owner will become part of the body corporate. Consequently, you will need to abide by its rules, regulations and obligations, including the payment of body corporate levies.
If you are purchasing a tenanted commercial property, get your solicitor to review the lease documentation. They will need to determine who the tenant is, the rent they are paying and the terms of the lease. Once you become the owner, you step into the shoes of the outgoing landlord and are bound by the terms of the lease.
Insurance is also another important issue to consider – ensure you have checked with your insurer that they are prepared to insure the property and what your premiums are likely to be.
TYPE
Are you looking at purchasing a factory, a warehouse, office space, retail premises or an industrial yard?
The supply and demand of each of these will vary greatly as will their respective yields. Certain types of commercial property will provide a steady stream of income and require very little maintenance although they may not generate you the highest yield. Are there opportunities to add value? What facilities are available to attract good quality tenants?
STRUCTURE
Are you buying as an individual, as a partnership, through a trust or a company? The structure you chose will depend on your individual circumstances. There are various tax and GST implications that may affect your decision on the type of structure you choose. Your accountant may also be able to provide assistance in this regard.
LOCATION
Give careful thought to the location of the commercial property. Most people are aware that location, location, location is key for residential investments. Did you know that commercial property has its own three L’s – Lease – Lessee – Location! To be servicing a commercial loan, a good tenant is crucial. If your tenant struggles then it is highly likely that you too will struggle. If the location is good then this will enhance your ability to find another suitable tenant if your current tenant leaves. It’s also worth thinking about any future developments planned for the area and how this could potentially increase the value of the property.
Next steps
Commercial property investments differ from residential property. Even a savvy investor needs to undertake thorough due diligence prior to purchasing. If you are considering investing in commercial property and want some sound legal advice then get in touch with us today. Mistakes can be costly but we can help you to appraise the risks.
