Commercial property: The right investment for you?

Right now, more and more people are looking into investing in property. The pandemic has highlighted the importance of having multiple streams of income, or assets to fall back on, during unprecedented times. Over the past couple of years, many have lost their main sources of income and have found themselves facing financial difficulty or even financial hardship as a result. It’s completely understandable, then, that many people are seeking new ways to support themselves, even during hard times. Investment is a great place to get started with this. There are many different things you can invest in, but one option that could prove great is commercial property. If you haven’t considered commercial property investment before, or whether you’re actively searching for new information, here are some of the basics! Hopefully, some will help you to make an informed decision about whether this is the right investment path for you!

What is commercial property?

Let’s start out by establishing what exactly commercial property is. Put simply, commercial property is any sort of property that has a commercial purpose. It can be anything from a brick and mortar store to an office space. If it is a space that is used for earning money, rather than living in, it’s likely a commercial property. Bear in mind that this doesn’t include homes that remote workers also work from. Common forms of commercial property include:

• Stores
• Malls
• Supermarkets
• Offices
• Industrial estates
• Manufacturing premises / factories

Why invest in commercial property?

Now, there are countless investments that you can make, from stocks to residential properties, bonds and beyond. So, why invest in commercial property? Well, commercial property tends to be a more reliable investment than residential property. Housing crises and other issues don’t tend to affect the commercial property market. Of course, many commercial landlords did take a hit in the unprecedented times of the coronavirus and Covid-19 pandemic. However, this didn’t last too long and is a situation that isn’t likely to recur regularly. Commercial property is also a smart way to add diverse assets to your investment portfolio.

How to invest in commercial property

If you haven’t invested in commercial property before – which many people haven’t – it’s important to consider the various different ways to invest in commercial property that are available to you. The best for you will likely depend on your personal circumstances, your budget and more. Here are just a few ways of investing in commercial property that could meet your needs and preferences!

• Direct investment – if you have the funds available to you, you may want to consider direct investment. This is when you buy the whole of a property or a share of a property outright. Often, paying up front can allow you the opportunity to secure a better deal, as people are likely to sell for lower to have the cash immediately rather than over time. It also means you won’t be paying back interest on mortgages, loans or other forms of financing a property purchase. Of course, this tends to be an unrealistic way of securing a property for the majority of people.

 

• Direct commercial property funds – you might hear direct commercial property funds referred to as bricks-and-mortar funds. This is a much more common method used to invest in commercial property. You generally take part in a collective investment scheme, such as a unit trust or investment trust and jointly invest in a property. You may find that you have a share in a whole portfolio of commercial properties that are higher cost, such as supermarkets, offices and warehouses. As you can imagine, this method makes much more sense for smaller scale investors.

 

• Indirect property funds – this form of investment is a collective investment scheme. You will take part in a scheme that then invests in the shares of property companies that are listed on the stock market. Of course, property shares can move up and down with stock markets.

Different ways to generate income

Whichever investment type you choose, it’s good to know that there are two different ways that these commercial properties can make money. The first tends to be leasing the commercial property out and receiving money through renting to a tenant. The alternative is waiting for the property to grow in value, or carrying out work to increase the property’s value, and benefitting from capital growth from an increase in the value of the property when you sell it on.

Affording the property

If you’re not opting for any of the options above, you may be considering how you can afford buying a commercial property. If you have your own home, you may be familiar with the process, as taking out a mortgage will likely be similar to the process you went through to get your own home. However, if you’re buying the property to let, you will need a special type of mortgage. This is a buy to let mortgage. You should, however, be aware of the differences between a residential mortgage and a commercial premises mortgage. First and foremost, you tend to need a much bigger deposit when taking out a buy to let mortgage. While residential mortgages tend to have a deposit between 0 and 20%, a buy to let mortgage will usually require a deposit reflecting 20% to 40% of the value of the property. You are also likely to find buy to let mortgages have a higher interest rate attached. This is because there’s more risk to the lender on these types of properties. They have no choice as to who lets the property and you could find that the tenant doesn’t pay, making it difficult for you to pay on time too. This is out of your hands and is taken into account through the interest rate. There could also be times when your property is empty and nobody is renting it, which could also cause problems with paying the mortgage. Another thing to consider is that you’re likely to pay set up fees too. When considering commercial properties to invest in, you need to consider what you are likely to be able to charge as rent. This will determine the value of the property you can afford to invest in.

Investing in buy-to-let commercial property

As we briefly touched on above, you need a good idea of how much you need to earn from a property to make it worth the investment. To achieve this, you can figure out your ideal property’s rental yield. Put simply, the rental yield gives you an indication of what kind of return you’ll be getting from the property. It’s not all too difficult to figure out. You do, however, need to be fully aware of all of the costs associated with keeping and maintaining the property over the duration of the mortgage. Some things to consider include the monthly mortgage cost, buildings insurance, maintenance cost, ground rent and associated charges, as well as the cost of professional services you’re likely to use letting the property out – such as an asset manager for commercial property or a letting agency. Deduct all of these costs from the rent you receive and you’ll be face with your “net rental income”. To then figure out the rental yield, all you need to do is divide the net rental income by the value of your property.

Investing in commercial property funds

As we highlighted earlier, becoming a landlord isn’t the only way to make money from commercial property investment. Instead, you might find that investing in commercial property funds can offer an easier and cheaper alternative that better suits you, your budget, your needs and your lifestyle. When it comes down to it, commercial properties can cost a lot of money to purchase. This figure can easily reach the millions. So, if you don’t have this kind of money to invest, or simply aren’t interested in putting so much cash into an investment, property funds could be a much better option. When you invest in commercial property funds, you engage with investment funds, such as unit trusts or investment trusts. The joint funds will either directly own properties and pay you returns based on their growth in value, or they will let the properties out and provide you with returns based on the growth in the value of the shares and the payment of dividends. 

Sure, this may feel like a whole lot of information to take on board. But it’s important to be aware that investing in property doesn’t come cheap and you’re going to want to have as much information as possible before making any decisions or investments. Hopefully, some of the information provided above will help you on this journey. Keep each step in mind and you should benefit down the line!

06/01/2022