3 Pros and 3 Cons of investing in commercial property

We’re getting more enquiries from VIC residential investors considering investing in commercial property so I thought I’d share three pros and three cons to consider.

Yes, I buy commercial property for business owner occupiers and investors but I will keep this relatively non-biased as commercial property is a very good proposition for many and it’s simply not for everyone. 

Firstly the Pros

1. Higher cash flow potential than residential property. Tenant pays many if not most of the outgoings including your council rates and insurances which means more cash in your pocket. You don’t have the upkeep costs that residential does.

2. Longer and more considered tenancies. Tenants are generally running their businesses from commercial sites and for good businesses in good sites, you should be looking at eight years plus tenancy. Also, they’re considered tenants, particularly in retail properties where they rely on customers and therefore must maintain a generally good appearance. They’re looking after your site which adds value.

3. Value appreciation. Commercial property bought well in a good area will realise capital growth. Similar to residential you must run your due diligence and you must buy well. Here are a few other factors to consider for value appreciation:

1. Location

2. Property upgrades (increasing the lettable space)

3. Quality tenant and quality lease terms

4. Strong growth area 

5. Diverse usage for the asset type therefore appealing to a wide range of tenants increasing demand.

Now - the Cons because it’s simply, not for everyone.

1. Higher purchase costs. You may require a higher deposit. Think of 30% as an average. However, you may not. Depends on asset type and tenancy in place as a couple of factors. Check with your mortgage broker and make sure you have a great one -  and if you’d like a connection, reach out.

   Higher purchase costs also include, a bank valuation which is generally paid by the buyer and higher legal costs associated with investigating the tenancy and contract sale terms. Stamp duty varies from state to state. Anticipate somewhere between 5%-7% of the property price going toward purchase costs.

2. Longer vacancies. Although there are ways to mitigate this risk including buying a great asset in a great area, and having an exceptional property manager who will search long before an expired lease, there are longer vacancies. On average, I’d anticipate 3-4 months for a warehouse and 4-6 months for retail. Longer for subpar assets or tougher markets. Shorter for great assets in good locations.

3. Market volatility. Commercial property is the first to feel the effects of higher interest rates and a tighter economic market. As an investor, it’s important to look at buying assets for industries that have resilience. 

If you are considering commercial property, I advise you first have a discussion with your financial advisor and accountant, and have a great lender on your side that will help guide you and research your lending options. Make an informed approach when investing in any asset type.

We source and secure property nationwide for investors. If you have any questions, feel free to get in touch.

Reach out for a free 15-minute discussion.