Four things to consider when investing in commercial real estate

With interest rates rising in Australia, finding high-quality investment opportunities has never been more important.

While the vast majority of investors will always be drawn to residential real estate, savvy investors understand just how lucrative commercial real estate investing can be. With investors looking for yield and with the continued lack of quality assets, the demand for commercial property continues to be incredibly high.

For investors getting into commercial real estate, it’s important to understand that it doesn’t have to be more complicated, it’s just different from buying residential property. Here are four things you need to know when getting into the market.

1. Higher deposits

Most residential property buyers know that it is entirely possible to buy a property with LVRs of up to 90-95%. For commercial property, the reality is that you are looking at an LVR of 60-70%, with some banks potentially offering loans at 80%.

Indeed, commercial real estate is considered riskier in their eyes and their loan value ratio (LVR is lower). Where residential property can be purchased with as little as $50,000 as a deposit to cover all necessary costs, commercial property, on the other hand, is $75,000 to $100,000 minimum.

So what’s the draw card? A high quality commercial property has the potential to pay for itself in 10 years, compared to the traditional 30 years a residential property might take.

This means that all that money typically goes to the bank, once the debt is paid off, and then goes straight into your pocket, not to mention opening up the possibility of leveraging equity and buying a second, third and fourth property. So, the decision to pay a higher down payment at the start starts paying dividends immediately afterwards.

2. Everything is up for negotiation

When you negotiate a residential property, you normally only look at the price and a few terms. Commercial property, on the other hand, allows you to trade on just about anything.

When you buy commercial property, unlike residential, you enter into an agreement with the tenant and their business.

Because it’s all up for negotiation, you’ll need a lawyer and seasoned negotiator in your area to make sure you understand what you’re signing up for. On the other hand, if you know what you’re doing, you can use it to your advantage and achieve a lot.

3. Potentially longer vacations, but also for longer leases

When a residential tenant signs a lease, they have several ways to get out of it if they decide to leave. For a commercial tenant, the lease is much stricter and therefore it is a huge financial commitment for the tenant.

Indeed, the success of their business is at stake and ownership will often play a key role in that success. This, coupled with commercial property having increased exposure to economic cycles and dealing with the end of a lease – where you may need to carry out repairs or undertake maintenance – means you should be prepared for a longer holiday. long if a tenant leaves.

The good news is that if you choose a high-quality commercial asset in areas with high demand and low supply, you can easily mitigate this risk, as these will always be recouped by tenants. If you buy a commercial property in a bad location and the building is in poor condition, the vacancy periods will of course be longer.

Investors should carefully assess this relatability potential. These factors include building quality, location, rent levels and the general state of the market surrounding it.

Getting the right due diligence will help ensure the property won’t sit vacant for long.

4. Not all assets are created equal

Commercial real estate can be divided into distinct asset classes – office, retail and industrial – and each type of asset has its own set of risks and rewards, and each follows trends.

It is important to understand the fundamentals of each and their relationship to the current market to ensure that you are buying a winning trading asset.

Understanding where each asset class is in its cycle and what will remain a solid investment 10 years from now will be key to knowing if you are buying a winning business investment rather than a failure.

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