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Commercial property – it may be a better investment than residential

With the large number of houses coming onto the market in New Zealand, coupled with the slowing immigration, it may be time to look at moving from residential to commercial investments.

Now you can crunch the numbers all day long, but effectively the cash return on residential seems to work out at 3 – 5%, whereas commercial is 7 – 8%.

I would be first to agree that the rise in values has been greater in the residential area than commercial, however if you factor in your time for looking after tenants and property maintenance in the residential area, I am sure that commercial works out better.

Advantages of commercial property

  • Higher yields than residential.
  • Tenants paying all outgoings, including rates, insurance and interior maintenance. As a landlord, you pay the exterior maintenance. This basically means keeping the water out of the building, together with keeping the building tidy on the outside.
  • Management fees are as low as 2 – 5%, but generally you can manage commercial property on your own.
  • The value of the property improves as the rents are renewed upwards, and this is an important part of the business.
  • The commercial market is really independent of the residential market, so even if there is an over-supply of houses, the commercial will stay stable.
  • You do not have to renovate the property every time the tenant changes.
  • Tenants generally do not bring all their mates over and wreck the place over the weekends either.
  • Your commercial tenant signs up to a long term lease, and are normally keen to stay. The difference is that they "make" a living in your building, as distinct from "living" in your building.

Disadvantages of commercial property

  • If you lose a tenant, then it can affect the value of the property downwards. This is why it is important to select a building with a good tenant who has a good business, and make sure that you look after them.
  • From the experiences with my own commercial properties, I tend to keep rents at market level or slightly below to ensure that the tenants remain happy, and feel good about being in my buildings.
  • Location, location, location applies to commercial. The building needs to be well located so that the tenant feels positive about the future of their business.
  • There are leases to be signed and kept in place.

Getting started

Getting started requires a different mind-set. There are heaps of residential houses to choose from, but much less commercial property available. I like clients to stick to their areas of knowledge, ie. in the local town or city, where they have an information flow. There is nothing worse than trying to negotiate with tenants and look after them in a city that is 2 or 3 hours away by car.

It may take time to find a suitable property, which shows a good return and a stable tenant, but time taken researching in order to find the correct property is well spent.

Remember your tenant is a "client", not a "nuisance" and should be treated accordingly. Keep them happy, and they will stay, but be horrible and greedy, and they will leave you that is for sure.

Features to look for in good commercial property

  • Land area. Try and get plenty of spare land. It is often the spare land that increases in value. It can be sold, or you may be able to put other buildings on it.
    Make sure that there are plenty of car parks available.
  • Ensure that there is good access and egress to the site.
  • You can invest in central city properties, which may include retail and offices, or you could invest in industrial property. Central city properties do however require more intellect to manage.
  • From my own experience, I prefer freehold land, and I try to keep away from unit titles etc. There is quite a lot of commercial and industrial properties on leasehold land, and you need your wits about you there too.
  • Registered Valuers can play a key role in commercial property by helping you increase the rents, and ensuring that you understand the land tenure issues.

Summary

Investing in commercial and industrial property makes good sense. There is a higher level of intelligence and knowledge required for commercial investing as compared to residential.

You need to treat your tenants fairly, and really get focused on the key issues.

Commercial property in my opinion does provide a happier and better investment than residential in the longer term.


 

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