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Commercial Property - Revisited

Commercial and industrial property as an investment is probably one of the best kept secrets. Largely, you are buying property with a tenant and the tenant looks after your building, pays all the outgoings and pays you the rent.

It is 'inflation-proof' investing in commercial property, compared to having money sitting in the bank depreciating.

Advantages of Commercial Property

Some of the issues that we never think about are as follows:

  • The investment is inflation-proof. That is to say that the property will go up in accordance with inflation and yet you still receive the same return as you might as a bank deposit.
  • A good lease guarantees your income. That means that if you have a good tenant who is happy to pay the rent and has a long term lease then he is guaranteeing your income for the term of the lease.
  • Location, location and location. This applies to all commercial and industrial property. Location is the key factor in finding new tenants for existing buildings. It is also key in terms of the rent that can be charged.
  • The tenant pays all outgoings. They pay the rates, insurance and all the interior maintenance. It is your job, as the landlord, to keep water out of the building and assist with keeping the exterior reasonably tidy.
  • Tenants can up-spec buildings for you, often at their own cost which ultimately becomes your asset.
  • Commercial properties are timeless. They just go on forever with very little work and maintenance.
  • Low maintenance costs. If you compare the maintenance costs with a farm or a residential property, commercial property costs (where the tenant pays) is very low.
  • The tenants look after the buildings mostly and that factor suits busy people; I am no exception.
  • Area of knowledge. I think you need to invest close to your home patch so you know the people and you know what's going on. It's no use having a commercial building in another city or town where it is difficult to get to and you don't really have the underground intelligence.

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 well located building with a good tenant who has a good business, and make sure that you look after them. From my own experience I tend to keep rentals at market level, or slightly below to ensure that the tenants remain happy and feels good about being in my buildings.

Documentation

Documentation needs to be attended to. There are:
  • Leases to be signed;
  • Rights of renewal;
  • Assignments of lease;
  • Valuations;
  • Insurance matters;
  • Building Warrants of Fitness, and so on.
All of these need to be managed. However, it is not that difficult.

Getting Started

You need to do the research and you need to realise that you will be employing valuers, consultants and real estate people and you will collect a lot of intellectual property from them.

The research is crucial to the business and don't expect to go out and find a building tomorrow. It might take six months of looking to find a suitable property.

You need to find an agent who is doing 80% of the business done by 20% of the agents. The old 80:20 rule. These people will be hard to find, very busy, but highly effective in what they do. They know the properties, they know the market and they are people who can be part of your team.

Entry Level

Entry level is higher in commercial than residential but maybe you need to look for a smaller building which is a practical first step for you.

Remember your tenant is a client, not a nuisance and should be treated accordingly. I encourage my tenants to make a lot of money. That makes them happy, they are happy to pay the rent and I am happy as the landlord to receive the rent.

More than that, I have found that horrible and greedy landlords tend to have empty buildings and we hear horror stories here. But, I think it is a really good thing to think about. You are in business with a tenant, look after them and you will both prosper.

Other Features to look out for

Land area. Try and find the property with spare land. It is often the spare land that increases in value and can be sold, or you can put another building on it.

Make sure there are plenty of car parks for the building. There is nothing worse than a building where there are very few parks.

Ensure there is good access and egress to the site. Be aware of this in central city properties which may include retail and offices. Central city properties do require more intellect to manage.

From my own experience I prefer freehold titles. There is quite a bit of leasehold commercial property, but again you need to know what you are doing if you get involved in leasehold land.

SUMMARY

Commercial property provides a very sound investment. It's a long term investment with an investment in the future and the buildings are timeless. Once these buildings become mortgage free and continue to be fully occupied, they are easy to pass from generation to generation. Advise the children that they should keep the buildings and take the cash flow rather than selling them and spending the capital.

People who have sold farms and property should consider commercial property as part of their portfolio investment.


 

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