Savvy investors have long been aware of how lucrative commercial property investing can be and many more are switching over from other investment streams each day. But with search volumes of commercial property reaching an all-time high in 2022, founder of Rethink Investing Scott O’Neill is warning all newcomers to the market that quality commercial assets are scarce. There is still a big upside though. “Commercial property isn’t complicated, it’s just different,” he says. Here are Mr O’Neill’s 5 top tips for those who want to get started in the market.
1. Adopt a wealth creation mindset
“Shifting from a tax saving or ‘fear’ mindset to an opportunistic or ‘profit’ based mindset is the number one key to commercial investing,” Mr O’Neill says. “This will help you achieve bigger goals resulting in higher-yielding properties, stronger growth and ultimately more revenue. And that’s what we’re here for, to make money from our investments, not to purchase the ‘prettiest’ property to make us feel happy and nice.”
Mr O’Neill advises potential investors learn to evaluate costs of remediating any flaws they see in a property. “Similarly if you have a mindset that recognises that sometimes things go wrong, and that you just have to roll with the punches, congratulations, you’re halfway there,” Mr O’Neill says. “The power of the wealth creation mindset is in recognising the importance of removing all emotion when investing in the commercial market. When you’ve had a bad day with maintenance or vacancy it helps to remember you’re playing the long game. A strong positive mindset allows you to back yourself.”
The essentials are carrying out due diligence and crunching the numbers to the point you can be certain your purchase is a high quality asset that will produce an income stream. “Being able to look beyond the day-to-day issues that can stress you out, will put you miles ahead of the rest.”
2. Higher deposits needed
The maximum loan you would usually receive when buying commercial property would be 60-70%, unlike the 90-95% now available for residential property. This is because banks deem commercial property more risky and therefore the 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 on the other hand is $150,000 as a minimum, Mr O’Neill says. “So that leaves many people asking ‘what’s the drawcard?’ ,” he says. “The draw card is high quality commercial property which has the potential to pay itself off in 10 years, compared to the traditional 30 years a residential property might take. That means all of that money usually going to the bank, after the debt is paid, goes straight into your pocket instead , not to mention the fact that it opens up the possibility to leverage equity and purchase a second. So the decision to pay a higher deposit in the beginning starts paying dividends immediately afterwards.”
3. Everything’s up for negotiation
Unlike residential, buying a commercial property almost always goes hand in hand with entering into an agreement with the tenant and their business. Absolutely every term can be up for negotiation and this where an experienced lawyer and are necessary to ensure you understand what you are signing up for.
4. Potential for longer vacancies, but, also for longer leases
“Signing a commercial lease is a huge financial commitment for tenants,”Mr O’Neill says. “This coupled with commercial property having increased exposure to economic cycles and also the management required at the end of a lease where you may be required to make repairs or undertake maintenance, all mean that landlords need to be prepared for longer vacancies.”
The good news is that choosing to buy a high-quality commercial asset in a high-demand, low-supply area will mitigate this risk, as these types of properties will always be snapped up by tenants. “If you purchase a commercial property in a poor location and the building is in disrepair, then of course the vacancy periods will be longer,” Mr O’Neill says. This is why investors need to carefully assess factors such as quality of the building, location, rent levels and general state of the local market. “Getting the due diligence right will help ensure that the property won’t stay vacant for long.”
5. Not all assets are created equal
Commercial property can be divided into distinct asset classes, mainly office, retail, and industrial. “Each asset type has its own set of risks and rewards, and each follows trends,” Mr O’Neill says. “It’s important to understand the fundamentals of each and their relationship to the current market to make sure you are purchasing a winning commercial asset. Having an understanding of where each asset class is in its cycle and what will still be a solid investment in 10 years time will be integral in informing whether you purchase a winning commercial investment over a dud.”The essentials are carrying out due diligence and crunching the numbers to the point you can be certain your purchase is a high quality asset that will produce an income stream. “Being able to look beyond the day-to-day issues that can stress you out, will put you miles ahead of the rest.”