Buying a commercial property: is it the right investment for me?

POSTED: 15th April 2015
IN: Personal Guides

Property has long proven to be a sustainable form of investment. For some, buying property to let is their career, but for others, it offers an extra income on top of their typical salary.

Residential properties have been popular with investors for generations, but with the fluctuating residential property market, many investors are turning to commercial properties for a greater yield and more stability. A commercial property can be a great asset to have and a reliable way of making your cash work harder. 

What is a commercial property?

A commercial property is any building that is occupied by businesses while bringing in a return for the owner. This may include anything from small local shops to large shopping centres and office blocks.

In the vast majority of cases, a commercial mortgage will be required due to the price of this type of property. Often, commercial mortgage repayments are paid by the owner using money gained from tenants’ rent, which is widely accepted as the primary way to make money on renting out business premises. Unlike residential property investment, capital growth is only a secondary way to profit from owning a commercial property.

What is the difference between commercial and residential?

While commercial property usually costs a great deal more than residential property, it can also bring a much greater yield.  Commercial property is set to deliver double-digit returns for investors throughout 2014, according to analysts and fund managers within the industry.

For some commercial property landlords, owning a business property is often less hands-on than its residential rival. The occupier will do most of the hard work for you by maintaining the space and refurbishing it to suit their business’ needs. With a typical tenancy lasting around 12-18 months, residential property can be much more demanding. With a slick of paint here and some filler there, you’re likely to find yourself having to tidy up general wear and tear in between tenancies – not to mention all the costs you’ll have to pay for repairs and maintenance throughout the year. Commercial property, on the other hand, is more likely to last, with most occupants staying for several years.

However, less than five per cent of commercial property is owned by individuals; most are owned by businesses, groups of people or collective investment schemes such as property funds. Perhaps this statistic reflects how costly commercial property investment can be.

How much does a commercial mortgage cost?

The cost of a commercial mortgage can vary dramatically depending on the size of the property that you wish to buy. The amount that you can borrow also differs. The generated rental income will often determine how much you can borrow, and some lenders may allow you up to 75 per cent. 

As with any other mortgage, the first big payment that you’ll face is the deposit. Lenders will typically need at least 25 per cent of the property’s value up front in order to lend you the money you need. You might also have to pay other costs such as arrangement fees and valuation fees.

There are various other costs to factor into your budget before you invest in a business property. Arrangement fees can cost between 1-2 per cent of the property value, while valuation fees are likely to start at around £500. You’ll also need a chartered surveyor to check for any underlying structural problems and assess whether any development plans that you have are feasible.

Minimise risk

Commercial property development is by no means an easy option, if you don’t do your research and struggle to make repayments, you can be left with financial troubles. One of the first steps you can take to avoid losing money is by ensuring that you get the property for the right price in the first place. Negotiate to lower the asking price just as you would if you were buying a house to live in yourself. Don’t make the mistake of paying over the odds and thinking that you will be able to get the money back through rent prices. While rent can be the sole source of profit for commercial property owners, the more money you can save initially, the better.

Also, if you see a commercial property that seems practically perfect but has one or two defects such as structural issues, severe damp or asbestos, ask yourself whether it is worth the hassle and risk when there may be better places out there.

Giving occupiers free rein to alter the space as they choose can be a great way of decreasing your workload, but it can also cause frustration if you’re surprised by the lack of control. If your tenants stay for many years, redecorating it once they leave won’t be the worst thing in the world, but if they don’t stay as long as you thought they would, you could find yourself regularly fixing tenants’ DIY mistakes or touching up general wear and tear.

Over to you

Whether you decide to invest all of your time to property investment, or fit it in around your current job, there’s no denying that it isn’t an easy road. But while residential property investment has a reputation for being labour-intensive and with a higher risk of making a loss, those thinking about buying a commercial property are likely to benefit from a greater yield within a completely different market.

If you’re keen to make an investment on a commercial property and would like to know more about commercial mortgages, contact us for more information.

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