Questions to ask before you invest in commercial property
Investing in any property is a big commitment, especially if it’s commercial space. Commercial property differs from the residential market for many reasons, not least because it's more susceptible to economic fluctuations, can involve complicated permissions, and deeds of sale or leasing are more complex. So, before you invest, ask yourself the following questions to help you get it right.
Does the property already have tenants?
If you’re buying a commercial property that is already occupied, this can be a big plus as you’ll have income coming in straight away. However, before you commit make sure you research how reliable they are in terms of payment and behaviour and how long is left on the lease. It’s also important to think about how well you’ll be able to market your commercial property to new tenants should the current ones leave – will it need remodelling or updating? Does it have restrictions on its use?
What is the market lease rate?
In order to maximise your return on investment, you need to know how much rent you can charge for your commercial property. Conduct thorough research about how much other units are charging in the area and industry to ensure you get it right. If you charge too much, your property could stand empty for a long time, whereas if you charge too little, your profits will take a hit. Rents in the business world are usually worked out on a per-square-foot basis. So, if you invest in an office space that’s 1000 square feet and rent it for £10 per square foot, you’ll receive £10,000 rent a year.
Does the property need renovation?
If the property you buy needs work, it might be wise to hold off renovating until you have a tenant. This is because you’ll cater to a much wider audience if the space is a blank canvas and could be transformed into offices, a restaurant, a shop, factory or gym etc. Fit-out and renovation is a big negotiation point when it comes to renting commercial property as the cost of the work is usually shared by the landlord and the tenant. You need to take this into account if your property is not turnkey, so you have cash reserves to provide for a tenant allowance.
What is the exit strategy?
Selling commercial property can take a lot longer than selling a residential home. With this in mind it’s important to establish a target holding period, how long you intend to keep the property, before you purchase and plan an exit strategy. For example, if your goal is to make a quick profit by renting and refurbishing the property, you may want to negotiate a longer-term lease with a tenant. If you’re planning on holding it until your retirement that’s 30 years away, you can afford to take your time with improvements and having shorter term lets. Whichever option you choose, ensure you have cash reserves to help you through the ups and downs of a fluid market.
FC Funding are leading commercial finance brokers in the South, arranging personalised mortgages and loans to suit your requirements. To learn more about our services, get in touch with the team today on 01202 937880.