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The dos and don’ts of commercial property investing

investing in commercial property

After working in the property investment arena as an active investor and investment adviser for over a decade, I’ve seen almost every angle and every strategy out there – from entry- level buy-and-hold residential investments right through to the confusing world of commercial property investment.

It’s the latter that really is not for the fainthearted. Commercial property can be one of the most lucrative investments in real estate and I’ve seen clients realise extraordinary capital gains and huge cash flow wins.

But I’ve also seen the opposite: two-year vacancies, big drops in market value and people losing it all.

Put simply, commercial property is higher risk than residential property and for those not well versed with its nuances or trends, it’s important to avoid costly mistakes to ensure a good return on your investment. Here are some dos and don’ts for commercial property investors.

Do have a plan

Before investing your hard-earned cash/equity in commercial property you must have a   proper investment plan that better equips you to recognise the right property when it comes along.

Many commercial investors make the mistake of buying a property because it seems like a good deal and then attempt to make it fit into their plan.

But seasoned investors not only have a plan, they understand how a commercial investment can fit into an existing portfolio (typically with a number of residential investments) with a big focus on the long-term strategy, risk mitigation, capital growth and, above all, cash flow.

Don’t believe the hype that you can make money quickly

I’ve seen plenty of first-time investors take the leap into the commercial real estate space only to have the tenant go into receivership or liquidation within months of the contract settling and then have to hold the asset vacant for months on end. Remember, commercial real estate is only as good as the lease and tenant in place.

Don’t think you can invest in commercial property single-handedly

Successful commercial investors rely on a team of professionals to assist them – from setting a clear strategy, commencing detailed research,   sourcing the correct property at the correct price and conditions right through to settlement and property management.

Your team needs to complement your shortfalls in knowledge, so be prepared to pay for the right help as the right team will typically make or break your long-term investment success.

Don’t overpay

It might seem obvious but rookie commercial investors often overpay. Now, I don’t mean if the asking price is $700,000 you shouldn’t be paying $750,000. I’m referring to possibly paying a price per square metre that is 10% or 20% above comparable sales just because there is a “long-term” tenant in place paying 8% net!

You need to know where the value point is and ensure that you are fully aware of the comparable prices for similar property and not become focused on the cash flow and lease structure. Paying too much for commercial property locks up your funds in a more rigid way than it would with residential real estate.

Banks are far more reluctant to provide equity releases or cashouts for commercial investing.

Commercial investors often overpay because they haven’t done enough homework.

Any field of business requires training and homework and commercial investing is most certainly one of them. By learning the fundamentals you’ve laid down the groundwork, better preparing yourself for investing in real estate and achieving success.

Do know your property and know the market inside and out

There’s nothing wrong with being cautious when buying property. Many new investors sign on the dotted line without doing enough research.

As a professional investor and buyers agent I know that it’s my job not only to have a better insight when it comes to the property’s history but also to secure established and new tenants. This takes time, resources and market connections to ensure you understand the full picture.

Don’t miscalculate cash flow

Many successful commercial investors buy, hold and rent out properties for the long term, ensuring they have enough cash flow for maintenance and other expenses.

The savviest investors allocate their budgets so there is sufficient coverage for expenses such as the mortgage, taxes, insurance and advertising. When you don’t have enough cash flow your property becomes a liability when it should be an asset.

Written by Paul Glossop

Paul Glossop

Paul Glossop is an award-winning property investment specialist, buyers agent and author of A Surfer's Guide to Property Investing. He is the founder of Pure Property Investment.

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