10 Things to Consider When Buying Commercial Property

By: Aaron Robbins

Commercial property investment is one of the most sought-after investment types for Aussies looking to generate passive income for their portfolio. While many investors are well-versed in the residential property market, buying commercial property does come with some nuances of it’s own.

If you’re wondering how to buy commercial real estate, we discuss the 10 things you need to consider to set your commercial property investment journey on the best trajectory.

1. Be strategic with your commercial real estate location

It is just as important when scouting for commercial properties as it is with residential properties, to scrutinise the location. Naturally, your strategy will need to differ from the residential property market, however, taking an objective approach and considering all angles lays the foundation for a strategic choice.

To attract tenants, you’ll want to understand who your prospective tenant may be and choose easily accessible locations for your tenant’s customers. On top of accessibility, look at:

  • Demand in the market segment.
  • Surrounding businesses (are they complementary or competitors?).
  • Distance to amenities such as public transport.
  • Car parking availability. For an industrial space, this may include surrounding roads for trucks to maneuver with ease.
  • Area population and zoning.

2. Check for any existing litigation

It should be standard practice, but before you get caught up in the numbers, it’s crucial to check whether any existing litigation exists on the property. This can include:

  • Disputes of partnership.
  • Class actions.
  • Breaches of contract.
  • Issues with shareholders.

When buying commercial property, if any litigation is found on the property, you, as the buyer, can then either immediately retreat from the deal or renegotiate the terms of sale.

3. Historical performance

While the adage that ‘past performance isn’t a reliable indicator of future performance’ still remains true for almost every investment asset class, commercial property investors should still consider a property’s historical performance.

The profile of the potential commercial tenants you’d be attracting can often be gauged by looking at past performance, as well as understanding how the property reacts in different market conditions, to be able to establish a robust commercial investment strategy.

real estate agent talking to clients

4. Know your budget

Above looking at commercial demand and potential income yield, you must first understand your budget. The full cost of property investments extend past the purchase price; this is true for retail properties and commercial properties alike. Knowing your budget parameters can help narrow down the type of commercial property you may land on. For example, a smaller retail space could be more within your budget as opposed to larger industrial properties.

It is easy to set your sights on capital cities, presuming that is where commercial growth is centred. However, overlooking other areas of Australia can be to the detriment of the investor.

5. Choosing between property types on the commercial property market

Investing in commercial property provides you with the option to choose between many different styles of property. For example, you could look at purchasing:

  • An industrial property, such as a warehouse space or logistics building.
  • An office building, contiguous office space or co-working offices.
  • A renovated property that’s been converted into an office space.
  • A retail space or retail property.
  • Shopping centre sites.

Your budget and investment strategy will typically drive what property type is going to best suit your objectives.

An important note to make is that if you’re selecting a renovated home or older building to purchase (for example, as an office space), be sure to verify that it is zoned commercial.

6. The condition of the commercial property & modification availability

It may go without saying, but the physical condition of the property and its aesthetic appeal can drastically determine the level of prospective tenants interested in tenanting the property. Some lessees (particularly when taking over vacant shops) want to modify the building or space to attract customers or improve functionality.

You, yourself, as the investor, may have ideas on how to modify a property to improve your chances of securing a commercial tenant. However, restrictions to interior or exterior modifications are usually dictated under laws and regulations, so it’s important to understand what limitations there are to modifying your commercial property.

7. Invest in a quality property manager and real estate agent

Commercial investing is generally more complex than residential property investment. With more complicated and negotiable lease terms, and a wider array of properties than the residential real estate market, commercial investors are wise to engage the services of a reputable commercial real estate agent and commercial property manager.

Real estate agents who specialise in commercial property are industry professionals who can provide guidance on what represents good market value and can provide insights into which properties may hold solid capital growth potential.

Similar to investing in a residential investment property, high-quality property management can make all the difference in securing tenants, managing maintenance and reducing the risk of commercial leasing disputes.

commercial leasing disputes.

8. Are there infrastructure or development projects planned nearby?

The demand for commercial property can be significantly lifted in areas with strong infrastructure plans. Whether it’s roads, hospitals, airports or upgraded rail systems, prudent investors know that most infrastructure development or upgrades typically improve an area’s value. Understanding the local Government’s plans and how they will expand infrastructure should be a key consideration, given that commercial properties are typically a long-term investment.

9. Review the commercial lease term

Understandably, when purchasing a commercial building, the lease term is a major determinant of which property an investor will choose. Using an updated lease agreement is advisable as it provides you with peace of mind that all lease terms have been written under current laws and legislations relevant to your state or territory. The terms of commercial leases are mostly available for negotiation, which means that legal practitioners and financial advisers are often required to draw up the terms of the lease.

Top tip: commercial yields from rental income often create positive cash flow for the investor. Due diligence on the commercial lease can mean ensuring it’s long enough to generate your target yield and recover your principal investment amount. Including a renewal option is also a way to secure future income.

10. Understand your finance options for commercial property investment

Breaking into the commercial property market is only possible when you have the finance behind you to do so. Whether you’re only just breaking into commercial property investing, or are adding another commercial investment property to your property portfolio, Diverse Funding Solutions are experienced at providing tailored, private finance solutions to investors in the commercial market.

Financing direct property investment in a commercial property doesn’t need to mean jumping through a bank’s extenuating hoops — contact the team at Diverse Funding Solutions to access a straightforward, bespoke finance solution at Australia’s most competitive private lending interest rates.

interior of empty parking lot

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