Posted: Tuesday 8th January 2019
The world of investing provides enthusiasts with a wide range of investment types that have been designed to maximize profit and help investors grow. Investing in property is a popular method of maximizing wealth, taking part in something interesting and challenging, and developing your experience as an investor.
The real estate market is an especially lucrative investment option due to its high demand, predictable price movements, and high returns. If you are an experienced investor with a rich portfolio you may be able to quickly spot the perfect investment and will most likely be familiar with the types of property investment. However, for the beginners out there, it may be a bit challenging to get a grip around the different investment types and making a choice between a few alternatives may not be so easy.
The challenges related to property investment should not put you off but rather inspire you to learn more about the field. The Seed Property Group experts and consultants are here to help you connect to the right people and institutions that will make your money plans a reality.
If you have made the decision to start your journey on the path to property investment, chances are that you have already stumbled across a few property types worth exploring such as commercial property, residential property, buy-to-let, HMO, and more. In this article, we will look into commercial property in more detail, shed light on its nature, consider its benefits and risks, and suggest some tips on making the right decision when investing.
Buckle up, here we go!
Britain is well-known for its property lovers, as private investors and organizations share an enthusiasm for the real estate market. One of the most commonly sought after property types is residential property, mainly due to its nearly guaranteed return on investment and the high demand seen in the UK. However, another popular property type worth investigating is commercial property.
Commercial property is real estate property used for business activities, as described by Investopedia. Commercial property can be either the building, which hosts the business or the land that will accumulate profit in the future. This type of property can be a mall, a grocery store, office or industrial buildings, manufacturing shops or warehouses, and more. A property can be classified as commercial depending on a number of factors such as its financing, tax treatment, and certain laws related to it.
Generally speaking from an investment point of view, commercial property has been acknowledged as a stable type of investment. A major difference between commercial and residential property is the initial investment required. Commercial property tends to be much more expensive than residential property and will require a greater sum available for investing. However, the returns of the investment are also usually higher for commercial property when compared to residential.
Furthermore, if both properties are bought with the purpose of renting, chances are that residential property will cause more issues related to finding tenants as they tend to change locations more frequently. With commercial property, businesses renting office space or a warehouse will usually have a long-term plan for their rented location, providing more certainty for the investor. In addition, the method of putting a renting price on commercial property and residential property will differ. Commercial property will usually involve a straightforward pricing method, while residential property will highly vary depending on its appeal to tenants and other vulnerable factors.
We already mentioned a few commercial property types in the description of the term. The types of commercial properties that an investor can invest in are:
When deciding on commercial property, a certain amount of research will be required to familiarize yourself with the nature of the property types, its advantages and disadvantages, any possible risks to consider, expected return on investment, and a number of additional factors. Working with a professional property investment consultant can save you time and a number of hurdles in making the right decision regarding the next commercial property investment in your portfolio.
Starting with the bright side, commercial property provides higher dividends and a larger return on investment compared to other property types, therefore offering a higher income potential. Usually, commercial property will have a higher number of tenants, meaning that operating costs are likely to be better covered in contrast to residential property, for instance.
Furthermore, there is wide flexibility of funding when it comes to commercial property investment, meaning that you can borrow money, partner up with other investors, or think of more creative ways to fund your project. Tax benefits related to this investment type is another powerful advantage that investors find tempting.
Another main benefit of commercial property investment can be the opportunity to spread the risk. Diversification is an extremely powerful tool to help reduce your losses as an investor and commercial property is the perfect example.
Although this investment type seems tempting and profitable, let’s take a look at a few possible risks associated with commercial property investment. The costs associated with vacant periods with commercial property will usually be higher than those related to residential property. To avoid high expenses, it is advisable to that the investor secures a long-term lease agreement with the business tenants.
Oversupply in the commercial property market can result in your property remaining empty for longer time periods, limiting the return on the investment. Research your market carefully and check for any future commercial property construction plans, if possible.
When investing in commercial property, the size of the project is often a challenge for investors. The bigger the commercial project, the more expensive it will be. However, if you choose to go with a small commercial plot, it may also be accompanied by certain limits. As an investor, it will be helpful if you have an understanding of the demand in your area to help make the right decision regarding your commercial property size.
Last but not least, we already mentioned that commercial property will require a larger investment amount and it may take a while to get the return you are after. Hence, if all of your investment finances are tied up in a single commercial property project, you may face financial difficulty as an investor.
Now that we have covered the basics of commercial property, it is time to look at a few tips that may help you when making a decision regarding commercial property. Before even analyzing a potential commercial property for an investment, it may be helpful to brainstorm about what the actual goal of this investment is. Are you looking to diversify your portfolio as an investor? Is income at the top of your objectives list and are the returns of the investment of highest importance? Or have you focused on raising more capital? If so, what is the number that you are looking for? Is commercial property your choice mainly because of the tax benefits associated with the investment?
Try to answer these questions as honestly as you can in order to set a solid foundation for your future investment. When buying commercial property as an investment, there are a set of factors to consider that will establish the success and future profitability of your investment.
Location is key to any property type and will be an active influencer of future price fluctuations, demand, and ultimately – your return on the investment. Think about how accessible to location is. Is it close to public transport, what do the surroundings look like? Are there any business enterprises nearby that can be of help to the business owners which will occupy your property? Also, consider the commercial property supply in the area to avoid overcrowding.
Make sure that the commercial property that you have laid your eyes on is flexible and will allow space for change in the future, if necessary. Especially if you also have a business that will operate in the premise, try to imagine all the possible developments that you will require in the future and choose a property that will provide this opportunity.
Related to the location of the property, the development of the infrastructure in the area is highly important. The data related to infrastructure plans can be found on your local council’s website or can be accessed through communication with real estate companies or associations. Ask about any possible developments that can change the price of the commercial property in the future to prepare a plan.
Gain as much information as possible on the population of the area. Familiarize yourself with their age groups, interest, behaviors, employment patterns, behavior, and anything else which may be useful to decide whether your commercial property will be successful. The people in the surroundings can be your tenants, the customers of the businesses that will rent your premise or partners that you can work with in the future.
You may think that parking is just a minor detail but especially if the area is central or close to public transport stations, this factor can make or break your deal with potential tenants. Businesses tend to make a decision that will improve the comfort of their employees and customers, therefore failing to provide ease of access can result in vacant spaces.
There is a range of existent financing options available for commercial property investors. Depending on the nature of the investment, its objectives, and your financial stability as an investor, you can choose from gaining access to portfolio financing or commercial mortgage. Other options include mezzanine financing, which is a mix of debt and equity funding or bridging finance, which is usually associated with receiving fast money when in need. The negative side to bridging finance is that the interest rates are usually higher than investors are willing to accept.
Property development loans are another option for the financing of your commercial property investment and are ideal for renovating the property and upgrading its condition. These are just a few examples of the available financing methods that can help you make your dream commercial property investment a reality.
As you see, property investment is no easy pick. The details related to the area are complex and sometimes difficult to grasp. However, the good news is that experts in the field are here to help investors make the best decisions and successfully grow their portfolios. Get in touch with Seed Property Consultants and let us help you speak to the right person regarding your property investment questions or objectives. Make the most of your investment and watch your money grow!