If you’re looking for an easily understood investment option, residential property investment is probably the first thing that comes to mind. This type of investment has become popular with real estate investors as it provides reduced risks of the property being vacant long term as well as the benefits of being sold on more easily during a slump in the market.

Commercial real estate investment has been commonly overlooked by many investors; however, this type of property can offer you far higher levels of return than that from a solely residential investment. And immediate benefit to the investor is that business tenants pay for outgoings on the property such as insurance, rates, building Warrant of Fitness fees, repairs and maintenance and often management costs.

As a real estate investor, if you are interested in diversify your residential investments, then commercial property would be the next logical step. However, we find that residential investors are frequently wary of entering the commercial property market because of their little knowledge of the motivating factors behind commercial investment and perceived threat in reletting a property in the event it becomes empty.

Vacant business properties have undoubtedly suffered more than residential in the past when it comes to finding a tenant and sustained vacancies can arise.

It’s crucial therefore that you have a lesser level of borrowing than you might for residential so that you can ride out any prolonged vacancy. keeping this in mind, lenders typically only mortgage no more than sixty percent of a commercial property’s value anyway.

Investment in commercial property has typically focused on the property’s location, however the associated tenancy is just as crucial as this ultimately provides the investment’s income.

The strength of an occupiers covenant to meet their lease responsibilities and pay the rent is one of the most important issues in commercial property investment.

Coupled with this the duration of lease term is also important. Long term leases (five years or more plus renewals) are highly sought after because they give you, the landlord, a much reduced risk profile of having a vacant building, particularly when a sound tenant covenant is also provided.

More essential concerns you should consider include location to make certain the property is well situated to local service centres, is handy to major roads or highway systems and can where possible reap the rewards from visibility and profile to passing traffic. As a landlord, you must ask, could the building be re-Iet without difficulty and efficiently should the existing tenant vacate?

Buildings should ideally be adaptable for a variety of alternate uses to meet future occupant needs. Specialised buildings lack this characteristic and are thus more at risk of prolonged vacancy if an occupant is lostdecides to move on.

Multi-tenancy properties are highly sought after by buyers as they provide a good spread of revenue and lower threat associated with having any vacant space in comparison with a single tenanted building. However, they do carry with them greater management issues.

All property investments should be seen as a long term plan and as a commercial investor you will see that over time you will have witnessed rents rise significantly more than a similar residential investment. When economic times are good, swift boosts in rental levels have been seen. With most lease contracts offering two yearly rent reviews, this can lead to a significantly greater rent roll and value of the property over time.

Current low interest rates have secured good returns on commercial property investment. The costs associated with borrowing for investors may be as low as 6.5 percent , while their returns may be as high as 10 percent, and this positive profit margin is likely to encourage many investors to think about commercial real estate as a potential opportunity.

When it comes to any kind of investing, weighing up all of the economic drawbacks and benefits is the key to success. Breaking into property investment with a long term mindset is crucial, because in continually fluctuating market all real estate owners are destined to see as many declining fluctuations as increases. This is especially true in economic hard times, but all in all investment in real estate is seen to offer some of the best long term financial rewards.

Author Bio: John Bolton is one of New Zealand’s leading experts on property finance, particularly mortgages and interest rate risk management. His business, Squirrel Mortgages, helps New Zealanders buy over $10m of property every month.

Category: Real Estate
Keywords: commercial property,investment,property investment