Have you been attracted to the possibility of longer leases, higher rental yields, minimal outgoings, and significant capital growth and decided to buy a commercial property?
Commercial properties are proving a very resilient asset class and can be a fantastic way to diversify your investment portfolio if you already own residential properties.
However, to take advantage of the benefits of holding and leasing a commercial property, you must get the property purchase right at the start. The wrong property could see you experiencing long vacancy periods and little capital growth.
But how do you know if you are buying the right commercial property?
Below are 6 crucial criteria that provide a solid foundation for assessing the suitability and viability of a commercial property:
1. Location and Accessibility
Understanding the location and accessibility of the commercial property is vital. Factors such as proximity to major transportation routes, customer demographics, competition, exposure, and visibility all play a significant role in the success of a business. Analysing the location’s potential and considering the target market’s accessibility are essential for long-term viability.
2. Understand future rental income
Understanding the financial performance of the property is crucial for evaluating its investment potential. Does the property currently have a tenant in place? If so, what are the lease conditions, length, options and are there annual rental increases? To find this out review the Commercial Lease Agreement that should be included in the vendor statement and contracts. If untenanted, what is the potential rental income, and/or what has it rented for in the past? You can ask the selling agent, but you may want to get an independent rental assessment.
3. Analyse the property’s ongoing expenses
You need to check what are the running cost of owning the property and what are your responsibilities versus a tenant. Unlike residential property, a commercial tenant will typically pay for all outgoings, including council rates, water rates, owners corporation fees, and usage charges for electricity, gas and water. In some cases, they may also pay for the landlord’s land tax. However, during any vacancy periods, you are responsible for covering outgoings. These details will be included in the Section 32 Vendors Statement.
4. Zoning and Permitted Usage
Knowing the property’s zoning regulations and permitted usage is critical. Zoning laws dictate how the property can be used, such as retail, office space, industrial, or mixed-use.
5. Physical Condition and Maintenance Requirements
Assessing the physical condition of the commercial property is essential to understand any potential maintenance or renovation costs. Evaluating the overall condition helps estimate future expenses and determine if the property requires immediate or ongoing maintenance. Getting a building inspection completed will help you to understand the condition of the physical property, including both major and minor defects.
6. Legal Contracts
It is highly recommended to get the legal documentation reviewed by your solicitor before submitting an offer. Unlike residential property, there is no 3-day cooling off period when you buy commercial property. Legal documentation includes the Contract of Sale, the Section 32 Vendors Statement, and if tenanted a Commercial Lease Agreement. These documents will clearly state what you are purchasing, what are the outgoings, the terms and conditions on the lease, and any owners corporations arrangements and certificates. These documents should reveal if there are any legal complications that could affect your ownership of the property.
These above items provide an excellent starting point for buyers to gather essential information about a commercial property enabling them to make an informed decision about a property’s suitability or not. We also recommended consulting with the necessary professionals along the way including the real estate agent, buyer agents, property managers, solicitors, and property inspectors for a comprehensive evaluation.
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