Big bucks: Commercial property trumps residential
January is traditionally an "eyes wide open" month. Consumers come down to earth from the dizzy heights of the holiday season and the festive glut makes way for goal setting and introspection. Gym workouts replace beach lollies and the expression "Let`s go for Japanese" implies exploiting opportunities in the Far East rather than hitting the local sushi deli.
At this time of year, residential real estate investors, struck by the most dismal returns of 2009, are looking for alternative ways to generate wealth
What if we could diversify and still hold on to good ol` bricks and mortar?
We can through commercial property and the returns could be very lucrative indeed. The "Trumps" of the world have been doing it for years. Yet this is an area where many fear to tread. To determine if this fear is justified, let`s uncover the myths.
Myth 1: Commercial property is more risky
False. Commercial tenants view their rentals as operating and tax deductible expenses of the business. They are willing (perhaps not ecstatic though!) to pay as long as they are deriving an income from the premises. Certainly there is a chance their business will fail but there is more of an incentive to pay when compared to residential tenants who often resent their exploitative, greedy landlord. Furthermore, there is less government protection for non paying commercial tenants than for residential tenants.
Myth 2: It is more difficult to secure a commercial tenant
True. If a house has not been rented, it is because the rent is too high. Drop the price (sometimes drastically) and you will probably find a tenant. On the other hand, when a commercial property is empty it may not be because of the rental level but because the property is only suited to certain activities, one may not be able to mould any operation into the premises.
Myth 3: You need greater capital to invest in commercial real estate.
True and False. Banks are willing to lend a large proportion of a residential purchase price. At boom times 110%. Banks are far more conservative with commercial real estate and generally do not lend more than 50-70% of the value of the property.
However banks are not concerned with PRICE, but rather VALUE (determined in commercial property largely by the rental income). One can purchase a vacant property (rental of 0) and source a tenant, increasing the rent and hence the value, leading to a loan which may exceed 100% of the price.
Myth 4: Commercial property requires more management
False. Commercial leases may run for up to 20 years or longer. Tenants will be establishing a business from the premises and require continuity. They have custom designed the premises to suit their needs and their clients and staff become familiar with the premises, hence their desire to stay.
Residential tenants on the other hand often look for the shortest possible leases and even when they do sign a long term lease, will often use a longer story to get out of it!
Myth 5: Commercial property requires more maintenance
False. Commercial tenants earn their income from the premises. They are much more likely to do small maintenance jobs themselves than wait for the landlord as they need things fixed immediately. In addition, they will always be looking for ways to make the property more desirable in order to please clients and generate a greater income.
Residential tenants often call the landlord with the most trivial problems. They will seldom, if ever, invest their own money in making the property more desirable because they view it as someone else`s investment.
Services Subscribe to newsletters News feeds
|
||||||||||
Facebook
Google
Laaik.it
Yahoo!
Digg
del.icio.us
Comments
"Commercial leases may run for up to 20 years or longer."
In SA, commercial leases average 3-5 years...in the UK leases of 20 years are more common. The biggest mistake a naive investor can make is assume he's going to be buying a steady . .more
by Kippie on January 27 2010, 09:38
Find this comment inappropriate? Report it
Why are banks more conservative in respect of commercial property loans? Does this not indicate that they have good reason to regard same as a bigger risk than residential ????
by Skippie on January 27 2010, 13:58
Find this comment inappropriate? Report it
It is also easier to evict tenants from a commercial premises.
by Anon on January 27 2010, 16:12
Find this comment inappropriate? Report it
I am commercial property broker and investor and I love commercial and industrial property but this article is over simplistic and basically stupid....
by Fred on January 27 2010, 17:01
Find this comment inappropriate? Report it
You are right. Broadly speaking the risk IS higher, a vacant residential property with no lease is worth more than the same property with a sitting tenant and a long lease.
With commercial property it is the other way round.
These . .more
by andrewa on January 28 2010, 01:10
Find this comment inappropriate? Report it
I got badly burnt on Commercial...tried to do this a few years ago..the whole commercial thing...tenant went under & wanted "out" after 3 years. Place was empty for 15 months....stuck me rrrrright out!! Prospective tenants ALL wanted me to do major . .more
by Skupid on January 28 2010, 09:09
Find this comment inappropriate? Report it
Interesting to note that at the time of posting this comment, 77% of respondents who voted, preferred commercial property as an investment. Interesting because (and I speculate) the number of persons who choose to invest directly (as opposed to indirectly . .more
by Steve Rennie on January 28 2010, 10:48
Find this comment inappropriate? Report it
Vacan land available in the south of Johannesburg to develop a commercial property in a growing residential township. Looking for investors to help develop. Interested parties inbox me tokaenterprice@webmail.com
by Karabo on January 28 2010, 14:39
Find this comment inappropriate? Report it