Everything you need to know about buying Commercial Property
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Commercial properties are currently a more profitable investment than residential properties. Here's what you need to know if you want to take advantage.
Property is traditionally a smart investment, and when most people think about property investment, they immediately imagine investing in residential apartments and renting them out.
But residential properties aren't the only option. You can also invest in commercial properties, such as office complexes, retail buildings, and warehouses.
Why invest in commercial property?
Statistics indicate that commercial property is currently more profitable than residential property.
The Capex rate in South Africa is currently +11% for commercial properties, versus 5-8% for residential properties.
The differences between commercial and residential property
- Investing in a commercial property is purely business-related. Emotion doesn't come into it, whereas purchasing a home is about more than just business.
- Most banks will only finance up to 75% of a commercial property purchase, meaning you'll need a deposit of at least 25%.
- Banks usually require commercial property loans to be paid off in under 10 years instead of 20 or 30 years for a home loan.
What to consider before investing in commercial property:
- The type of property you want to invest in. It helps to know which types of commercial property are performing well. For example, office complexes weren't a good investment during COVID but are more viable now as people have returned to work.
- The location of the property. The type of property determines this. For example, industrial properties should be in more remote areas, while office complexes and retail properties should be closer to business centres. Generally, you'll want to look for properties close to public transport and important roads.
Rent or buy? This depends on your plans for the property.
Have an idea of your long-term plans before investing. For example, if you're investing in an office complex and you don't plan to expand it in the long-term, you should probably rent instead of buying, whereas a property with expansion potential makes sense as a purchase.
Renting the property allows you to avoid upfront costs, which is helpful to small businesses.
But if the property is in a good area, it's in your long-term interest to buy quickly as the value will appreciate.
Commercial property benefits
- Tenants are more likely to take care of the property since they are financially invested in it.
- Tenants go home after business hours, so less chance of landlords having to deal with emergency phone calls after hours.
- Dealing with commercial tenants is generally easier than dealing with residential tenants. Communications are business-oriented and therefore more likely to be conducted professionally.
Commercial property risks
- External factors such as economic conditions (or as we've recently discovered, a pandemic) can affect your investment to a greater degree than with residential properties.
- Another complication is liability. More people visit a commercial property daily, meaning a higher chance of injuries or criminal activity occurring on the property.
- Vacancies are more impactful in the case of commercial properties, as you'll only have a limited number of tenants. Be sure to have funds set aside for periods with less rental income.
Important factors
- The lease agreement. It's recommended to seek the advice of a legal expert when drawing up a lease agreement with the tenant; probably more important than in the case of a residential property as both you and the tenant will be looking to protect your financial interests.
- The state of the market. Stay informed on average vacancy rates so you can make your properties competitive.
- Screening tenants. Develop a watertight process for determining the income and credit records of prospective tenants. Reliable tenants are a valuable commodity.
- Be ready to adapt. The commercial property market is constantly evolving, and you need to stay aware of new trends such as the increasing incorporation of technology.
Author: OOBA Home Loans
