The boom in property investment is set to continue in Commercial Investment property. With the security of long-term leases, strong rentals due to rent reviews, and prices for great properties starting as low as €250,000, it's a realistic investment opportunity for many investors. So if you've been thinking about investing in commercial property, here are some simple tips to point you in the right direction.
As an investor, identify your motives for investing in commercial property.
Then, pinpoint the kind of commercial investment that best suits this, be it retail, industrial, or office.
Remember, Commercial Investment property should always be considered a medium - to long-term investment, due to the higher initial costs of acquisition.
Research your chosen investment carefully. Observe similar transactions to establish market trends, for example, where local adjoining shops/offices/warehousing has been sold nearby.
You'd be surprised how many properties never get advertised to the public. In fact, the best ones are often acquired shortly after the current owner decides to officially put them on the market. At Real Estate Alliance, we've got our ear to the ground so that our agents are often the first to be instructed by a vendor.
Obtain financial advice. Talk to an accountant and at least two lending institutions to find out the most tax-efficient way of investing. Identify how secure or low risk your investment will be. Know what kind of time frame you are looking at before buying and what percentage return on the investment you can expect. When you know all this, decide how much of a percentage of the purchase price you need to borrow.
Be conservative with your initial figures, but remember values sometimes increase substantially each year, so you might be able to afford to purchase more than you initially think.
Don't let the price of the property versus the rent be the sole defining factor. There are hidden costs, such as stamp duty, management fees and service charges.
Avoid leases with what's called 'get-out clauses' that allow tenants to terminate early. Check the lease to ensure rent reviews are timely. Never consider indexed linked review clauses, 'open market' rental value traditionally gives better return and capital appreciation over the years.
Approach the establishment of a commercial property portfolio as you would build a house - a good foundation is essential. Then as you gain greater experience, and build up equity within the portfolio, look at higher yield, higher-risk opportunities.
Before buying a commercial property, you should know its VAT status, as this can be a very substantial extra cost. Also, take taxation advice on whether to become registered beforehand.
In most commercial property the purchase price is subject to VAT . Once registered, you may have to charge VAT on the capitalised value of a long-term lease. Some tenants may not be in a position to reclaim VAT and will need to be told that a lease is subject to VAT on the rental or on the creation of a new lease. Consider also the knock-on effect on other short-term lettings within your portfolio where VAT could also apply (including sometimes residential lettings).
Go for the best location you can get. Find out about new future developments being planned - will a new edge-of-town shopping centre undermine the value of a high-street location which you are looking at? Ensure that there's a future market for your property by doing your research on nearby facilities such as hospitals and colleges, as well as employment trends. Find out about whether further improvements are prohibited by any current planning laws. Find out whether new retailers / other businesses are coming to the area. Remember this is a long-term investment, the extra time and effort will be well worth it.
Firstly, inspect the property yourself with your REA Agent. If you like it, then take further independent professional advice on its viability from your accountant, solicitor and engineer. Decide whether you want to buy a new vacant building or an established property with existing tenants.
Also look at the building from the tenant's point of view. Tenants' demands are influenced by factors such as location, size, layout, profile, use, state of repair and population growth. Try to get a modern or recently refurbished building with an efficient use of space. Tenants today are generally looking for medium / bigger floor spaces, particularly in the retail sector.
When buying a commercial property, research the planning trends in the area. Get professional advice on the structural aspects of the property by getting a survey of the building by an architect or engineer. Check with the local authorities to ensure planning permission and fire safety requirements are in order.
Planning permission for certain types of outlets is difficult to achieve in high-street locations. Some permissions, like fast food outlets, are now very difficult from a planning permission perspective. Conversely, a small run-down existing takeaway might be a very good value purchase in years to come if permission is existingly there or obtainable for the property.
Commercial property has a lot of advantages over residential property when it comes to the quality of tenants, but it is important to establish their expectations in advance. While commercial tenancies, under their lease, usually pay for insurance and external and internal repairs, check that this is what is in the lease. Are you as a landlord expected to contribute to the fit-out (not usually the case in retail, but it's very likely in some new office situations)? Or are they looking for a rent-free period while these fit-outs are carried out? What about local car parking availability?
If you are purchasing a property with existing tenants, check if they, or their predecessor in title, have Landlord and Tenant renewal rights. For instance, if a tenant or predecessor has been in occupation for 5 years or more there are often additional obligations that have to be met by the landlord, including the tenants right to lease renewal.
Is there hidden value that can be released? Can some of the assets be divested? Can a pub license be sold and the property turned into a restaurant or shop, for instance? Can improvements be made or land subdivided? Or maybe there are pending planning permissions in place for new developments that would increase footfall in a run-down area.
Consider the implications of joining with family or close friends and deal only with people who are contributing a reasonable amount of equity. As we have already discussed, do your groundwork, get expert advice and have all aspects of finance sorted out in advance.
Lastly, listen to the professional advice offered by your local Real Estate Alliance agent. Why? Because at Real Estate Alliance you'll find professional, well qualified staff who are experts in the area. So you can be confident you'll get expert, unbiased advice. What's more, we have 48 offices nationwide and thousands of staff with their ear to the ground on your behalf.
With a network of 48 OFFICES across Ireland, we have the power to move you. Our agents offer many decades of property knowledge and experience.