A guide to investing in your first commercial property

With everything which has been going on in the residential buy-to-let market over the last few years, it’s hardly surprising that some investors have been taking a whole new interest in commercial property. If you’re new to this branch of property investing, here are four tips to help you get started.

Do your general homework on the sector

The broad principles of investment generally apply across any sector, but each industry area has its own specific characteristics you need to understand in order to be successful in it. Much of what you have learned in the residential property sector will also apply to commercial property; however, there are also some major differences you will need to grasp. A good approach would be to do some general reading, with a particular emphasis on understanding the necessary jargon, and then network with industry experts to test your understanding and develop it further.

Choose your preferred commercial property niche

Like its residential counterpart, the commercial property market contains a number of specialist niches, each with its own distinct set of traits. When you are just starting out in commercial property, you may find it best to choose a niche which has a lot in common with the residential property market such as student halls, care homes or hotel rooms. This can make the learning curve rather easier for those new to commercial property. As a side note, it is often best to stick to this niche to begin with so you can really come to understand it in depth and then diversify later if you feel the need.

You need to understand corporate financial statements to be able to judge a prospective tenant’s financial health. (Source)

Learn exactly how the numbers work for your chosen niche

When you buy a residential property, you generally buy a whole property, have ownership of its management (even if you choose to delegate to an agent) and decide for yourself what rates you wish to charge to tenants. When you buy a commercial property, it is much more likely that you will buy a “unit” within a whole and that all the investors will be mandated to use a designated management company, which will guarantee them an income for a fixed period and have a process by which investors can exit the scheme (after a certain period) by selling their units back to the vendor for a previously-agreed price. These differences can require some mental readjustment.

Get to grips with corporate financial statements

If you choose to buy a whole property and let it to tenants directly, then you’re going to need to understand corporate financial statements to be able to judge a prospective tenant’s financial health. If you choose to buy a property as an investor in a limited company and/or in a niche which depends on the use of management companies, then you’re going to need to understand corporate financial statements to be able to judge the health of a prospective investment partner. In short, if you’re thinking of investing in commercial property, it’s highly unlikely that you’re going to find a way round getting to grips with corporate financial statements.

—

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.