15 Helpful Tips For Successfully Purchasing Commercial Property

Purchasing a commercial property can be a time-intensive and lengthy process that requires you to do your due diligence, research and make smart investment decisions.

As 68% of London’s population alone are homeowners, it’s easy to see that we’re particularly well-known for having an aggressive, risk-taking culture when it comes to acquiring real estate assets.

However, there are larger risks involved when it comes to buying and investing in commercial property. For example, one factor shows how the success of the investment itself is relative to the market demand of the business.

There are two kinds of people in commercial property investing: brave risk-takers and rational dreamers.

Taking risks is good but it also pays to be rational in real estate investing. Also being too impulsive in taking risks can lead you to lose everything. So, here are 15 tips so that you can make the right decisions when buying your next commercial property.

 

1. Know the Type and Purpose of the Property

You should purchase a commercial property with a purpose. The biggest mistake new investors make is not having a plan. They buy a property because they think they got a good deal and then try to figure out what to do with it. That’s working backwards”, says Andy Heller author of “The Regular People’s Guide to Real Estate Riches.” Set-up your buying criteria based on your priorities. You can start by asking the question:

Why should I buy this type of commercial property?

This will reveal your business purpose. It will also serve as a guiding rule and buying criteria in selecting a suitable property. Thus, helping you to avoid unrealistic deals.

Majority of commercial property types in the UK are as follows:

TypesSub-types
Offices
RetailShops, supermarkets, shopping centres, retail warehouses
IndustrialWarehouses, factories
LeisureRestaurants, pubs, cinemas, gyms, hotels
Alternative commercial propertyPetrol stations, schools

Small business owners are at an advantage in this aspect. Their type of business to pursue is already established. So, they can proceed with other business decisions such as business-to-property compatibility. This leads to the next question:

How would this type of property suit my business needs?

One of the most crucial things is if the property is suitable for the business that’ll take place. Here are some factors to consider in answering the question above:

  • Expansion friendly.
  • Suitable for business flexibility.
  • Availability of transportation links.
  • Space allowances appropriate for business.
  • Parking and sub-letting options.
  • Gives a good impact for the current and future customers.

 

2. Know Your Investment Budget and ROI Goals

Exciting as it may seem, investors may get too emotional in investing. Causing them to overlook miscalculated construction costs and go over their budget. “One of the common mistakes in real estate investing is the failure to purchase within the budget, says Beatrice de Jong from Open Listings.

Make sure to set a budget and always remember to include hidden costs. To be firm in your decision making its best to use a set of buying criteria.

Set the expectation by researching and estimating the costs you’ll be facing onset. Here’s a preview of the possible fees ahead:

  • Professional fees.
  • SDLT (Stamp Land Duty Tax).
  • Construction and repair costs.
  • Operational and maintenance cost.
  • Environmental compliance costs.
  • Waste management.
  • Mortgages.

At the same time, a ‘buying criteria’ also sets your ROI standards. A standard of 10% minimum cash return would be a good start. If initial estimates of possible ROI falls less than 10%, then it’s not worth the gamble. So it’s important to consider all the factors that may affect your ROI such as the location.

A key advantage of letting a commercial property in the UK is the FRI lease. FRI lease is a commercial lease agreement in obliging tenants to keep the property in a good state.

 

3. Good Location

What makes a good location is how the business blends to the market exceeding expected ROIs. A successful property investment relies on a good performing business. So, take precaution and time in looking for the perfect location.

Here are the factors to consider:

Type of business: If a business transacts in the premise like shops, a central location would be suitable. But, if it’s more of remote transactions, an out-of-town option would be more practical.

Local commercial competition: Gauge the competition in the area. Target a spot where your business can outsmart their customer demand. Consider the visibility of the location to the target market.

Customer/Tenant demand: The demand should meet your standard ROI goals.

Growing area: The developments in the proximity can directly boost the economy of the place. A good example of this is when a local district becomes a food hub for a new university built in the area.

How to find a good location?

It’s hard to find a good location. But as long as you know what your business needs you’re one step ahead. It’s worth doing your research on the following:

  • Determine the traffic generators (Traffic generators are the establishments that draw people in the area).
  • Know your competitors and the advantages of the traffic they make.
  • Do an area check. Observe daily patterns and interview the landlords in the area.
  • Talk to professionals (real estate brokers in the area).
  • Set strategic objectives of the business.

Alternatively, you choose to look into brownfield sites and off-market properties. Brownfield sites, according to sustainablebuild, are previously developed land that has the potential for being redeveloped. On the other hand, an off-market property is a process of selling or already been sold, property without public advertising.

 

4. Research The Local Commercial Property Market

Never rely on real estate brokers, building brokers and other investors. You should know best with what you need and what fits your standard. “The real estate investor should know values better than anyone if they want to be successful and make good decisions“, says Mark Ferguson of InvestFourMore

Every local market has its unique set of values for the following so be sure to check them out:

  • The current value of commercial properties in the area.
  • Tax rates.
  • Interest rates.
  • Availability of commercial mortgages.
  • Rental values.

Another thing that investors should consider is the presence of environmental issues. These issues can have a direct impact on the property value in the future.

Additionally, it’s vital that you know the ‘ecosystem’ of competing investors and the supply of skilled building labour.

 

5. Check the property’s eligibility to Capital Allowances, BPRA, and Land Remediation Relief

The UK government offers relief allowances and is aimed at rebuilding communities across the country. These reliefs are defined as follows:

Capital Allowance is the amount of expenditure that a British business may claim against its taxable profit under the Capital Allowances Act.

Business Premises Renovation Allowance (BPRA) is a 100% tax allowance for certain spending when you’re converting or renovating unused qualifying business premises in a disadvantaged area.

Land Remediation Relief is a relief from corporation tax only. It provides a deduction of 100%, plus an additional deduction of 50%, for qualifying expenditure incurred by companies in cleaning up land acquired from a third party in a contaminated state.

A lot of investors don’t know that they are eligible for the claim. Remember to consult your local real estate professional to claim for your benefits.

 

6. Stamp Duty Land Tax (SDLT)

Commercial properties have lower SDLT rates. See the figures below:

RateBands
0%First £150,000
2%£150,001 – £250,000
5%£250,000

A shift in investing started in April 2016. This is due to the amendment of tax relief laws on residential buy-to-let landlords which made investors look for other options.

These investors are eyeing to earn bigger annual yield by converting semi-commercial properties. The trending pattern is letting a flat above the commercial ones. Thus making double income streams with adequate tax relief.

 

7. Consider the flexibility of the property

The possibility of your business to grow should be one in your lists. Always remember that commercial properties are more sensitive to the economy. So, the property should be adaptable to the shifting market trends.

Nowadays, ‘re-purposing’ the property is trending in the market. Not only will it bring back your will to invest but also sustain the recurring costs. Here are some of the latest industry shifts:

  • Home-based workers are on the rise which explains the demand in co-working spaces. So offices may consider this as a new venture to dive-in.
  • Due to the rise of demand in online shopping, ‘Brick and mortar’ establishments in high streets are now being transformed into retail warehouses.
  • There is a higher demand for industrial spaces for export products. A lot of entrepreneurs have shifted into the export industry due to the fall of the pound in 2016.

Other things to consider is the property’s parking and space allowances for expansion.

 

8. Think of the possible ROI potentials for the commercial property

Return of Investment(ROI) is also referred by Investopidea as “four-wall cash contribution”. It is the amount of profit earned by the business. And, the rule is simple: The faster you gain your ROI back, the faster the income grows.

It pays to maximize the potential of the property you’re eyeing to buy. These ‘potentials’ can contribute to your ROI, these may include but not limited to:

1. Transforming the top of the property to a rental flat.

2. Ad/signage rentals.

3. Energy conservation hacks by shifting to a solar energy source.

 

9. Consult Professionals and Be Mentored

As a first -time investor, you might have done your research. And for sure you’ve gone through all the analysis that you may think of. But, there are certain things that can only be learned by experience.

So, it’s much better to get an ample amount of wisdom from the veteran investors and real estate experts.

In every stage of your buying process, you’ll be needing at least one expert’s advice. If you do use a real estate proficient accountant, purchasing commercial property can make your costs higher, so make sure that your investment calculations are precise.

You’ll also need the expertise of property inspection and surveying professionals. Listen and consult with them to determine your best options.

 

10. Explore Your Options And Weigh The Yields Vs. Risks

There’s no such thing as risk-free investment. Nothing is in absolute security when it comes to real estate income returns. So you should consider your tolerance with the present and forthcoming risks.

Eric Tyson, co-author of “Real Estate Investing for Dummies”, warns beginner investors: “These gurus don’t talk about all that hard work. You have to be smart, you have to be willing to work, and you have to understand your risk tolerance”. The key is to acknowledge the risk and see if the property’s potentials can outsmart it.

 

11. Get a Full Structural Survey

Surprise repairs are major headaches that sets you in long stressful months. So it pays to hold your horses and check the physical loopholes of the property. Not only that will a structural surveyor act as a precaution from poor property purchases but it will also prevent any defects from arising in the near future.

 

12. Visit the Property Before Deciding to Purchase

With all the efforts and pep talks with the professionals, one last look of the property can change the game. Undisclosed defects can be lingering in the property that can decrease its value. So be smart enough to decide, if you found one.

Non-disclosure of certain information is not punishable by law. Leaving the buyer in full responsibility for their own security.

 

13. Be Patient and Think Things Through

There’s this misconception that owning a property will make you rich. One strong factor for that is value appreciation. So, here’s something to burst your bubble. There are no short term gains with ‘brick and mortar’ properties so you should think long term.

Value appreciation is only a fraction of the long term benefits. It’s important to know the sustainability of the property, just like in any other form of investment, smart work and time are your best allies.

 

14. Learn the Property Market Terms and Lingo

Does syndication and covenant strength ring a bell? Well, if no, there are only two things that might happen to you: fall in a wrong deal or miss a great opportunity. It’s good to know these terms but it pays to understand how they work.

 

15. Alternatives to Purchasing Commercial Real Estate.

There are two major options for alternative commercial real estates.

Non-commercial Options

In a recent performance review of IG Group Ltd. on UK’s commercial properties, student housing and self-storage are showing strong signs for future growth potential.

New Investment Scheme

  • Syndication is the process of sharing the cost of property with other investors. It borrows the concept of ‘stock shares’ but on a property level. It is suitable for a passive investor but also requires a bigger amount of investment.
  • Real Estate Investment Trusts is a form of a property company that allows people to invest in commercial properties. The main benefit of investors in REITs are being exempted in tax.

In a recent review of Investopedia, REITs annual returns topped commercial and residential properties with an average of 11.8%. The market seems promising for REITs but of course, there are special rules to be a part of it.

 

Final Thoughts

Purchasing a commercial property is hard work. But, with extreme caution and thorough analysis, your next property can change your life for the better.

We hope that the tips above will help with your future commercial property investing.

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