Top 10 Tips for your First Commercial Property Purchase
Countless investors are attracted to investment in commercial property and that is no surprise, with the possibility to reap greater rewards than residential property investments- the former can yield as much as 10-15% growth annually, whereas the latter may only accumulate 1-4%. However, with more money and potential comes greater risk. Many first-time commercial property investors will feel in over their head as they embark on making their debut purchase, but with the right level of planning, research and calculated decision-making, they will be on the route to success.
Commercial property, put simply, is property used for business purposes, which can include shops, warehouses, flats and offices. Commercial properties usually have a lease of 10-15 years, far surpassing the 6mo-1 year lease you can expect for residential properties. Furthermore, with the freedom and authority to make important business decisions with regard to your commercial property, the advantages for investment are undeniable. So, if acquiring a commercial property is the next step on your property journey, look no further than this blog post, which will delineate our top tips for making your first commercial property purchase.
#1- Determine your budget
As with any property purchase, you must be certain of how much you can afford in accordance with your own personal financial situation. Equally, if you find yourself in your worst-case scenario later down the line, you will have saved yourself some grief by ensuring you knew how much you could afford to lose. By setting a realistic budget at the very start of the process, you can ensure that acquiring your first commercial property does not lead to financial ruin.
#2- Set pragmatic objectives
Once you have a solid idea of your budget, the next step is to set objectives for what you want to achieve from the investment. Work out your return goals and educate yourself on what can affect returns in commercial property, whether that be the socioeconomics and available workforce in the area, or the infrastructure and location of the building itself. It is important to remain level-headed and patient throughout the process. Keep your objectives in mind so you don’t get carried away by the thrill of the property hunt.
#3- Establish your financing
Depending on your objectives and personal financial situation, you will need to decide what route is best for you, whether that be purchasing or leasing the commercial property. For the majority of buyers, leasing will be the most achievable route, which means that funding options need to be located and established. You will be able to get a mortgage on a leasehold so long as the lease is more than 70 years, otherwise it becomes more difficult and you may be required to provide additional security. Knowing the options available to you and their compatibility with your objectives is an important step to make in the initial stages of the process.
#4- Consult an expert
On occasion, despite the sufficient amount of due-diligence, buyers can experience a stroke of bad luck and things just don’t go to plan. Make sure you have planned for this situation by researching industry experts that will be available for a phone-call to put you back on the right track.
No Research Without Action – No Action Without Research
#5- Examine latest market trends
Having an eye on the ins and outs of the current local and national commercial property market will enable you to choose the right time to buy commercial property. A couple of hours browsing the internet and you will be able to discover the value and supply of commercial property, the availability of commercial mortgages, investors you may be in competition with, tenant demand and rental values (if you plan to let the property).
#6- Narrow down your property search
So you’ve got a budget, your objectives and you know what funding option you will use, and you’re ready to start the search. Depending on what you intend to do with the commercial property, you will need to consider the type of property it is, its size and its location. If the property will be used by a business, you may want to consider its nearby transport links, parking facilities, local amenities, space configuration etc.
#7- Work out the costs
With your budget in mind, work out the costs of a particular property purchase to determine whether it could be feasible. Most buyers need professional assistance through the acquisition of commercial property, from a commercial estate agent, lender and solicitor, which will accumulate charges. You will have to pay Stamp Duty Land Tax if you buy a commercial property valued at more than £150,000 (read our handy guide to SDLT here: https://www.978finance.com/blog/2019/4/9/what-is-stamp-duty-land-tax). If you are based in Scotland, the equivalent of SDLT is Land and Buildings Transaction Tax, and in Wales, the equivalent is Land Transaction Tax. Furthermore, other costs may arise in the form of VAT, fees associated with arranging a commercial mortgage, decoration and refurbishment and setting up facilities. Evidently, there is lots to be considered to determine the overall cost of a purchase, but with the right due-due-dilgence there will be less chance of short-falls.
#8- Utilise all ROI routes
Make the most of what is available to you with your commercial property to maximise returns. Commercial properties offer more ROI avenues than with residential, single-family homes, including advertising. For instance, selling billboard space may be an avenue you had not thought of, but could increase the return of your investment.
Good decisions come from experience, and experience comes from bad decisions
#9- Make a calculated offer, but be ready to negotiate
When you have found the right commercial property for your objectives, its time to make an offer. You will usually need to make a written offer, most likely to the vendor’s commercial estate agent. If the vendor refuses, don’t be put off, you may need to negotiate to reach a mutually agreed number. Remember, the seller has a number of factors to consider, so be willing to compromise so that the price is right for all parties.
#10- Secure the deal
If the offer is accepted, politely request that the commercial property is taken off the market to prevent other interested parties closing in on the deal. Congratulations! You are now the owner of your first commercial property.