Overview

Owning a commercial property is a good way to diversify your portfolio, create tax benefits and build wealth. However, the procedure involved in buying a commercial property can be daunting.

Consider your options and ensure you obtain expert guidance before buying any property.

This article is aimed to provide you an insight on the key features and the risks involved in buying a commercial property by a small business.

Features

Commercial property generally includes:

  • office space including business car parks;
  • retail property including shops, supermarkets and shopping centres; and
  • property including warehouses and industrial estates.

Following are the key features of buying a commercial property:

  • Return: Buying a commercial property is risky but the returns can be high.
  • Risk: The high risk comes in the form of high vacancy rates. For example, in order to find a tenant for a warehouse, it might take months or even more but in case of a residential property it generally takes less time.
  • Duration of leases: Commercial property leases, typically run for longer period of time. This gives greater certainty of rental income to the property owner.
  • Quality of tenant: The tenant is obviously a crucial part, if you have bought the commercial property as an investment. In a commercial property, large corporate tenant is considered to be a ‘blue chip’ tenant. They are likely to rent your property for a long period of time and are unlikely to default on the rent.
  • High cost of entry: Buying a commercial property is an expensive affair. Generally office or retail spaces are the most expensive property due to its location. Industrial property or warehouses are also expensive due to the size of the property.
  • Maintenance costs: Initially upgrading a residential property is relatively cheaper than a commercial property. Refurbishing a commercial building is very expensive. However, the expenditures are generally not borne by the owner.
  • Outgoings: Unlike residential property, once the commercial property is leased, the maintenance costs, council rates, insurance and repairs on a commercial property are paid by the tenant and not the landlord.

Borrowers Obligations under Mortgage Agreements

Under mortgage agreements, borrowers have the following obligations:

  • the borrowers need to be truthful and should provide all factual details while applying for the mortgage;
  • all mortgage repayments should be made before or on the due date;
  • the borrower should keep the property in good condition and should always take prior consent from the lender before undertaking any major alterations in the property;
  • the borrower should take proper insurance on the full value of the property and should keep it up to date; and
  • the borrower should not re-sell or lease or re-mortgage the property with any prior consent from the lender.

Risks Involved In Buying A Commercial Property

Following are the risks involved in buying a commercial property:

    • high level of expertise is required in buying a commercial property. You need to conduct proper research in order to know the risks and benefits of buying a commercial property;
    • buying a commercial property requires huge amount of investment and it ties up your capital for a long period, which you can invest elsewhere in your small business;
    • long term loan repayments for commercial property can put financial pressure on small businesses;
    • high vacancy rates in comparison to residential properties;
    • upgrading or refurbishing a commercial property is very expensive;
    • less number of choices with few desirable commercial properties available to buy; and
    • low capital gains. On an average, commercial property has not enjoyed the same historical capital gains as residential.

Buying a commercial property can be a very profitable and rewarding experience when it is done correctly. The team at Owen Hodge Mortgage Solutions can guide you through this very important decision in your business.

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