Six Factors To Be Wary Of When You Invest in Commercial Property
Investing in commercial property can offer great opportunities for capital growth and income. And, as the economy begins to recover, more and more people will be tempted by commercial property as an investment. However, whilst there are numerous positive reasons to choose commercial property as an investment, there are plenty of factors that you should bear in mind. Here are six things to think about if you are considering taking out a commercial mortgage to buy business premises.
More chance of rental void periods: Commercial property tends to be more specialised and therefore there is less demand. This is particularly true in tough economic times where fewer businesses result in lower demand. So, you should bear in mind that there are likely to be more 'void periods' - occasions when the property is untenanted - than there would be with a residential investment.
Commercial mortgages can be more expensive: Business loans and commercial mortgages are often more expensive than residential or 'buy to let' mortgages. The gap may have narrowed over recent years as the cost of buy to let mortgages has risen, but you should be prepared to pay a higher interest rate on a commercial mortgage. You may also have to take part or all of the loan on a capital and interest basis, increasing your monthly repayment.
It's not just higher interest rates where you can expect to pay a premium; practically all lenders will want a large deposit for a commercial mortgage, usually somewhere around 25-30% of the property's value. Easily more than would be required for a residential property, which have been asking 25% at the highest during the downturn, where commercial deposits start at 25% and go upwards.
Related Costs of Buying are Also Higher: So the rates are higher, the deposits are higher; it should be no surprise that other costs are going to be higher. Stamp Duty is going to be a problem; you will most likely end having to pay the higher rates as commercial property is expensive to begin with. Larger properties is going to mean more work for conveyers to cover, so expect these fees to be higher, as well as other valuation and legal fees, it all has a knock on effect.
Expect Rougher Conditions in a Recession: Companies will fall and fail in a recession, meaning commercial landlords can take quite a hit during the lean years. Obviously this doesn't happen in a recession for residential landlords, there might be a small drop, but people still need a roof over their heads. Be prepared for any sudden turn in the economy as a commercial property owner.
It is a highly regulated sector: Commercial properties are subject to rezoning, use regulations and planning consent. You also have countless building regulation and health and safety concerns to consider. Does the building have ramps for disabled access? Are fire safety regulations being met? Is there emergency lighting? In addition, you may also be responsible for the maintenance and repair of communal areas such as lifts or staircases.
Commercial Property Regulations: Commercial property lets come with the huge responsibility of ensuring that the building complies with regulations. You need to consider everything to do with health and safety including disabled access, fire doors and fire extinguishers, emergency lighting and power, as well as maintenance of the building in general to ensure that no accidents happen.
Buying a commercial property is not something you should do lightly. You have to do your homework both in terms of finding a property in a good location with strong tenant demand and accessing the commercial mortgage finance you need to buy. Research is crucial to investment success.
More and more people understand the opportunities offered by commercial investment. Whilst large institutions and pension funds have been big players in commercial property in the last, it is possible to get a great commercial mortgage deal and profit from commercial property as an individual investor.
About the Author
Timothy Frodsham writes for http://JustCommercialMortgages.com the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.
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