Conducting a commercial property health check can deliver dividends

Assessing the health of your commercial property isn’t just a one-off task; it’s an ongoing process.

Health check
Performing a health check on your commercial property can lower the blood pressure. (Image source: Shutterstock.com)

Investing in commercial property can be lucrative, but it requires constant vigilance to ensure your investment remains profitable.

With high interest rates, shifting economic conditions, and increasing debt levels, now is the perfect time to assess the health of your commercial property and take steps to safeguard your returns.

Assessing cash flow

One of the first aspects to evaluate is cash flow. Calculating the net rental yield gives you a clear picture of whether your property is generating enough income to justify its costs.

Start by deducting expenses such as maintenance, insurance, and management fees from your total rental income, and then divide the result by your property’s purchase price.

This figure helps determine your cash flow’s strength. Be cautious, though; agents often omit critical costs like land tax and basic outgoings. A complete understanding of your property’s true net income is crucial for accurate valuation and decision-making.

Capital growth versus rental yield

Beyond cash flow, it’s important to consider what’s driving your wealth creation. Are you relying on capital growth, rental yield, or a combination of both?

While capital growth can boost long-term value, rental yield ensures consistent income. Striking the right balance depends on your financial goals and the specific characteristics of your property.

Market performance

Next, compare your property’s performance against the broader market.

While properties in high-demand locations are generally more secure, individual property features often play a more significant role.

For instance, a well-maintained office with a premium fit-out and exceptional views can attract tenants even in areas with high vacancy rates. This highlights the importance of choosing a property with unique attributes that mitigate vacancy risks.

Maximising tax benefits

Tax benefits are another area worth exploring.

Commercial properties offer a range of deductions, from depreciation to interest expenses. Many investors fail to fully capitalise on these opportunities. A property-savvy accountant can help to identify deductions you might have overlooked and enhance your property’s profitability.

Interest rate impacts

Interest rates are a growing concern for investors, as they directly impact profitability. If rising rates are eating into your returns, reevaluate your debt coverage ratio (DCR).

A DCR above 1.25 indicates that your property generates sufficient income to cover loan repayments, reducing financial stress. If your DCR is slipping, consider refinancing or exploring cost-saving strategies to regain stability.

Upgrading your investment

Sometimes, upgrading your property can breathe new life into your investment. Renovations can improve tenant appeal and rental income, but reinvesting in innovative solutions can also yield significant benefits.

For example, commercial property owners can generate additional income by leasing unused rooftops for solar installations. This approach not only diversifies your income but also supports the transition to green energy.

Diversifying your portfolio

As we move into a new year, diversification is another strategy to consider.

Many investors are now prioritising higher cash-flow investments, a trend driven by economic uncertainty and rising interest rates.

Expanding into commercial property can hedge against risks and provide a steady income stream.

Evaluating tenant quality and lease terms

The quality of your tenants and lease terms plays a pivotal role in your property’s health. Long-term agreements with reputable tenants offer stability and reduce vacancy risks. Performing due diligence on tenants, especially in niche industries like childcare, can provide insights into their financial stability and success.

This reduces the likelihood of unexpected vacancies and ensures consistent cash flow.

Seek professional advice

To ensure your property remains profitable, enlist the expertise of professionals such as accountants, property managers and commercial lawyers.

Their insights can uncover risks and opportunities you might not have considered.

Be wary of relying solely on sales agents, whose primary role is to represent vendors. Instead, seek objective advice from independent experts to make informed decisions.

Assessing the health of your commercial property isn’t just a one-off task; it’s an ongoing process.

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