The five major mistakes new commercial property investors make
Helen Tarrant at Unikorn Commercial Property shares potentially investment-saving tips on how to avoid five of the most common - and costly - pitfalls associated with commercial property investment.
Every morning I wake up and see another agency post some more deals that they have done for their clients, and the yields all seem to be so seemingly good that investors are flocking to those posts and wanting the same deals.
The truth of what they do not tell is behind that glossy post prose, but there is much to unveil about what is not shown in those posts.
Below are the five major mistakes that I see investors make in commercial property repeatedly.
1. Misleading yields
Yields are cash returns on the commercial property you purchase and they define your cashflow.
Most investors get this wrong because the question is never asked, what is the cap rate (benchmark rate) for that particular property? Instead what is asked is, what is the cap rate for the market?
This is where other agents can really pull the wool over your eyes by saying the general yields are 5 or 6 per cent and subsequently show you non-related properties as supporting evidence, so buyer beware.
2. Tenancy transitions
You may have secured a multi-tenanted property but some are likely on expiring leases within the next 12 to 24 months.
You may think you have done well by securing an above-market yield but in reality, when factoring in any tenant incentives, the leasing and marketing fees for a new tenant plus allowing for the vacancy rate, your yield is possibly lower than the cap rate in that market.
Again, this is something an inexperienced buyer will not notice and an agent can really exploit or at least conveniently gloss over.
3. Capital costs
These expenses are often dismissed by agents and buyers agents who just need the sale.
Capital costs, such as replacing a roof or air conditioning units, can wipe out your cash flow on a property for the first two years.
A residential buyer investing in commercial property for the first time is unlikely to have any idea how much it costs to replace a commercial roof or air con as opposed to a residential one. This is where it again can be glossed over, and after settlement, the issues emerge.
4. Troublesome tenants
Agents invariably showcase how wonderful the tenants are, but not all tenants are alike.
I’ve seen many tenants who are in premises that do not match their needs and/or are not bonded to their business premises because they are not invested in fit out or bond or long-term leases.
The mindset of a lot of ordinary residential investors is that you just go out and get another commercial tenant.
In reality, you need to do thorough due diligence on not only the tenant but who else would occupy that space should your tenant move out. Making sure you have a backup plan if your current tenants move out is essential in avoiding long periods without rental income.
5. Blindly following market trends
Too many investors follow market trends, simply want to do is buying the industrial warehouse that is the most popular at any given moment.
That may be the worst investment, as the yields on industrial are shrinking.
This is where education and investing a little bit more time on strategy and big picture really helps.
Unfortunately most buyers agents out there are order taking rather than doing strategy with their clients and making a blueprint for financial freedom. Property investment is a long term play and you should always start with the big picture in mind regardless of whether it is your first or tenth purchase.
With all of the above said, there are still good deals out there but you need to seek the guidance of a professional team who can help to guide and mentor you through the process.
