If you want to play it safe and follow the portfolio crowd with your commercial property purchase there are plenty of ways to toe the line. Long lease contracts, trusted tenants and a low maintenance property will see you secure a good low-risk investment. However, savvy investors understand that the safe purchase isn’t going to lead to explosive income. What you see is what you get with these calculated buys, so yes, while the results are predictable, they are also pretty much limited to that estimation, and you are going to have to pay upfront for the security they bring.
There is a less traveled path for those who know where (and how) to look to find the little commercial gems hidden in the rough. These properties may be uncut, underappreciated and require that little bit of polish and trust to uncover; however, they have the capacity to unlock higher than average income, that will probably cost you less as well.
When it comes to determining the upside potential of commercial property you need to be ready and willing to put in some serious problem solving, risk management, and market research. It’s more work for sure, but getting it right gives you the edge over the rest of the market and secures you a property with significant growth potential.
So where do you look for the overlooked investment opportunity?
The most important factor, before anything else is to have a solid understanding of the commercial property market. Lack of market research is the one area where new investors typically fall down. You need to understand what a commercial property is worth, as well as, what it can achieve through careful analysis of the local market, current market cycle, potential risks, as well as, the relevant sub-market fundamentals.
There are added layers as well with commercial properties as you need to understand all the ins and outs of how leasing works. With a low-risk investment, you can simply buy and forget, and have that income trickle in. With a high gain investment, you have to do the research and know what you are looking at before you even contemplate a sale or you risk buying the wrong property or buying into issues that can’t be repaired.
2. The property makeover
The next step is buying a property that has a curable flaw. Cautious investors won’t look twice at a property that has a problem. This is where your creative problem-solving ability comes into play. By being able to analyse the issue and fully understand all the facets of it, can you find viable ways to overcome the problem and get the property working in your favour?
Fixes might include renovations, rezoning or re-development to extend or elevate the property use.
Not every problem has a fix so before you commit to a purchase you need to draw a clear line in the sand of how much time and money you are able to invest, which is why your market knowledge is so important. You can find an amazing rundown commercial space and fix it up new, however, there needs to be a demand for the space you make in order for that investment to pay off.
3. Market value
A flawed property will most likely come in below market value. This can show up in two ways, firstly in the selling price, but also too if the leasing agreement is lower than potential. While this can make the investment all the more tantalising you need to make sure the costs come out in your favour. Once you have identified a property it’s time to get real with numbers and determine what your property will be used for when it is completed and what the new income numbers will look like. Get accurate quotes for the repair work, and be realistic about costs. Cutting corners on design and materials can have significant long-term consequences so consider the bigger picture when you are calculating your outlay.
4. Is your fix viable?
Before you go ahead with a sale make sure you are able to do everything you have planned, which includes council permits, regulation, and zoning green lights, and as little red tape as possible.
5. Work with an expert
Going it alone may be a cheaper option, but it also comes with a higher risk. Eventually, you are going to have to bring experts on board to make the sale and do the rebuild so bite the bullet and get a trusted, experienced team together as early as possible.
Your conveyancer is one of the experts you want to be talking to early on in the planning phase. They can help make sure you have all the legal backing you need on the property and may be able to negotiate a lower price on your sales contract. As well as a commercial property conveyancer you need to be seeking advice from property experts and successful investors. The right team can help point out trouble spots and ask the tough questions on issues you’ve missed.
No property purchase is ever a sure thing, even those listed as low risk can come undone. At the end of the day, you simply have to trust that your research will pay off. As with any business, the quickest way to learn is to get your feet wet and start swimming. As daunting as this method seems, it is the most effective way to learn the ropes. In time your experience will be your best asset, so if you are serious about having an investment portfolio, the sooner you get in and get started the better.