A lot of people consider that Commercial property investment is too complicated and sophisticated for us normal folks and stick to Residential investment. Others believe all they can do is invest in a shop unit on a local high street. We have done that too, but of course commercial property investing can be so much more. There are many different commercial investment options hidden in plain sight.
Have you just sold your business or inherited a lump sum and want to find a secure home for your money?
Are you stuck in the mindset that a commercial investment is perhaps a town centre shop or fast food outlet let out on a full insuring and repairing 15-20 year lease? In this mainstream strategy yield rates can be low and there is a limited amount of value add that you can do to improve the value of the property.
It does of course come back to what is your ultimate objective then you can develop your strategy to get there. Commercial property investment does not have to be in the later stages of your investment plan. I used to think Commercial was a buy and hold strategy, locking in a yield and effectively an interest rate on your money invested. However a hidden and overlooked commercial strategy can be to build your portfolio value through the creative process, therefore increasing your equity levels so you can leverage further purchases without stretching your loan to value (LTV) level. This has been our main strategy for years.
Different types of commercial property investment to consider:
The list of commercial property uses is huge and each has its own unique set of challenges and opportunities. Some investors specialise in a very specific niche whilst others will have a broader approach. I have met investors who have had amazing success by focusing on just one of these niches or through a wider investment mix. It can work both ways.
- Offices, coworking, studios, start-up space.
- Industrial units, workshops.
- Individual retail shops and high street units, Shopping arcades.
- Multilet properties, business centres, business parks
- Leisure including restaurants, fast food outlets, hotels and gyms.
- Recording & rehearsal studios.
- Warehousing, storage, container storage, parking & transport hubs.
- Park Homes & holiday lets.
- Care homes.
- Show rooms & trade counters.
I know I have missed many off the list, but isn’t it amazing how many different types of commercial space there are and that we can all invest in. You don’t have to be a hotelier to own a hotel or know your dumb bell from your bench press to own the building in which a gym operates.
partnering with someone who has the time and experience could allow you to access higher returns
What Investment Strategy is going to suit you?
Having realised there are many different types of commercial property with different types of customers and potential returns it is important to choose an investment strategy that is going to suit you. Here are a couple of scenarios from different ends of the financial spectrum:
Scenario 1: Large pot of Money: seeking secure investment return
In one scenario you could have a large pot of money from which you want a guaranteed return with as little time involvement as possible. So you may choose to invest in income producing assets that will provide you with a steady reoccurring income with a high level of security / safety. A city centre unit with a blue chip occupant would give you a reasonable level of certainty but it will come at a cost. The more “secure” the tenant and income the lower the yield rate. Some city centre units have a return from as little as 3-4%, which makes them expensive. Having said that, depending on where you are in your investment career this could be exactly what suits your strategy for passive income.
Scenario 2 – Little money: seeking to grow the pot.
In the other extreme you may not have much money and you want to use Commercial property to build up your own pot. I would certainly have put myself in this category. Investing in challenging commercial property that can be developed into a different offering can significantly increase the size of your investment pot. This is definitely an active form of investing and not for those who wish to park and hold. The rewards can be significant for those who are willing to stretch and work out new strategies for different space uses.
In reality it is not that black and white, most investments require some time input and a degree of risk management. Neither method is right or wrong, it all depends on what you are trying to achieve. The key thing is to identify your objectives and to develop an investment criteria to help you attain your objectives. Once you have identified the key characteristics of your investment criteria it is far easier to assess each opportunity.
Don’t forget, if you have just sold your business or inherited a lump sum and want to find a secure home for your money, then investing in blue chip commercial assets is definitely a possibility. Alternatively partnering with someone who has the time and investment experience could allow you to access higher returns with the comfort that your partner has the time and skills to de-risk some of the higher returning investments.
More about setting your investment criteria in the next blog.