Some investors say that investing in commercial real estate is not for the faint of heart. The reason is that, while income and equity potential is much larger than those in residential properties, the risks are also greater.
“If you [choose to] take the plunge into investing in commercial properties, do so with longevity in sight,” says Tamara Wrigley (pictured), media personality and property investor, who has a portfolio of more than 40 properties. “Buying commercial properties is like giving birth to a child – you have to take care of and look after it for many, many years to come.”
Wrigley entered the property market at the age of 19 and focused on building and investing in residential properties. It wasn’t until 15 years ago when she started to “dab her toe” in commercial real estate.
“There are a lot more pros when it comes to commercial properties,” she says. “This includes stronger returns, which is a combination of capital gain and income, and stability of income because your tenants sign longer leases.”
Wrigley also says that investing in commercial real estate has greater tax benefits.
“We live in a highly taxed country, and as an investor I look for ventures that have great tax benefits. Commercial properties provide just that with generous benefits and substantial depreciation allowances.”
However, Wrigley admits investing in commercial real estate has some drawbacks.
“One of the disadvantages… is that it can take months and months – and in some economic climates, years – to sell or lease, unlike our residential friend that can be snapped up within days or weeks of being listed for sale,” she says.
It’s a team effort
Many first-time property investors may not have sufficient knowledge and experience to seamlessly navigate the commercial real estate landscape. Wrigley says this is where having a solid support crew becomes crucial.
“Knowledge is power in any industry and, unfortunately, there is very little information or resources for people interested in commercial real estate,” she says “This is where you need to have a good team of people behind you to guide you in the right direction.”
Wrigley lists the four people who play important roles in helping investors build a successful commercial property portfolio.
Solicitor: They not only recognise the numbers but, more importantly, help in understanding any leases or legal issues.
Accountant: They crunch the numbers and help with the appropriate purchasing entity and tax planning.
Financial advisor: They help set financial goals and keep investors focused on those goals.
Finance broker: They are essential in finding the best funding opportunity for each purchase. Wrigley advises to “never go directly to a banking institution as they limit your financial choices.”
Practical tips for commercial real estate investors
With the team set, Wrigley says these six pointers can help guide investors in securing their first commercial property.
Practice due diligence
As with any type of investment, Wrigley emphasises the importance of learning about the industry before dashing in head-on.
“I said it before, knowledge is power, and understanding the commercial property market is going to be the key to your success,” she says.
Buy in a good location
Location can often spell the difference between yield and loss in property investments. Wrigley’s advice is to “look into high growth areas with good exposure and potential to add value.”
She lists parking availability and accessibility to public transport as among the biggest factors to consider when buying a commercial real estate.
Purchase a leased property
The coronavirus pandemic has resulted in a lot of volatility in the property sector. Wrigley says buying a leased property can help add some form of stability.
“In this current climate, there are a lot of businesses that have suffered the COVID-19 blues,” she says. “To mitigate your loss, look at purchasing a property where a tenant is already in place and is on a long-term lease agreement.”
Purchase with potential
A keen eye for potential is a must for every property investor and Wrigley suggests to always be on the lookout for “underdeveloped and undercapitalised properties.”
“Older buildings may not be using all the land, which means you could expand,” she says. “Also, check the zoning of the land as it may allow you to increase the opportunities of that space.”
Pay it off
“Paying down the debt against the building should be factored into your financial strategy,” Wrigley says. “The faster you pay it off, the more money goes in your pocket and the more equity you have in case you want to buy more in the future.”
Learning never stops
If one wants to be successful in the commercial property market, the learning must never stop.
Wrigley’s advice is to “keep educating yourself and keep asking loads of questions” because when done correctly, commercial property investments can be “extremely rewarding.”
“To me, property is king – and done right, you can retire and live off the rental returns for the rest of your life,” she says. “It’s a bit like that spray you put on your outdoor tiles – set and forget. That, to me, is commercial [property investment] – set it up and then you can forget about it (to a degree) and enjoy the rewards of living a positive cash flow life.”