Should You Buy or Lease a Commercial Property?

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Should You Buy or Lease a Commercial Property?
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Have you ever wondered if it would be better to lease or buy a commercial property for your business, or have you thought about investing in Commercial Property? If the answer is yes, then you need read this article to make sure that you take the right steps and precautions in order to make sure that you make the right decision. Rent Or Buy a Commercial Property

Buying Commercial properties is a complex task, capable of baffling even the experts. It is for a fact that every once in a while the real estate market goes through a certain financial environment, which either causes the market to crash or grow. These financial environment are usually related to financial growth or crisis in the country.

It is the usual case of supply and demand, if conditions are right for a strong business economy, then there existing businesses will grow and new businesses will become established which leads to a shortage of commercial offices and property space. This leads to higher prices in the market place. If the economy goes through a financial crisis or slump, then businesses will struggle as clients reduce their spending and only the stronger businesses with the ability to change and evolve will stay in business. This leads to a surplus of commercial office and property spaces and therefore prices in the industry reduce.

Most of the time businesses ask the question as to whether they should sign a lease or buy a commercial property. The answer to this question is never easy and is very dependent on each businesses financial situation. While some business owners prefer to own their commercial property and can afford this purchase as an asset to the business, some business owners can’t afford the long term commitment of this type of purchase in an unstable market place. One good source would be the article written by Martin Farrer regarding 'Australia's Housing Bubble Ready to Burst'.

Some of the key questions to ask in relation to the financial environmental and whether you can afford this:

  1. Is Demand higher than supply?
  2. How high are the interest rates?
  3. What is the difference in payments between a lease and a loan?
  4. How old is the building and will it need maintenance?
  5. Do you predict that your company could outgrow the premises?

 

  1. Is Demand higher than supply?

    Do you notice more offices and commercial properties up for lease and sale than usual? Don’t include new office space which might have just been constructed and doesn’t have clients to move in yet. This will usually happen in the case of a slump in the countries financial position and will grow over time. Prices will decrease as more properties go on the market and clients to fill these spaces become harder for owners and agents.

    The purchase prices will be negotiable and will be at a lower price than usual as more people try to sell out. Just remember that if you expect a high income from current and future owners, in this type of market the leases also have the power and there is a chance of office space being free due to the decline of business. It is important to keep your current tenants in this market to keep income coming in.
     
  2. How high are the business interest rates?

    If the economy and inflation is declining, the federal bank will look at reducing interest rates to stimulate the economy by putting more money in people’s pockets through reduce interest rates and buy encouraging more people to purchase housing.

    The thing to watch out for is that banks may only pass on some of the interest rate drops as they also borrow money from outside of the country which may not have dropped, so they may only pass on a certain percentage of the drop. Also in extreme financial crisis the banks may tighten their lending conditions for business lending which makes it harder to borrow money for business and commercial property purchases.

    This can result in the ability to actually make a purchase of a commercial property for your business if you don’t have the cash flow available for the purchase.
     
  3. What is the difference in payments between a lease and a loan?

    Run a comparison between the cost per month of a lease on a commercial office or property of the same size as the one that you are looking to purchase. Compare this to the payments that you would need to be making to a bank if you were to borrow the money and add onto this figure any other expenses which you might need to pay which aren’t included in a usual lease.

    For example –
    Leasing Payment - $250 per week for a similar size including water and electricity
    Loan Repayments - $230 per week
    Amenities (water and electricity) - $30 per week
    Lease $250 – Loan $200– Amenities $30 = Difference of $10 per week extra for a loan
     
  4. How old is the building and will it need maintenance?

    When looking to purchase a commercial property, you need to take into consideration the age of the premises. All properties need ongoing maintenance and depending on the location of the property (i.e. coastal or inland) the age of the building, the older it gets the more maintenance it will need. This includes everything from electrical, plumbing, structural, security, etc…

    As the owner, this is your responsibility and a vital part of OHS for anyone leasing or working in the premises. Your will have to budget for extra expenses for this type of maintenance in your figures.
     
  5. Do you predict that your company could outgrow the premises?

    If the reason for purchasing this property was for the purpose of running your business in this premises and you are expecting to grow over the next 12-24 months, it is no use purchasing a factory or office which you will grow out of in the short to medium term or else you might have to sell your property in less than ideal circumstance.

    If you are unsure about potential growth, then a lease might be the best option as it offers the ability to move to larger premises if need be without committing to something for the long term.

    If you are new in the real estate industry, then before you decide to put your money in, you must understand and analyse the benefits and risks of investing in commercial properties.

 

6 Key Benefits of Investing in a Commercial Property

  1. If you plan on investing in commercial properties then you can create a substantial current income. Leasing your property provides a regular income stream which is significantly higher than stock yields.

    Stock Yields — A financial ratio that shows how much a company pays out in in dividends (a sum of money paid regularly by a company to its shareholders out of its profits) annually relative to the price of the share.
    = Annual Dividends per Share/Share Price
     
  2. When compared with residential properties, commercial properties provide a generous amount of tax benefits, which in some cases can be far more than residential properties. Commercial property is easily capable of competing with residential property and is considered a sound investment and most of the time the income return is a lot higher.
     
  3. Investing in commercial property carries fewer risks than investing in a residential property or in stocks.
     
  4. It is easy to add value to a commercial property. A few basic ways include enlarging, renovating, upgrading, improving the exteriors of the building and even by renegotiating the leases being paid by the tenants.
     
  5. Properties are usually considered as a good Hedge Against Inflation (to take certain steps to limit the reduction of the value of an investment due to inflation). As inflation usually decreases the value of money such that an investment’s return is not worth as much as it might have been during the time when the investment was being made. With actual long term surveys, it has been proved that commercial property has offered investors excellent returns.
     
  6. As you improve your commercial property and its value increases, you can then borrow against your commercial investments. When done correctly, monetizing this process many expert investors have quickly reached a position of owning and controlling several properties in a short amount of time.

4 Key Risks Involved with Commercial Property Investments and How to Minimize Them

  1. Commercial property investments are much higher(especially with large products such as Office buildings, factories, Hotels, Industrial warehouses, etc... ),therefore the financialrisk is a lot higher for the purchaser and can be termed as a disadvantage. This is especially the case for small – medium business owners who try to maximize their ROI. Therefore, it’s always a must to plan ahead and always think things through.
     
  2. Some people jump into this industry without the proper research. Lack of knowledge on your part can become a huge disadvantage. In this industry, amateurs or beginners are usually considered as a gold fish in a shark tank. A piece of good advice is to start with something small, and then as you gain more experience in the industry, you can start increasing your investment amount, but never rush.
     
  3. There is a huge personal risk involved with investing in Commercial properties as well, especially for people who are employed or small business owners. Before buying a property you must always make sure that you have proper financial backup. Always make sure that you have the right insurances and the ability to survive the case that your property becomes vacant for a longer period of time. That backup can also be used for emergencies as well, so before making an investment in properties you must have a cash reserves to cope in these situations.
     
  4. The next major risk is economical risk involved with investing in commercial property. This is something which is out of your control. It usually depends on how the Australian economy is performing. Without a good economy, it can be quite hard to find funds or buyer for your property. As mentioned above, although this is completely out of your control but you can always keep an eye on things, start reading reports and checking the market stats on a regular basis. If ignored it might hit you quite hard. A financial crises happened in Australia as well, way back in the 2008, you can read about it at 'How Australia Weathered The Global Financial Crisis While Europe Failed'. 

Once you have gone through the pros and cons of investing in commercial property and you have still decided to invest,then the next step would be to set up a team of experts who can advise you on questions related to the property. You will need a lawyer, an accountant, a mortgage broker and a commercial realtor.



Listed below are the tasks which your team of experts can perform in order to make sure that you end up with a good investment.

Lawyer – The purchase of a commercial property requires a detailed review of the contract terms, planning investigation and reviews of the property for any defects and the transfer of the deed of title. Even after buying the property if you plan on leasing it, you will require the services of a good lawyer to drawer up the leasing agreement.

An expert lawyer will be able to offer you advice in regards to the terms of the contract or any unnatural condition in the terms and will help you single out any issues related to the title and planning. They are also capable of negotiating appropriate amendments that ensure your interests are protected properly.

Accountant — before making any sort of investment, it is a must to contact your accountant and/or financial investors. It is always important to receive independent advice. Accountants help to manage your books even when you plan on leasing your property, and it’s always an important task to keep everything in order so that it becomes easier to review the tax documentation in the future.

Mortgage broker – when you get an experience mortgage brokers in your team, you will have a number of choices for financial institutions to choose from. There are many brokers who have access to over 20+ established and reputed lenders.

The mortgage broker will even be able to provide you with the best deal available to you while comparing the terms of interest and fees. One of the main advantages of going ahead with an experienced and well reputed mortgage broker is that your chances for loan increases significantly as they will try a number of institutions to help you gain approval from 1 of them..

Commercial Realtor – A good commercial Realtor will present various forms used in the property transaction and will help you construct an accurate property offer from their portfolio of properties to match your needs. The realtor will also help you negotiate with the property owner and some will even do the negotiations for you as well.

The main advantage of having a Realtor would be to assess the current market conditions, trends, the location of the property, etc... in order to find you the best possible property in your interest which could benefit you in the long run.
It’s always a must to go with someone who has been earning his living in the real estate industry for a long period of time. As the more experience they have, the more they’ll be able to keep intact with the current market conditions, which could be a huge benefit for you.

Deciding on the Right Commercial Property to Buy

Once you have your team ready the next step would be to start looking for the right type of commercial property to invest in. This is important n order to make sure that you minimize your risks as much as possible.
Three main aspects to consider are listed below:

  1. Location
  2. Condition of the property
  3. Accessibility

 

  1. Location
    No matter if you are into buying a business, a residential property or a commercial property, the location plays a vital role in all of them. The location of the property may vary a lot, depending on the type of property you wish to purchase.

    For example, if you wish to purchase a factory for sale, then you’ll be looking for a place which is somewhere in the outskirts of the town or industrial areas which have been allocated by the local council. Whereas when you decide to go with a Retail or a hotel for sale, they you would want someplace which has a good amount of foot traffic. When you consider buying an office space for sale or lease, you would try to look for an area where it offers easily accessible and is quite centrally located for your staff to travel to on a daily basis with lots of parking space.

    This is the reason why location always plays an important role when you decide to go ahead with purchasing a commercial property.
     
  2. Condition of the Commercial Property

    The condition of your property plays a significant role in decreasing or increasing its price. You should also identify how the property was used beforehand, which company used it and how many changes happened to the property during that period. Also make sure to know each and every physical aspect of the property before you decide to go ahead and purchase it. If there were any changes made to the property which is not approved or environmental friendly such as lead paint, unapproved extensions to the building, etc... then this can become a concern in the future.

    Also understand the limitations and uses for the commercial property. For example, if you wish to purchase a commercial property for your small business and office staff, then you would have to look for an office space, and if you are planning to become a manufacturer then you would have to go for a factory for sale., of in some cases you might need to look for a combination of factories with office space.
    If you have 10+ employees, then the next important thing while purchasing any type of commercial property would be to look for the parking space available. You need to make sure that your employees, clients, etc… have adequate parking access with ease. It can cause quite a bad first impression if your staff and potential clients find it hard to get a parking space or if they have to pay for parking to come and meet you.

    The other important point to keep in mind is to know if there are any limitations for modifying the interior and/or exterior. As mentioned above, changing or modifying the interior and exterior of the property can easily change its value as well.

    This is one of those options which should always be there at your disposal. In certain places due to zoning laws, the building may have limitations when it comes to altering the interior and exterior of the commercial property, so always make sure that you have all the rights to make any sort of alteration you desire in the near future.

    Another thing to look for is whether it is a possibility for expanding the property as well. Almost always entrepreneurs would want to expand their current business.
     
  3. Accessibility

    While purchasing a commercial property you have to make sure whether it is easy to find and accessible. Depending your requirements, there are certain things an investor should consider before buying a commercial property for sale. If you want to go ahead with a manufacturing business, then you may need access for heavy trucks to enter your premises, or in some rare occasions, access to wharf's and railway lines to transport your supplies and goods.

    If you decide to go with a retail or showroom type property then you may need a business location which is at the centre of the city, in a shopping centre or in busy areas like main streets or busy malls. . In order to make sure that your investment pays off, you should also look at how easy it is for people to access your property.

    Although ease of accessibility is required, sometimes investors forget to keep it in mind and even though they are not planning to use the location for themselves, they find it quite hard to find a tenant for their property. This may happen because the commercial property is too far away for the convenience of staff who may need to travel to the office on daily basis.

    Keeping the above factors in mind, will surely help you get the property which suits you the best. Although it can still be tricky to find the perfect commercial property for sale, you can always use the services of a commercial Realtor who can help you with multiple commercial properties located in your desired area.

    Of course there are always other factors to consider when making a decision on where and whether to Leasing or buying a Commercial Property, but this outlines most of the important information which you should considering these points.

    If you think of any other points, please feel free to comment on this post and we are happy to help you out.

Author Info Paul OBriennot found
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