While Australian’s are becoming more comfortable with the idea of having a stake in commercial buildings very few really understand the rules of investing in commercial real estate. According to international real estate investor Dolf de Roos, people make some huge and ultimately costly mistakes when they enter the commercial property investment game.
People need to understand the difference between residential and commercial real estate investing. Different rules apply and they must be followed if you want to be successful. Of all the extremely high-net-worth property investors I know, only two own predominantly residential properties. The rest all own commercial.
Here are eight rules that all good commercial property investors should consider:
1. Investing in commercial property is a totally different game
When you invest in residential property, you deal with people. With commercial property you deal with contracts. This requires a different level of advice and compliance in order to protect both you and the tenant. It requires that you become better educated. It requires that you have a good team of professionals around you. Your financiers and your legal team will be very important to your success.
2. Fall in love with the deal, not the property
One to the biggest mistakes investors make when they buy into an investment property (whether it’s commercial or residential) is that they fall in love with the property. When it comes to a commercial property, in most cases, the property is only as good as the tenant and the lease. Without a tenant, the property could be useless – or it could be an amazing opportunity. It all depends on your education and experience.
3. Look beyond what the current use of the property is
Know your market. What else could the property be used for? For example, could you pick up a warehouse with little structure and build offices. Is the area zoned for some residential and could you therefore redevelop the property and get a greater return. The rent you can get on a commercial terrace house in Sydney’s Paddington is likely to far outweigh what a residential tenant will pay to rent the same property.
4. Be counter-cyclical
Don’t do what everyone else does! The most successful property investors buy when everyone else is selling, and bide their time when everyone else is buying. Right now, many residential real estate investors are starting to look at commercial, that papers are hinting that while residential property prices are down, returns on commercial are likely to remain healthy – so if you want to get into the market, don’t wait until the market is flooded with newcomers.
5. Always try to buy with zero or little down
For years we have been told by our parents to “pay off your debt”. We have this natural inclination to want to get rid of our mortgages. Putting in a lot of cash does not make good investment sense. Educated investors know how to secure deals with little or no outlay.
6. Seldom Sell
In general people who sell their properties never do as well as people who just keep hanging on to them.
7. Always buy from a motivated seller
The more motivated (read desperate!) the seller, the better the deal will be. Often properties passed in at auction can be a good deal – especially if the owner desperately needs to move the property. Remember there are far fewer potential buyers for a commercial property compared to a residential one.
8. The Deal of the Decade comes along about once a week
If you believe that great deals do not really happen, then you will not see one even if you fall over it. The more good deals you see the more you believe they exist. But, you need to know what you’re looking for. You need to have access to finance, be able to accurately analyse the property and know what the market is doing.