Investors inevitably insist on buying commercial property with a high return and usually present their favourite argument that, if they can’t realise a good return, they may as well leave their money in the bank or invest offshore.
High returns inevitably go hand in hand with high risk and it is worth applying the following principles before jumping head first into a perceived high yield property.
- Property must be a long-term investment.
- Balance your risk and return when creating a commercial property portfolio.
- If you elect to fix the interest rate on your bond, it may be wise to only fix a portion of your bond with the bank. Leaving a portion of the bond amount variable allows you to take advantage of lower interest rate environments while having a relatively flexible repayment profile to pay in lump sums of surplus capital when available, as opposed to being tied into the fixed payment profile.
- A good commercial property investment will inevitably appreciate over time while inflation decreases the value of your money. This is why your investment should work if you buy wisely.
- Once you have a property asset that has built up equity, you can gear it up and raise equity to use on purchasing another property and growing your portfolio.
- If you are asked to sign personal suretyships, make sure you understand them and why you might be signing them. Personal sureties are generally asked for when loan to values exceed the 70% mark, and there is more perceived risk in the transaction, so banks take personal suretyships to de-risk the transaction to some extent. On the other hand, banks can take personal suretyships as a sign of confidence in a transaction, they should have no intention of ever calling up the suretyships but having some personal risk on the line tends to focus individuals on the task at hand to make the property work and pay the bond off. If a bank enters a transaction with an intent or a chance of having to call up a personal suretyship, the bank should not be lending the money in the first place.
- Annual expenses, depending on the quality of the premises, should vary between 15% and 30% of the annual rental income depending on the type of property.
- Make sure your capital investment is safe by:
Buying in an established commercial node with a supportive municipal infrastructure
Examining the audited financials when buying into a Sectional Title scheme and request a C.V. of the managing agent. Beware of complexes run by inexperienced owners.
Insuring your premises against all possible risks including loss of income in the event of the property being untenable for a period
Implementing an on-going maintenance programme
Investigating current and future electricity and water supply resources
Finding out what telecommunications/internet facilities are available, particularly in new developments.
Being informed on zoning restrictions, building restrictions, parking bay allocations, future commercial planning initiatives by local and national government and any possible servitudes over the property
Monitoring residential growth in the area.
Qualify your tenant against the length of lease as the value of your property is determined by the quality of your tenant and the strength of the lease
Upgrade your premises. This will keep your tenants happy and reduce the risk of tenants moving, and if they do at least the premises will be attractive to new prospective tenants.
Is the broker qualified to give professional advice on the commercial market?
Does your broker have a Fidelity Fund Certificate?