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How To Break Into Commercial Property

Commercial property can be an easier investment than residential, says John Urlich of Barfoot & Thompson.

11 October 2021

JUNO Autumn 2020

Investing in commercial property isn’t complex. It’s just not well understood, says John Urlich, Commercial Manager of Barfoot & Thompson.

“I think the whole concept of ‘easy’ is something to consider,” he says. “Things we don’t know about tend to be more difficult.”

He believes if Kiwis put in some time and research, they’d soon have enough of an understanding of how it works to buy their first investment property.

Leases are different

So, it’s not hard, but it is different to residential property. The first difference is that you’ll need to understand a formal lease, Urlich says.

“A commercial lease differs from the Residential Tenancies Act. The responsibilities and roles of the tenant and the landlord are slightly different.

“However, the long-term nature of lease arrangements means that the landlord and tenant soon form a business relationship – and a good business relationship is key to the success of the investment.”

In residential investments, tenants are required only to keep the property clean and tidy, but commercial lessees go a lot further.

“Tenants take a lot more pride in their premises, maintaining and presenting them well,” he says.

“With a longer-term lease, you find that a tenant almost has a right to be in your property.

“All external maintenance is handled by the landlord, but most items in the interiors are handled by the tenant.”

That cuts down your maintenance costs: “You’re not having to repaint; you’re not having to put in new electrical points or suchlike.”

Tenants might also have to reinstate the building when they move out, but even that’s not always done.

“More often than not, tenants and landlords reach a compromise that serves the interests of both parties.

“For example, you wouldn’t want to see them take out a very expensive retail or hospitality fit-out elsewhere.”

A worry-free cashflow

Long-term leases are a bonus for a savvy investor, says Urlich.

“It’s a lot easier to account for your mortgage and your free cashflow. The longer the lease, the more worry-free the investment becomes.

“I find in general that a good business that’s operating in premises for a long time has a certain tendency to just get on with it, and the landlord just becomes secondary. 

“That’s the ideal investment profile, because less effort’s required from the investor.”

There are cheaper properties

Some high-rise office buildings sell for many millions of dollars, but you don’t need a lot of money to get started in commercial investing, says Urlich.

“It’s not unusual for us to find smaller unit titles for under half a million dollars.”

He suggests that new investors look at small industrial units, small retail units, and suburban offices as a start point.

“The relative yield on an investment like that is probably superior to the yields of a similar space in a residential setting. Typically, we see yields for units at the moment anywhere from 4 to 5.5 per cent.”

Yields are how commercial property investors work out the value of an investment. Yield is worked out by dividing rental return by your purchase price. 

Says Urlich: “Properties that might have cost you $900,000 to a million residentially may only cost you $400,000 commercially, so the relative return would be significantly better, as much as two percentage points.”

However, to fund commercial property, banks demand more of a deposit, says Urlich.

Managing a commercial property can be easier than a residential house.

“There is a specialist knowledge required, however, the nature of the lease is that basically most items around fair wear and tear in the interiors are handled by the tenant.

“Having a professional look after your property means rent reviews happen regularly. And it’s not uncommon that the management fees for commercial are lower than they are in residential – as low as 5 per cent for larger properties, compared to 7 per cent for residential.”

What to look out for

When you’re looking to buy properties, relative position within a location is probably more important than the actual suburb itself, says Urlich.

Consider exposure, car parking, security, and how close public transport is, how functional the property is, its layout and the yard.

For more information, see www.barfoot.co.nz/commercial

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