It’s a common misconception that a lot of capital is required to be able to invest in commercial premises and that it’s only for large-scale investors. Naturally, the larger the building the more expensive it will be, but there are many smaller retail and office properties that can cost no more to buy than residential property.
Investing in commercial property has its ups and downs, like every market does, but with the possibility of securing a ten year or more lease, when you’ve got the right tenant and management team in place, it can be a fairly straightforward and long-term relationship that benefits both parties. Before you become a commercial landlord, there are a few things you should know. This article will help you decide if it is the right path for you.
What is commercial property?
Commercial property can be defined as buildings that are used for business activities rather than a living space. They can include shops, offices, hotels, warehouses, and more. With that in mind, a commercial landlord is a business owner with an obligation to maximise rental income from a building and is responsible for safeguarding its value for tenants and for future sale.
What do you need to know about being a commercial landlord?
Where you’re looking to buy your property will be a key part of your success as a commercial landlord. This starts with the cost of commercial premises in various areas. For example, buildings in the heart of London will be more expensive than commercial property in Newcastle.
Commercial landlords traditionally opt for premises in high-foot traffic areas. If you want tenants with shops, cafes, or bars, then a city centre or busy high street is ideal.
However, keep in mind that there are a growing number of commercial tenants whose businesses are mostly conducted online, and they might prefer to be outside of the main hustle and bustle. This is because they will typically get more space for their money, which is especially advantageous if their business needs storage, e.g., events companies.
Commercial property is an appealing option for those looking for a long-term investment. It’s especially popular with people who already have an investment portfolio and are looking to spread their risk. If all your money is sitting in one place and the market experiences a decline, you could quickly find yourself in financial trouble.
However, if you invest a wide range of assets such as commercial premises, annuities, shares, and residential property, it can put you in a more secure financial position overall. Let’s explore the key benefits of becoming a commercial landlord below:
It can provide a consistent, long-term income
This is likely the main reason people decide to get into commercial investment. For many property landlords, the most desirable tenant is one that will look after the property and stay there for a long period of time, paying good market rent.
Commercial leases are often longer than residential ones too, being contracted for at least 3 years and normally lasting around 10 to 15. Also, given that termination of the lease is pretty much up to the tenant after the fixed term expires, as long as they’re still happy with the building, a commercial investment could give you a steady stream of income for decades.
Returns can be higher than other investments
The yield on commercial rental properties tends to be higher than for their residential counterparts, remaining relatively stable at roughly 5% since 2015. Additionally, when compared to other assets classes, overall returns are high as well.
Between 2000 and 2018, commercial property returned 308% compared to the FTSE 100 with 209%, according to research from the CEBR. Unlike in residential tenancy agreements, commercial leases normally specify that rent can only be altered upwards. So, even if market prices fall, you aren’t required to lower how much rent you charge.
It’s fairly low risk
Generally, the biggest risk to residential landlords is having void periods, when a property is empty with no income being generated. With an estimated commercial lease length of about seven years, void periods are not too much of a concern day-to-day. If you’re able to let a building to two or more tenants, that lowers the risk even more, as you’re much less likely to have a fully vacant building at any given time.
Your returns are also safer in commercial property than they are with other investments such as shares. This is because rental income is guaranteed at a set level for a long period of time, with the risk of the tenant defaulting on payments being significantly lower than in residential tenancies.
In terms of the drawbacks of being a commercial landlord, they are the same as with all types of property investment:
- You need to be ready to hold for the long term in order to see good capital growth.
- You’re tying up your money in the property, so you can’t strictly get capital out if you suddenly want or need to.
- There could be a market crash or an oversupply of your type of premises, leading to a decrease in value and/or lengthy void periods.
- It will need ongoing financial input for maintenance and repairs.
- Unless you’re an experienced property professional yourself, you will likely need to pay the ongoing cost of property management.
However, most of these factors can be overcome by seeking expert advice from the team at Toomey Legal and planning, buying, and managing the let in the correct way.
The specific responsibilities of each party will typically vary from one lease agreement to another, so it’s essential that you thoroughly check the terms of the lease and ensure you understand what you’re committing to before you sign. As a widely accepted rule, the landlord is responsible for the external and common elements of the premises, as defined in the lease, including any fixtures and fittings:
- General maintenance and upkeep
- Completing repairs when needed
- Gas safety- including making sure there is a yearly inspection, that the Gas Safety Certificate is obtained, and a copy of it is given to the tenant
- Electrical safety- a registered electrical safety engineer should inspect the commercial building every five years and the landlord should get an Electrical Condition Report (EICR)
- Energy Performance Certificate (EPC rating)- commercial landlords aren’t legally allowed to rent out buildings with a rating below E, or they could incur a £4,000 fine. By 2023, they won’t be able to continue renting out properties with a rating of F or G if it’s on an existing lease
- Fire safety- such as fitting, checking, and maintaining equipment (fire alarm system, extinguishers, etc)
- Other common health and safety requirements in the communal areas including temperature, ventilation, lighting, and water supply (this includes making legionella checks)
Commercial landlords should also take appropriate steps to ensure their tenant complies with their health and safety responsibilities in the building.
Overall, the benefits of becoming a commercial landlord largely outweigh the risks, as long as you’re prepared to be responsible and available as a landlord. Of course, there is a lot more intricacies involved in being the landlord of a commercial property, which you can learn about when you’re ready to take the next step.