Make no mistake, buying commercial property is an investment. This means that buyers should seek to generate a return on the money spent on commercial property purchase, either through utilising the property for business purposes or by making improvements to the building itself. This post examines whether one of the options for increasing the value of a commercial property is to rent it out to a commercial tenant.
How to value a commercial property
In most cases, commercial properties have a higher value than residential ones for a number of reasons. Although valuing commercial property requires considering multiple factors. These can include:
- The income expected to be generated from the purchase.
- How long it will take to pay off the total cost of the property through rent payments.
- The approximate cost to build.
- Comparing similar recent property sales.
- Size of the property and its condition.
- Any contents that are included in the purchase.
- The location (supply chain, customers etc).
It can often be difficult to gather all the information necessary to accurately gauge the value of a commercial property. Although enlisting the help of experienced commercial property solicitor will help you make well informed purchasing decisions. Find our complete thoughts on ‘How to increase the value of your commercial property’.
How tenancy impacts on commercial property value
As mentioned, there are many factors in the conveyancing process and beyond which can influence commercial property value. Tenancy has the following effects:
- Regular income: One of the most significant advantages of having a tenant is receiving rental income. A property with a long-term, reliable tenant is usually more attractive to investors as it represents steady cash flow. The property can therefore be seen as a lower-risk investment, which often translates to a higher market value.
- Long term lease: Commercial property leases are typically long term (5-10 years commonly), meaning the rental income is all but guaranteed for that length of time. This offers stability for landlords.
- Less hassle: Prospective buyers often prefer properties with tenants because it saves them the hassle of finding and vetting new tenants. This increased demand can drive up the property’s value.
- Greater financing opportunities: Properties that demonstrate a stable income are often more appealing to lenders due to the perceived lack of risk. Buyers may then be willing to pay more because they can obtain funding more easily.
Considerations for buyers and sellers
If you are a commercial landlord that’s looking to buy or sell a property, there are some important considerations to be aware of in each case. For buyers this includes:
- Due diligence: thorough due diligence is essential regarding the tenant’s lease terms, business prospects, financial situation, and more. ‘Due diligence checklist for buying commercial property’.
- Check market conditions: much of the value of a property is due to the demand for that type of property. As such, buyers should consider what type of business activities can be completed in the property and the scope of alterations that can be made.
- Review the lease terms: it’s important you understand all the terms in the lease, including the responsibilities of both parties and its duration.
Those selling tenanted commercial property should be mindful of:
- Negotiating the lease: take the time to check over the terms of the lease and negotiate for favourable terms for selling.
- Getting an accurate valuation: many commercial property sales are used to generate cash to invest in the business or other property. As such, getting a professional valuation from an experienced conveyancer helps demonstrate the value added by the tenant.
Experts in commercial property transactions
There are many ways to capitalise on the purchase or sale of a commercial property. With the help of Toomey Legal, you’ll have all the knowledge necessary to choose a commercial investment that will bring stable income and low risk. We can then help you draw up a commercial lease property for your chosen tenant. Get in touch if you have any questions. We’ll support you throughout the entire commercial conveyancing process.