What should you know before investing in commercial property?

Commercial property is a popular option for many investors because it has the potential to offer healthy capital growth, consistent monthly income, and more security than investing in stocks and shares. One of the biggest benefits of commercial property investment in the UK compared to the likes of the US and EU is that the leases are longer, and they are longer than leases on UK residential properties. 

The typical lease length for an office is around eight years, meaning the landlord is getting a fairly stable income for a long period of time. The property market has begun to favour commercial investment over residential buy-to-let recently due to changes in tax laws that have hurt landlords. 

What do you need to consider before investing in commercial property? 

Investing in commercial property can turn out to be very lucrative, but it’s not something that you should jump head first into, as any commercial property solicitors in Consett will tell you. Let’s look at some of the key factors you need to think about before committing to a commercial property investment. 

Short or long-term investment? 

Before you invest in commercial property you need to think about your timescale, and ask yourself the following questions: 

  • Are you happy to wait for the right opportunity and watch the market for a property that will maximise your return on investment? 
  • Do you already have an idea of what you’re looking for, the location, and how you plan to finance the investment? 
  • Are you in a position to invest straight away because you’ve already found an opportunity? 
  • Do you want to see an immediate return on your investment? 

What type of property do you want?

Your knowledge and personal experience will be a driving force the type of commercial property you go for. Perhaps you’ve renovated an office or shop before? Maybe you have experience in a specific industry or location, so you know what type of buildings these companies prefer to rent. For example, commercial property in Cramlington. Have you found a gap in the market for a specific type of property? 

You may have found a great opportunity like a new office block development in bustling town with good transport links, or an industrial unit on the outskirts that’s affordable and can be handled by a management company. It’s always worth keeping your ear to the ground for regeneration projects involving new office space or warehouse developments in cities and towns that draw in large companies or are popular for start-up businesses. 

Do you want to lease or buy? 

When you buy a commercial property, you become the owner it once you have paid off any loans. Leasing means you rent the property from an owner on whether it’s just for a short time or an extended period. If you think you might want to buy the property in the future, you could take out a lease-to-own plan. 

Purchasing a property has several advantages, such as:  
  • There is potential for the property to increase in value over time, which could lead to a profit.  
  • The equity in the property can be used as collateral for business financing if needed.  
  • The property can be rented out to tenants. 
  • There are tax benefits to owning a commercial property you can take advantage of. 
  • If you want to alter the space, you have more control and a say in doing so than if you were leasing. 
The drawbacks of buying a commercial property are: 
  • The purchase price will likely be high, so you will need to make a large down-payment at the start. 
  • A commitment to mortgage repayments, think about how you will make repayments if the property is vacant. 
  • The money you invest in the property will be tied up in the building itself and any structural repairs or maintenance costs will be your responsibility. 
The benefits of commercial leases are: 
  • Reduced maintenance costs, you won’t be responsible for structural maintenance, but it will be down to you to maintain the rest of the property. 
  • Your money won’t be tied up in the building so you can use it for other business needs. 
  • You can deduct your entire lease payment from your taxes 
  • There is more flexibility to relocate your business if you are leasing than if you own the property. With leasing, you will normally be able to agree on the length of the lease with the landlord or have a clause in the lease that allows you to break the lease. 
The drawbacks of leasing include: 
  • Due to the cost of the rent and the landlord’s service fee, total rent payments may have been higher than mortgage repayments would have been. 
  • You will be liable to pay rent for the full term of your lease agreement even if you don’t use the property for the entire time. 
  • You will not profit from any of the long-term capital appreciation as you would if you had bought the property. 

What you decide when it comes to buying or leasing a property will depend on your knowledge, experience, and circumstances. It is always best to seek professional advice from commercial conveyancing solicitors to discuss your options and find the best one for you. 

Where do you want to invest? 

You may invest in a commercial property in a certain location because it’s close to where you live or work, or it is the hub of a familiar type of business to you, meaning you can calculate the likely success of your investment. If you want a modest, short-term investment, you might want to look for commercial property in an area with a lower cost of living to get a more affordable price. Location is essential to a lucrative investment. 

What are the options for funding your investment?

You don’t need to be rich to invest in commercial property, and there are multiple financing options available to help you. Below are just a few examples.  

Direct investment 

You purchase the whole property or a share in it. 

Direct or ‘bricks-and-mortar’ fund 

This funding allows small investors to access commercial property. Investment is done via a collective scheme like an Oeic, an investment trust, or a unit trust. The trust invests in several commercial buildings to spread the risk across various property types and locations. 

Seek legal advice today

When making decisions on commercial property investment, there are a number of factors to weigh up on top of the tax implications to consider. Commercial conveyancing is highly complex, so it is best to get legal advice from professional commercial conveyancing solicitors, like Toomey Legal, early on. We’ll take the time to learn about your company and customise our service to fit your individual needs and business requirements. Contact us today to find out more.