Commercial Investing Series: A Look at Tennanted Commerical Property For New Investors
Tenanted commercial property is a great option for your first-time commercial property purchase. Unlike the untenanted or new commercial properties, as the name suggests, this one comes with tenants (and their rents) that are already in place. This means that you don’t have to spend time or resources finding tenants and marketing the property for lease. A tenanted investment property comes in various forms. You can find it in retail space, office space, warehouse space, and much more. As long as there are tenants in place, you can make it work for your portfolio. As a new investor, there are some advantages to investing in a tenanted property - either residential or commercial - but like with any investment in property, there are always questions to ask before you decide.
In the article below we’ll go through some of the practical considerations for buying a tenanted property.
What you need to know when buying a commercial property with existing tenants
Commercial property investing has changed a lot in the last couple of years and after covid. While there is still a place for the traditional buy-to-rent model common in residential property investing, alternate strategies are becoming popular.
Investors are looking at commercial property and tenanted investment properties as they find that they can get significantly better returns than this type of property as their numbers (rents, tenants, volumes) are typically larger in the commercial field.
There are relatively simple buy-to-rent residential models - to which we can assume some level of familiarity from anyone in the property investment market. That process is a to one relationship between a lessor and lessee.
When you move to commercial property, things get more complex, as the parameters change. Even if you stick to residential property we increase the number of tenants and the complexity level changes.
Then factor in other types of property you might want to look at, from mixed-use to industrial to retail and you have a significant increase in the amount of complexity.
But with that increase in complexity comes the opportunity for greater rewards.
What to consider when buying a commercial property with existing tenants?
Buying a building that is leased to tenants (either residential, mix-use or commercial) can be a good option for those who are looking at investing in commercial property but are not interested in changing, modifying, or refurbishing properties from the current purpose to fit potential use (e.g. converting a commercial use property to residential or retail to foodservice) But there are some things to consider if you want to make sure that your investment will last long-term.
Tenanted commercial properties attract investors because they offer them the ability to maintain a current level of return based on the existing tenants, lease(s), and the history of the use and occupancy of the building.
One of the best things about investing in tenanted properties is that you can usually rely on these investments continuing to generate rental income, which is not the case with unoccupied commercial property investments.
That means you are buying the track record of the property, renters, and the business they run there, and with that, you can make an assessment of the future returns, the viability of the property, and what you might be able to do with those.
But you also take on the complexity, history, and agreements that come with the property from the service contract, body corporate, and of course, leases.
Issues to consider when a property is multi-tenanted
A multi-tenanted property can be a great investment for landlords, but there are also some potential issues involved with this type of property. These issues will vary depending on the nature of the tenant, their commitments towards the building, and any other specific issues that may arise from time to time.
- Security issues: It could be difficult to protect the assets from different business units from one another as they could have different security requirements.
- Strategic, financial, and operational risks: There are many risks associated with operating a multi-tenanted property that needs to be carefully considered before proceeding with the investment.
Should I pay for property management for a commercial property?
Tenanted commercial property is a way to buy commercial property already leased in the market. This can be a profitable investment strategy for people who are looking for steady cash flow based on an asset with a track record of revenue.
Factoring in costs of management (as well as all the other costs associated with this type of investment) are important to gauge the viability of the investment. Many who invest in commercial property have a background understanding of this level of asset management, but if you are new or relatively inexperienced in commercial property management it would be wise to seek out a professional to help here.
Tenanted commercial property is an opportunity for investors who are familiar with the real estate industry or investors that are not comfortable taking on the risks of investing in new assets.
How to add value to your commercial investment?
If you are thinking of investing in tenanted commercial property for the first time, it is important to consider a few things.
First, it is important to find out what the property's vacancy rates and rental rates are like and what these are as a percentage of income that a business might generate. The higher these rates are, the more likely that you will be able to get good results and make a profit from your investment.
Second, you should also take into consideration how passive the investment will be for you. If you intend to manage the property then you should factor your time into this as a cost, if you want a hands-off investment then you will need to consider some level of property management.
Thirdly, when choosing between buying a leasehold or freehold commercial you should consider the long-term implication of upgrades, improvements, and changes as these can have different tax implications. As always, ask your accountant and lawyers...
Sale and purchase of tenanted commercial properties
Commercial property investors are growing more aware of the potential of tenanted commercial property. Investors need to know the different risks associated with this type of investment.
The risk of investing in tenanted commercial property for the first time is that you rely on the viability of the business or tenants. This means that the landlords need to be diligent about the management of the businesses/tenants as well as the property - even though they have no control over the day-to-day operations. Lenders, on the other hand, are more willing to offer loans for tenanted commercial properties because they often have higher rental rates and lower vacancy rates than untenanted properties
Final thoughts.
Buying a property that is leased out can be a great way to generate cash flow to help grow your portfolio or secure income and returns on capital.
A lot of investors relish this kind of commercial property because it provides the opportunity to earn money through steady rental returns as well as capital growth, which is the most common reason people invest in commercial properties.
The fact that there are tenants already in the property also means that they will be able to forecast a level of cash flow from day one, coupled with the ability to diversify your portfolio and gain an understanding of the types of business (or tenants) you feel comfortable with.
