Real Estate Blog
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The life of a Commercial Investor - Part One
It seems there is a resurgence of small private investors targeting Commercial Real Estate. Old timers are falling back in love while new buyers are taking the plunge.
The attraction? Higher yields and what is thought to be easier-to-deal-with clients than tenants renting in residential property.
Like anything there are two sides to every story, and the best way to learn is by giving it a go, talking to others and making mistakes along the way.
I began talking to Rod who was more than happy discuss his roller coaster ride of "Life as a Commercial Investor".
Rod has been investing in commercial real estate for over 30 years. He has seen commercial interest rates reach a hight of 23%, market crashes, the negative side of tenants and probably pretty much all of the ups and downs involved in commercial investment.
Even after all of this Rod is still in the game and wouldn't have it any other way.
It was great talking to Rod and he was happy for me to share our conversation with you. I certainly learnt a lot and I hope you pick up a few tips or thoughts that may help. It may also leave you inclined to add a commercial property to your investment portfolio, it is now on my list of to-do's.
Me: Have you ever invested in Residential Real Estate?
Rod: No, the only houses I have purchased are the ones I have lived in. My rule is to invest in commercial Real Estate only.
Me: Why have you decided against residential investment?
Rod: I feel residential has a risk element about it. I don't think the tenants care about the property like a commercial or industrial tenant does.
A commerical or industrial tenant is running a business out of the premises so they have a different mindset. They tend to keep it cleaner, tidier and in good presentation because the premises is part of the business.
They are also less likely to do a runner because its much harder to pack up a shop full of stock and vanish overnight without anyone noticing! (laughs)
No actually it's more involved than that. An important difference I would like to point out is that a business owner has a vested interest in paying the rent and also a greater importance in a valid lease.
Me: What do you mean by that?
Rod: Well in most instances if a business owner was selling, a buyer would look for up-to-date rent and a valid lease as part of the sale. The importance of a lease though obviously depends on the type of business, but say for example your tenant was a hairdresser, the income the business generates can be affected greatly by its location. Its location may mean it is situated in a popular or well known commercial precinct, or its a business that has been in the current premises for a large number of years and all the locals know it is there. If you purchased the hairdresser and moved it to the other side of town then there is no history of income, most likely it wouldn't have the same sale value.
"Jen, what other things might you think are important to a buyer of a business?" asks Rod.
Me: I laugh and say "Aren't I supposed to be asking the questions here! Well if I was buying a business, I would want everything set up and done for me.
Rod: Exactly. And what would that include?
Me: I would think Logo, signage, customers, stock and suppliers.
Rod: Sure so how might you think those things would be affected by the business premises?
Me: Well the signage would be already setup, the customers would already know where the business is situated, the premises has been set up for the stock and even the suppliers could be affected by delivery access, which might make it difficult to find another premises to suit the business.
Rod: That is right, and I can't think of one reason why a residential tenant needs to stay in or has any reason to look after a residential property. Can you?
Me: No not really, maybe only if they were house proud. I suppose the driving factor for them to look after the property is that they have to because they are bound by legislation.
Rod: This then brings me to another reason why I only invest in commercial property.
Me: What's that?
Rod: The ups and down in markets. Residential property generally follows a turn around in commercial and industrial property. Just look at the mining towns ......... to be continued.
This discussion will be continued in "Life as a Commercial Investor – part Two" where Rod and I discuss in further detail how market trends and influences are what he believes far less secure in residential investments. I am a residential investor, and already at this point in the conversation I was ready to jump ship.