6 Dangers of Commercial Property Investment to be Aware Of
Investing in commercial property can offer great opportunities for capital growth and income. And, as the economy begins to recover, more and more people will be tempted by commercial property as an investment. However, whilst there are numerous positive reasons to choose commercial property as an investment, there are plenty of factors that you should bear in mind. Here are six things to think about if you are considering taking out a commercial mortgage to buy business premises.
More chance of rental void periods: Commercial property tends to be more specialised and therefore there is less demand. This is particularly true in tough economic times where fewer businesses result in lower demand. So, you should bear in mind that there are likely to be more 'void periods' occasions when the property is untenanted than there would be with a residential investment.
Commercial mortgages can be more expensive: Business loans and commercial mortgages are often more expensive than residential or 'buy to let' mortgages. The gap may have narrowed over recent years as the cost of buy to let mortgages has risen, but you should be prepared to pay a higher interest rate on a commercial mortgage. You may also have to take part or all of the loan on a capital and interest basis, increasing your monthly repayment.
Bear in mind that in addition to commercial mortgages often being offered at higher rates than other types of secured lending, you may also have to put down a larger deposit to buy a commercial property. Banks will typically require a deposit of 25 40 per cent in order to agree a commercial mortgage, compared to 20 25 per cent on a buy to let investment.
Costs of buying are high: You will generally find that the costs involved in buying a commercial property are higher than a residential property. As commercial properties tend to be larger and more expensive, you will often have to pay 3 4 per cent Stamp Duty. Additionally, your legal and valuation fees are likely to be more expensive than a buy to let purchase.
More volatile during a recession: During a recession, many businesses cease trading or go into administration or liquidation. This reduces the demand for commercial property, making it a much more volatile market than residential property. Always take into account that commercial property is more likely to suffer in a recession than residential homes.
It is a highly regulated sector: Commercial properties are subject to rezoning, use regulations and planning consent. You also have countless building regulation and health and safety concerns to consider. Does the building have ramps for disabled access? Are fire safety regulations being met? Is there emergency lighting? In addition, you may also be responsible for the maintenance and repair of communal areas such as lifts or staircases.
Commercial assets are more difficult to sell: The market for commercial property is smaller than the market for residential property. This means that when you come to sell a commercial investment and redeem your commercial mortgage you are likely to find it more difficult to sell. Commercial transactions are often long and drawn out and require lots of legal input, meaning the asset is less 'liquid' than other investments.
Buying a commercial property is not something you should do lightly. You have to do your homework both in terms of finding a property in a good location with strong tenant demand and accessing the commercial mortgage finance you need to buy. Research is crucial to investment success.
More and more people understand the opportunities offered by commercial investment. Whilst large institutions and pension funds have been big players in commercial property in the last, it is possible to get a great commercial mortgage deal and profit from commercial property as an individual investor.
About the Author:
Howard O'Gollegos writes for Just Commercial Mortgages the UK's No1 site for the latest commercial mortgage rates and commercial property finance news.
Article Marketing
32 people like this article
