When you’re looking for a commercial property investment, in order to achieve consistent positive cashflow, there are six key must-haves…
1. Location
2. Long lease
3. Strong tenants
4. Higher than average yield
5. Good building structure and design
6. Hidden upsides/exit strategy
#1. Location is always number one. Whichever area you’re looking at, whether it’s the city or regional, there will always be some busy little hubs.
When you’re doing your research, you’ll always find an area that is the busy hub of that town or city. These are the areas you want to look at.
Why buy in a location where you are waiting for something to happen? You may as well buy where it is happening now – unless of course you have knowledge that makes it more profitable long-term. For example, a Coles or a Bunnings setting up 2 kms away that could hurt your tenancy potential.
#2. You’re also looking for an investment that has a combination of a strong tenant and a good, strong and long lease. They usually go hand in hand.
Indicators of a strong tenant would be length of tenancy and length of lease.
For example, if a tenant has been in place for over 20 years and they are on a five-year lease, it is a good indication that they are going to be there for a long time to come.
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#3. You also need to look for something with higher than average yields.
If other businesses or shops in that street have sold recently for a 6% net yield, aim to buy one at a 7 or 8% yield by negotiating hard. Getting a better buy than everyone else might help build some equity into that property in the first 12 months, simply by buying the property below market value.
#4. The actual physical building cannot be ignored. It doesn’t matter if you are looking at purchasing a strata lot, say a small office or a large property where you will own the land and building, the design and quality of the property is very important.
Ask yourself, is the building well designed for light and access? Would it be easily adaptable for another use, apart from the current one?
#5. Also, look for hidden upsides. One hidden upside maybe negotiating with the tenant to allow the installation of an ATM machine in the front window. The bank might pay $200 a week for that, so you could give the tenant $100 a week, and you’d get $100 a week. A great win-win-win situation.
#6. Look for exit strategies, and with a single tenant property, the best exit strategy might just be hanging on to the property for a long time and then selling it at a good increase in value in 10, 15 or 20 years’ time.
But if it’s a multiple tenant property, or it has a residential component, one great exit strategy is strata titling – dividing that property up into individual lots and selling them off whenever you feel like it.
You should always be looking for these points to make a great investment. And depending upon the style of property you are looking at, some of these points will be more relevant than others.
To Your Success
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