Categories: commercial mortgages | guides

If you want higher yields  or want to grow your portfolio, a commercial property can be a great choice.

Contents

Commercial properties refer to buildings or land serving business purposes. In the UK, commercial buildings are in five categories. These are offices, retail, industrial, leisure, and healthcare. Read our guide on the types of commercial property

Buying a commercial property can be a robust addition to an investment portfolio. There is a higher potential for steady income streams and appreciating property values.

This guide covers why investing in commercial real estate can be a good choice.

Why is investing in commercial property a good investment?

There are many reasons why a commercial premise can be a good investment.

High investment return

Commercial properties usually have a higher return on investment compared to residential properties. This is due to a few factors, including longer lease terms and the potential for multiple tenants in one property, such as offices or industrial units.

Businesses are usually willing to pay more for prime locations, resulting in a higher rental income.

Steady rental income

Commercial leases are usually 5 years or more. This extended lease period will provide you with a steady and predictable income. Knowing you have a consistent income stream can provide peace of mind.

Most commercial leases also include clauses for rent increases tied to inflation. This can help to ensure your income keeps pace with the cost of living.

Less competition

Investing in commercial buildings usually sees less competition than residential property investments. There is less competition for various reasons, such as residential properties requiring a lower deposit percentage.

Fewer investors venturing into the commercial space means more choices and reduced competition for prime properties.

Spread risk

Investing in a commercial building can help diversify your investment portfolio. Diversification helps spread risk across different types of investments. This can protect you if other markets do not do well.

If your commercial property has multiple tenants (e.g. self-storage site, office, industrial warehouse), risk will be distributed across the tenants. This will protect you as the landlord against more costly void periods, as you will now most likely have void periods for smaller individual units as oppose to the whole property.

Value increase

Commercial properties can appreciate over time, especially if they are well-located or improved. The value can also increase if the area around the property improves. This can result in capital gains if you decide to sell.

You need to select the right type of commercial premises to ensure it is a good investment. The most profitable commercial properties include industrial spaces, office buildings,  and self-storage facilities. Although as always, do your due diligence before investing, making sure you not only understand the local area’s market, but understand whether the investment will make sense with your budget.

You need to decide if you are looking for a short or long-term investment

Choosing between a short- or long-term investment will depend on various factors. These include your financial goals, risk tolerance, and timescale.

We highlight the differences between a short- and long-term investment:

Short-term investment

A short-term investment involves buying a property, improving it, and then selling it at a profit. Where successfully implemented, this strategy offers a faster return on your investment. Whilst this strategy is heavily reliant on your approach, and ability to sell on at a profit, it does offer the chance to make a profit over a short timeframe.

The short-term investment strategy carries risks. Market conditions can change, making it difficult to sell the property. There is always a risk that the property may not sell as fast as you would like, or for the ideal price.

You also have to be careful that any improvements you make are value-adding ones. Sometimes it can be easy to be drawn into additional expenses in order to achieve a higher quality of finish, but that stretches your refurbishment budget and reduces the profit you make upon sale. Read our guide on how to flipping houses if you want more on this.

Long-term investment

Outside of flipping property, property investment is typically more effective when implementing a long-term investment strategy.

A long-term strategy could involve buying a commercial building and renting it out. The rent allows you to earn a steady income over a long period.

You can choose to sell the property only when the value has increased with a long-term strategy. This strategy is often seen as less risky because it does not rely on quick market changes. Instead, it focuses on the steady growth of property values over time.

You may be investing in commercial property so you can run your business from the premises you buy. Whilst you will not get the benefit of income from rent (unless you let part of the space out to a third party), you will benefit from any growth in property value.

The other reason investment in commercial property is typically a long-term operation is because there are other significant costs associated with a building than just the building itself (e.g. stamp duty on commercial property, legal costs, lender costs, letting agent fees), and so a longer term investment is necessary to re-coup those costs in income.

Your circumstances will determine which strategy is best for you. You can seek advice from a financial advisor or property professional before deciding.

Two ways you can earn money from a commercial property investment

Make money from your commercial real estate in these two ways:

Renting out the property

You can make money by renting the property out to businesses and collecting rental income. Over time, you can increase the rent, typically in line with market rates so your mortgage costs do not start to outweigh your rental income.

This can provide a steady way to maintain profit.

If you take a capital repayment mortgage, which pays interest and pays back the capital borrowed, over time the profit you make from rent could increase, as the cost of the mortgage could decline as the capital borrowed reduces

Growth from the increase in the property value

You can make money from your business property investment by selling the property. Over time, the value of your property may increase due to various factors such as inflation, demand, and improvements in the property or area. When you sell the property, you could make a significant profit if its value has increased.

Don’t forget, property prices can also go down, so investing for longer means that the chances of any fluctuations ultimately resulting in an increase are greater as typically trends in property prices rise over many years.

Benefits of investing in commercial property

Here are the main advantages of investing in commercial property:

Tax benefits

Investing in commercial properties can provide certain tax benefits. For example, you may be able to deduct the commercial mortgage interest from your profits. These tax advantages may make owning commercial premises even more profitable. Although we do suggest consulting a tax advisor before making a purchase with tax benefits in mind, as they will determine the tax benefits of your commercial investment.

Can alter the property in any way

When you own a property, you can change it how you like. This could involve enhancing its aesthetic appeal, expanding the available space, or implementing other structural improvements.

Strive to make alterations to the property that will increase the overall value. When your property is worth more, it can lead to higher rent or a higher selling price in the future. This can increase your return on your commercial premise investment.

Please note however that if the structural changes are large enough (e.g. extending the building upwards or across), you may need to acquire planning permission from the local council before you make any changes, otherwise you may incur fines.

You can let to multiple tenants

Owning a commercial building that has multiple units allows you to let individual units to separate businesses, this is particularly common with large self-storage spaces, industrial properties, and office spaces. Letting to multiple tenants generates multiple streams of income and can potentially generate a higher yield than letting out the entire property to one tenant.

It also distributes risk as if one tenancy has a void period, the whole property is not put at risk.

You could also use a unit for your own business, and let the rest of the units out.

Commercial Trust can help you find the right mortgage!

Commercial Trust is a specialist mortgage broker. We can help you find the right commercial mortgage to buy a commercial property.

We work with a wide network of lenders in the UK. We can match you with the most suitable mortgage for your needs.

We will also guide you through the complex process of getting a commercial mortgage. This allows you to focus on getting the most out of your investment.

Talk with an expert mortgage advisor to discuss your commercial property investment.

FAQs:

A good return on investment is subjective. Ultimately balancing your costs versus your income is vital to ensure you make an income. Your investment strategy will influence this (e.g. are you looking to own the property at the end of a mortgage term, do you want a monthly income from rent?).

You may find that commercial property estate agents publish annual average figures as a guide on what you can expect, but there will be huge variance geographically, by property type, by industry etc.

You will pay stamp duty on commercial properties above £150,001 in the UK. The stamp duty rate depends on the value of the property.

Commercial property can be a great investment choice as it often provides higher potential returns than residential property. Like all investments, it can come with risks which you should consider.