Six Factors To Be Wary Of When You Invest in Commercial Property

StarBuzz Weekly, Toronto-Author: Timothy Frodsham

Before you decide to take out a commercial mortgage to buy a commercial property, there are some things that you will need to consider.

More chance of rental void periods: Commercial properties tend to fall into certain niche markets, sites for retailing, office space and catering attract a certain type of prospective renter, and sometimes this can leave you with fewer potential customers. There can be longer periods without tenants, though to counter this, most landlords insist on longer tenancy agreements and six month notice periods from tenants.

High Mortgage Costs: Commercial mortgages are often on higher interest rates than residential r buy to let mortgages,  and the mortgage fees are generally higher too. You will also be required to put a large deposit down, usually between 25-50%.

It's not just higher interest rates where you can expect to pay a premium; practically all lenders will want a large deposit for a commercial mortgage, usually somewhere around 25-30% of the property's value. Easily more than would be required for a residential property, which have been asking 25% at the highest during the downturn, where commercial deposits start at 25% and go upwards.

High Purchase Costs: One of the most important things to consider is that the costs of buying a commercial premises are high in comparison to residential.  As the properties are generally quite large, the purchase price will be higher, which means that so will the stamp duty land tax and the other fees involved with setting up a commercial mortgage.

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: Understandably, the commercial property sector is closely regulated by local and central government. Planning consent, zoning and other laws prevent residential areas from being affected by or turned into commercial areas. The law requires you to make your property accessible for disabled users, fire safety regulations must be adhered to and communal areas must be looked after by the landlord, not the tenant.

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.

As with all aspects of a business venture, think very carefully before purchasing property, it is a major undertaking and can be very costly if it is not thought through properly. It is vital that you do your research and find a good property in a location that is in demand and that will be an asset, not a liability.

The tide is truly turning in the commercial property sector as it has in the residential buy to let sector. Buying/investing/selling of commercial property used to be the exclusive domain of large companies and investors, from pension funds to property magnates, now smaller companies and individuals are beginning to crack to market. As always, take care where you tread and be prepared for all the small print and potential pitfalls in the market, when you are the rewards could be quite handsome.

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Timothy Frodsham writes for Just Commercial Mortgages.com the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.
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