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6 Pitfalls of Commercial Property Investment You Need to be Prepared For

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.

High Insurance Costs: When purchasing any property you will normally be required to obtain buildings insurance because the property acts as security for the loan, but you need to bear in mind that insurance costs tend to be higher on commercial properties. You will also need liability insurance so that you’re covered if someone has an accident on the premises.

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: It is important to buy into commercial property at the right time in a business cycle. The current recession has shown how vulnerable to economic downturn the commercial sector is. A recession results in fewer businesses looking for premises and a general downturn in the entire commercial market. The commercial sector is far more likely to be badly hit than residential.

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: Commercial property can be more valuable sometimes if it occupies a particular niche in the market, but also, it can be tough to sell on if there is insufficient demand. With residential properties simply drop the asking price far enough and someone is sure to buy, even in a depressed market. With commercial properties it’s not quite that simple. If the property doesn’t fit the buyer’s needs, it will never sell, irrespective of how cheap it is.

Before signing on the dotted line, make sure that you research the commercial property market to ensure that your property is in a desirable location so that you won’t be short of tenants and won’t find it too difficult to sell the property in the future.

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.

Howard O’Gollegos writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.

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