Office buildings are not just the massive skyscrapers that we think of when we think of the corporate lifestyle of big cities. They can be found in every town, whether it is just one company or many that occupy it. The owner of the building might have their own offices or they might rent them out instead as an additional form of income.
Retail buildings encapsulate all shops, ranging from small independent businesses to large shopping centres with multiple different companies renting out spaces.
Industrial buildings are a lot broader in their definition than the previous commercial properties. They range from manufacturing spaces to workshops to warehouses. Often, these spaces contain dangerous chemicals or heavy machinery which can cause potential noise or a need for increased risk assessments. As a result, there are generally measures in place to prevent them being built too close to residential areas.
Leisure buildings include a range of diverse properties from restaurants, to fast food takeaways to bars and clubs and hotels. The diversity of these properties opens up a wide range of possibilities for business ventures, but they also have greater risk and are more difficult to acquire as these properties are not always available on the market.
Private healthcare buildings are generally built for economical purposes as well as for serving customers. This can involve clinics, dentists, optometrists or general private healthcare. These can have buildings specifically designed for these purposes, or they could rent out a space within a communal multi-use building.
Residential properties are where people live, either through renting or investing in the property. Many use this as a way to gain income, through buying a property and renting the rooms for a profit. This is different from commercial renting as the tenants actually live in the space and therefore the landlords have a greater role with the lives of the tenants.
Commercial property is not used for residence, but instead used as a space for business. This can include office spaces, retail, leisure and warehouses. Many companies choose to rent rather than buy a space to reduce risks and place greater investment into their business rather than the workspace.
How does commercial property investment work? There is not a one size fits all for commercial property rentals. Depending on the agreement between the landlord and the tenant, rent may be based on a monthly, quarterly or yearly basis.
Unlike the standard AST (Assured Shorthold Tenancy) agreements that are often used in residential investments, commercial leases tend to be more unique based on the client. They are also generally created with more of a long term plan than that of AST’s, with leases lasting three to twenty years.
The pros are much higher than that of buy-to-let (where an investor opens a mortgage to purchase a private property with the intention of renting it out to tenants) as they often yield much higher profits. On average, retail properties yield much higher profits than a residential BTL.
With a £200,000 investment, one would produce on average £11,400 in comparison to just £7,062 with a residential BTL. In addition, residential properties generally involve higher levels of maintenance and repair work. Generally, commercial leases ensure that tenants are responsible for all repairs and insurance on the property. This is much more time and cost effective for a landlord.
It is much harder to find vacant commercial properties than residential ones as the market is less dynamic. It can also be more difficult to find a tenant when your property remains vacant.
In these situations, business rates often still have to be paid along with the mortgage which can be financially draining for a landlord.
It can also be harder to sell your property during times of economic trouble and therefore could lose money on your investment.
Do your research into any property that you are thinking of buying, along with the economic landscape at the time. In 2020, many retail businesses were forced to close by the government due to the Coronavirus pandemic. This was a difficult financial period for many businesses, although many essential stores such as supermarkets saw their sales skyrocket.
Although you cannot predict if there is going to be an unprecedented global pandemic, it is important to do your research into market trends to ensure that your investment will be profitable. It is always worth investing into a surveyor, a solicitor and a commercial mortgage broker to enable you to make the most informed decision.
Through commercial mortgages – the equivalent to a buy to let loan except for commercial properties. However, there are some important differences between the two.
Commercial property mortgages tend to have higher interest rates (especially if you are a first time buyer). There is also the assumption that the loan will be based on a capital repayment basis – with some lenders only accepting mortgage claims through this basis.