Investing in Commercial Property - how does it work
Discussion
Very simply, buy property, let property, invest/spend money!
It is entirely possible to write a 5,000 word answer to your question, and it's tough to know where to start.
The starter would be instruct a surveyor - commercial leases can be fairly complicated animals and there's lots of rules around rent reviews and renewal/expiry - you can't just a turf a tenant out because you feel like it for example
It is entirely possible to write a 5,000 word answer to your question, and it's tough to know where to start.
The starter would be instruct a surveyor - commercial leases can be fairly complicated animals and there's lots of rules around rent reviews and renewal/expiry - you can't just a turf a tenant out because you feel like it for example
JuniorD said:
I have a friend who is an analyst in a commercial property investment outfit. Says it's just like 2008 all over again; they keep buying despite prices being at record high, while just waiting for the crash.
This is my job, well advising funds/advisers but same sector, yes and no - depends what metric you use, what your performance/price is bench marked against and what specific asset/asset class you're looking at... kiethton said:
JuniorD said:
I have a friend who is an analyst in a commercial property investment outfit. Says it's just like 2008 all over again; they keep buying despite prices being at record high, while just waiting for the crash.
This is my job, well advising funds/advisers but same sector, yes and no - depends what metric you use, what your performance/price is bench marked against and what specific asset/asset class you're looking at... Commercial property is similar to residential BTL in many aspects but everything is taken up a notch. You can make much better returns here, but it costs a lot more to start off and the risks are a lot higher. I'll jot down some of the main considerations here and relate it back to my history of investing in property and why I'm only considering commercial going forward.
The big difference is how you make money from it. Residential for most investors seems mainly to be about capital appreciation, with any rental income a bonus. It's the other way around with commercial. A few well chosen commercial units can give you enough income to live a good life off, though you won't see them trebling in value over a decade like residential has done in recent history.
An example - one of my office buildings I bought for £225K in 2010. The company I bought it from had it from new in 1989, when they paid £220K for it. Compare that to the rise in value of your average house over those 21 years and the commercial unit looks like a dreadful investment for them. The difference is that the office building rents for £2400 a month, whereas a house for the same value would probably generate about £1000 per month.
Looking back, I probably paid a bit over the odds for that building and should have gone in lower. On the same business park a couple of years ago I bought another building at a much better deal, via auction. The previous owners had gone bust and the bank put the building up with a tenant already in place on one floor. The other floor was empty. This kind of situation puts lots of investors off due to the lower yield (more on that later) and the empty space and rates due (more on that later as well) but as I was looking for a home for one of my businesses it suited me perfectly. The previous owner paid around £1.3m for it in 2007 and thanks to the quirky situation I won it for under £500K. Rent across the two floors is nearly £70K per year, whereas the mortgage is a fraction of that. It doesn't take many of these for you to start making some good money.
Understanding yields is key here. Commercial values are based more on the tenant than on the property. If you've done BTL before you'll have probably covered rental yields to a degree, usually when taking out a mortgage, but it's much more in-depth with how the values of commercial are calculated. There are three main considerations - the amount of rent being paid, how long that rent will be paid for, and who is paying the rent. A "blue chip" tenant (i.e. a well known high street brand with good financial standing, or a govt department) in a long-term lease will give the property a high valuation. You may be looking at a 5-6% yield with the former, meaning if they pay £20K in rent, you'd be looking at a valuation around the £400K mark. If the unit is empty, it might be up for sale for half of that amount (kind of what happened with my auction example above) because you don't have the income, and with a lower quality tenant it'll be somewhere in between as they are less financially stable.
Not only does this affect the value but also the likelihood of getting finance, and how much a lender will give you. The high street brand tenant would make lenders comfortable and they may ask for less of a deposit than if you are buying a unit with an unknown tenant. It's just them calculating risk and the likelihood of it blowing up in their face. They are far more comfortable knowing that Marks & Spencer will be paying your rent, which in turn pays their mortgage, than they are with some start-up Vape shop. If the unit is empty, you may struggle to get a lender at all.
There are great deals available all throughout the commercial property world, whereas you don't tend to find them in residential that much. This is partly due to competition. Half the people I know are residential property investors but only a few of us got into commercial. If you are getting into this side of property investing, I'd start looking into auctions, speaking to commercial agents, etc and seeing what's in your area. There are always properties for sale that you can pick up below market value. Like the old saying goes - you make your money when you buy, not when you sell.
Some of the other things to be aware of:
Unlike residential, as the landlord you often aren't responsible for the upkeep of the building. I have lost count of the number of days I've spent over the past 20 years dealing with crap from residential tenants, where something has gone wrong with a property (usually their fault) but I barely lift a finger with the offices. That's because they are all under what's known as "Fully repairing and insuring" leases, which is standard in this game. The landlord is responsible for insuring the building itself, which is usually a condition of the mortgage, whereas the tenant is responsible for also insuring it, is responsible for things like contents cover and is also responsible for repairing it. And when they leave, they have to put everything back exactly as they found it, or they have to pay you the money to rectify it. That's known as a "Dilapidations claim". Any commercial lease should include it so that you aren't on the hook, as fixing commercial units can quickly get expensive.
Leases tend to be long-term. Unlike the 6-12 months you'll get with a house, commercial leases last years. 5-10 is typical. You'll often see what's called a "break clause" at certain stages, where it can be called off by either party. These exist because business needs change and the tenant may want to move before the 10 years, or you may want to rent it to someone else. The longer the lease, the greater the value and the more you'll pay for that building. Or the more you'll sell your building for.
On that note, I know someone who does incredibly well (i.e. new Bentley Continental as his daily driver well) just by buying up vacant commercial units, refurbishing them, finding good tenants and putting them in there on long leases. He does a few of these a year and tends to sell them for twice what he paid for them. He doesn't retain any of them, whereas I prefer to retain rather than sell as I want the residual income. Horses for courses, as they say.
Speaking of rents, the biggest downside to commercial is when you have a void period. This is the bit that keeps commercial investors up at night. With a residential investment property, you may go a couple of months without a tenant and you have to cover the mortgage yourself. With commercial, void period can and usually do last months, if not years, and the big kicker is you are liable for council rates during that time. Rates are based on a percentage of the rentable value and after something like a 6-12 week grace period, you have to pay them. On my auction example earlier, the council rates are around £40K per year, so I hope to god that building doesn't become vacant anytime soon. If that happens then it goes from an asset generating thousands of pounds of profit each month to one costing thousands of pounds a month! Something you need to seriously consider before buying any commercial.
The other downsides when compare to BTL are things like it taking ages to sell commercial property. Most business parks across the UK have units for sale that have been on the market for years. You could say that's because the sellers aren't being realistic with their values but if any of them need a quick sale, they can always go to auction but will likely take a hammering on the price.
You will also find fees here a lot higher than you are used to. The charges from lenders, conveyancing fees and lease agreement charges from solicitors and surveyors fees are all a lot more than with BTL. You may also have to consider VAT. I am not an accountant so will offer no advice in this area, other than to say that about half of the units I've looked at have been VAT applicable, meaning I had to find the money to cover an additional 20% of the asking price. Even though that was claimed back afterwards it's still a big amount to have out.
When borrowing money, you'll need to contribute a much higher percentage towards the deposit. Buy to Let lenders often go to 85% and in the past were doing 90% Loan-to-Value deals, whereas many commercial mortgages are more like 65-75% LTV. On the two properties I mentioned above, I got 85% on the one and 80% on the other. Those loans were with Barclays and HSBC but I'm not sure if they will still offer deals like those. There are plenty of non high-street lenders like Aldermore and Shawbrook who will often lend more or will consider slightly more risky purchases, though you'll find the rates quite high compared to BTL.
As an asset class, commercial property can be used for your pension. As mentioned by a poster above, you'll need to have a SIPP (Self Invested Personal Pension) in place and that can buy and retain the commercial units. I don't know much about this as I haven't done one myself, but if I remember correctly a SIPP can raise 50% of its value towards the purchase. So, if you already have a pension pot worth £100K then the SIPP will allow you to purchase a £150K property. Any rents then go into the SIPP fund rather than your current account. A big draw back is you don't benefit from the money until retirement time though it is very tax efficient.
Hopefully this helps give you an idea of what it's like. If I remember anything else, I'll add it here and feel free to ask any questions.
Best of luck if you do go for it. I don't think you'll regret it. I'm currently chucking everything I can into commercial and actually had an offer accepted on a place just yesterday, which is my biggest purchase yet. Now I've got to find the money for the damn thing.
The big difference is how you make money from it. Residential for most investors seems mainly to be about capital appreciation, with any rental income a bonus. It's the other way around with commercial. A few well chosen commercial units can give you enough income to live a good life off, though you won't see them trebling in value over a decade like residential has done in recent history.
An example - one of my office buildings I bought for £225K in 2010. The company I bought it from had it from new in 1989, when they paid £220K for it. Compare that to the rise in value of your average house over those 21 years and the commercial unit looks like a dreadful investment for them. The difference is that the office building rents for £2400 a month, whereas a house for the same value would probably generate about £1000 per month.
Looking back, I probably paid a bit over the odds for that building and should have gone in lower. On the same business park a couple of years ago I bought another building at a much better deal, via auction. The previous owners had gone bust and the bank put the building up with a tenant already in place on one floor. The other floor was empty. This kind of situation puts lots of investors off due to the lower yield (more on that later) and the empty space and rates due (more on that later as well) but as I was looking for a home for one of my businesses it suited me perfectly. The previous owner paid around £1.3m for it in 2007 and thanks to the quirky situation I won it for under £500K. Rent across the two floors is nearly £70K per year, whereas the mortgage is a fraction of that. It doesn't take many of these for you to start making some good money.
Understanding yields is key here. Commercial values are based more on the tenant than on the property. If you've done BTL before you'll have probably covered rental yields to a degree, usually when taking out a mortgage, but it's much more in-depth with how the values of commercial are calculated. There are three main considerations - the amount of rent being paid, how long that rent will be paid for, and who is paying the rent. A "blue chip" tenant (i.e. a well known high street brand with good financial standing, or a govt department) in a long-term lease will give the property a high valuation. You may be looking at a 5-6% yield with the former, meaning if they pay £20K in rent, you'd be looking at a valuation around the £400K mark. If the unit is empty, it might be up for sale for half of that amount (kind of what happened with my auction example above) because you don't have the income, and with a lower quality tenant it'll be somewhere in between as they are less financially stable.
Not only does this affect the value but also the likelihood of getting finance, and how much a lender will give you. The high street brand tenant would make lenders comfortable and they may ask for less of a deposit than if you are buying a unit with an unknown tenant. It's just them calculating risk and the likelihood of it blowing up in their face. They are far more comfortable knowing that Marks & Spencer will be paying your rent, which in turn pays their mortgage, than they are with some start-up Vape shop. If the unit is empty, you may struggle to get a lender at all.
There are great deals available all throughout the commercial property world, whereas you don't tend to find them in residential that much. This is partly due to competition. Half the people I know are residential property investors but only a few of us got into commercial. If you are getting into this side of property investing, I'd start looking into auctions, speaking to commercial agents, etc and seeing what's in your area. There are always properties for sale that you can pick up below market value. Like the old saying goes - you make your money when you buy, not when you sell.
Some of the other things to be aware of:
Unlike residential, as the landlord you often aren't responsible for the upkeep of the building. I have lost count of the number of days I've spent over the past 20 years dealing with crap from residential tenants, where something has gone wrong with a property (usually their fault) but I barely lift a finger with the offices. That's because they are all under what's known as "Fully repairing and insuring" leases, which is standard in this game. The landlord is responsible for insuring the building itself, which is usually a condition of the mortgage, whereas the tenant is responsible for also insuring it, is responsible for things like contents cover and is also responsible for repairing it. And when they leave, they have to put everything back exactly as they found it, or they have to pay you the money to rectify it. That's known as a "Dilapidations claim". Any commercial lease should include it so that you aren't on the hook, as fixing commercial units can quickly get expensive.
Leases tend to be long-term. Unlike the 6-12 months you'll get with a house, commercial leases last years. 5-10 is typical. You'll often see what's called a "break clause" at certain stages, where it can be called off by either party. These exist because business needs change and the tenant may want to move before the 10 years, or you may want to rent it to someone else. The longer the lease, the greater the value and the more you'll pay for that building. Or the more you'll sell your building for.
On that note, I know someone who does incredibly well (i.e. new Bentley Continental as his daily driver well) just by buying up vacant commercial units, refurbishing them, finding good tenants and putting them in there on long leases. He does a few of these a year and tends to sell them for twice what he paid for them. He doesn't retain any of them, whereas I prefer to retain rather than sell as I want the residual income. Horses for courses, as they say.
Speaking of rents, the biggest downside to commercial is when you have a void period. This is the bit that keeps commercial investors up at night. With a residential investment property, you may go a couple of months without a tenant and you have to cover the mortgage yourself. With commercial, void period can and usually do last months, if not years, and the big kicker is you are liable for council rates during that time. Rates are based on a percentage of the rentable value and after something like a 6-12 week grace period, you have to pay them. On my auction example earlier, the council rates are around £40K per year, so I hope to god that building doesn't become vacant anytime soon. If that happens then it goes from an asset generating thousands of pounds of profit each month to one costing thousands of pounds a month! Something you need to seriously consider before buying any commercial.
The other downsides when compare to BTL are things like it taking ages to sell commercial property. Most business parks across the UK have units for sale that have been on the market for years. You could say that's because the sellers aren't being realistic with their values but if any of them need a quick sale, they can always go to auction but will likely take a hammering on the price.
You will also find fees here a lot higher than you are used to. The charges from lenders, conveyancing fees and lease agreement charges from solicitors and surveyors fees are all a lot more than with BTL. You may also have to consider VAT. I am not an accountant so will offer no advice in this area, other than to say that about half of the units I've looked at have been VAT applicable, meaning I had to find the money to cover an additional 20% of the asking price. Even though that was claimed back afterwards it's still a big amount to have out.
When borrowing money, you'll need to contribute a much higher percentage towards the deposit. Buy to Let lenders often go to 85% and in the past were doing 90% Loan-to-Value deals, whereas many commercial mortgages are more like 65-75% LTV. On the two properties I mentioned above, I got 85% on the one and 80% on the other. Those loans were with Barclays and HSBC but I'm not sure if they will still offer deals like those. There are plenty of non high-street lenders like Aldermore and Shawbrook who will often lend more or will consider slightly more risky purchases, though you'll find the rates quite high compared to BTL.
As an asset class, commercial property can be used for your pension. As mentioned by a poster above, you'll need to have a SIPP (Self Invested Personal Pension) in place and that can buy and retain the commercial units. I don't know much about this as I haven't done one myself, but if I remember correctly a SIPP can raise 50% of its value towards the purchase. So, if you already have a pension pot worth £100K then the SIPP will allow you to purchase a £150K property. Any rents then go into the SIPP fund rather than your current account. A big draw back is you don't benefit from the money until retirement time though it is very tax efficient.
Hopefully this helps give you an idea of what it's like. If I remember anything else, I'll add it here and feel free to ask any questions.
Best of luck if you do go for it. I don't think you'll regret it. I'm currently chucking everything I can into commercial and actually had an offer accepted on a place just yesterday, which is my biggest purchase yet. Now I've got to find the money for the damn thing.
Useful post and thanks for taking the time to post.
We looked at our last Commercial property in 2001. Up for £705k so offered £350k. Settled on £450k. The spectrum on commercial is a wide one.
Since moved it into our SIPPs and rental is £80k pa. 10 year lease with 5 year review.
Also do BTL - can be absolute PITA.
We looked at our last Commercial property in 2001. Up for £705k so offered £350k. Settled on £450k. The spectrum on commercial is a wide one.
Since moved it into our SIPPs and rental is £80k pa. 10 year lease with 5 year review.
Also do BTL - can be absolute PITA.
Thank you very much indeed for such a comprehensive and well written explanation. Definitely some food for thought there, I'd like to get started late this year or early next.
Do you tend to go for office blocks as opposed to industrial units? Say you had a hypothetical 100 to 250k to start, how would you approach it with the benefit of hindsight and your experience?
Thanks in advance
Do you tend to go for office blocks as opposed to industrial units? Say you had a hypothetical 100 to 250k to start, how would you approach it with the benefit of hindsight and your experience?
Thanks in advance
No problem. I've had some great advice from people on this forum in the past so happy to pay it back.
Office blocks are mainly my thing. Nothing against industrial, it just doesn't really come my way that often. The only industrial unit I have done to date was a really cool vacant old listed building in a city centre that used to be a factory. It had been up for sale with an agent for years but they weren't pushing it, so I tried my luck and went in with an offer of about 60% asking price, which they said yes to! It had lapsed planning permission to develop it into 12 flats so I paid to get that reinstated. I would absolutely love to build them out though in reality it's too big a job for me and the listed status gives me shivers, so I'm in the process of selling to a developer.
For investment purposes, I think you'd benefit from having tenants stick around a lot longer in industrial units. Moving a factory is a huge job, so they'd stay put until they absolutely had to go. I think the rents are lower, though that'll be reflected in lower asking prices.
Something that might be worth considering is semi-commercial. I.E. A shop with accommodation above. There's loads of it out there and then you get the benefits of residential as well as commercial. Might be something to consider as a step into this side of the property world?
Regarding your hypothetical situation, I'd use the money to buy an office building with multiple floors to accommodate 2-3 tenants. That way there would likely always be some businesses in paying for things and the risk of an empty building taking you to the cleaners is reduced. You have the added hassle of finding tenants more frequently but that is a price I'm willing to pay for the peace of mind.
To get started, I'd take a look at auctions. If you are outside of London then the commercial units in your area probably come up in local property auctions as well as the big auctions in London. Register on their websites for catalogues, so they send you the stock beforehand. I'd then get to know the local surveyors and property agents. Meet up with them to let them know you are in the market for purchasing some units and then will also need help letting them. They can advise you on the areas where units are hard to tenant, as those are the ones to avoid. If you can make friends with some of these guys then that's a must-do, it's where the best deals usually come from. Off-market transactions are regular and the two best deals I've ever done happened in this way, where an older investor was selling off stock and asked his favourite surveyors to find a buyer.
I'd also try to find older buildings that are renting out at low £-per-square-foot rents in areas where they should be higher. One building I bought had three tenants in place all paying under £10 psf. The leases were all close to ending and the property was shabby, so it went for a low-ish asking price. I then did the place up but it wasn't much work - new lighting, decorated communal areas, new carpets, better wiring, etc. You just need to get the property to "landlord spec" which is a workable empty shell that the tenant is then responsible for furnishing and decorating to their tastes. All the newer offices nearby to that building rent out at closer to £20 psf so I charged £15. That was an easy way to increase the value and income from this property by 50%. You can then use this increase in value to pull equity out for use as deposits on other properties. If you can find similar, then I would strongly consider it. It's the business model that I'm sticking to going forward.
(Apologies if this is illegible at all. I'm typing this on a phone whilst walking my dog)
Office blocks are mainly my thing. Nothing against industrial, it just doesn't really come my way that often. The only industrial unit I have done to date was a really cool vacant old listed building in a city centre that used to be a factory. It had been up for sale with an agent for years but they weren't pushing it, so I tried my luck and went in with an offer of about 60% asking price, which they said yes to! It had lapsed planning permission to develop it into 12 flats so I paid to get that reinstated. I would absolutely love to build them out though in reality it's too big a job for me and the listed status gives me shivers, so I'm in the process of selling to a developer.
For investment purposes, I think you'd benefit from having tenants stick around a lot longer in industrial units. Moving a factory is a huge job, so they'd stay put until they absolutely had to go. I think the rents are lower, though that'll be reflected in lower asking prices.
Something that might be worth considering is semi-commercial. I.E. A shop with accommodation above. There's loads of it out there and then you get the benefits of residential as well as commercial. Might be something to consider as a step into this side of the property world?
Regarding your hypothetical situation, I'd use the money to buy an office building with multiple floors to accommodate 2-3 tenants. That way there would likely always be some businesses in paying for things and the risk of an empty building taking you to the cleaners is reduced. You have the added hassle of finding tenants more frequently but that is a price I'm willing to pay for the peace of mind.
To get started, I'd take a look at auctions. If you are outside of London then the commercial units in your area probably come up in local property auctions as well as the big auctions in London. Register on their websites for catalogues, so they send you the stock beforehand. I'd then get to know the local surveyors and property agents. Meet up with them to let them know you are in the market for purchasing some units and then will also need help letting them. They can advise you on the areas where units are hard to tenant, as those are the ones to avoid. If you can make friends with some of these guys then that's a must-do, it's where the best deals usually come from. Off-market transactions are regular and the two best deals I've ever done happened in this way, where an older investor was selling off stock and asked his favourite surveyors to find a buyer.
I'd also try to find older buildings that are renting out at low £-per-square-foot rents in areas where they should be higher. One building I bought had three tenants in place all paying under £10 psf. The leases were all close to ending and the property was shabby, so it went for a low-ish asking price. I then did the place up but it wasn't much work - new lighting, decorated communal areas, new carpets, better wiring, etc. You just need to get the property to "landlord spec" which is a workable empty shell that the tenant is then responsible for furnishing and decorating to their tastes. All the newer offices nearby to that building rent out at closer to £20 psf so I charged £15. That was an easy way to increase the value and income from this property by 50%. You can then use this increase in value to pull equity out for use as deposits on other properties. If you can find similar, then I would strongly consider it. It's the business model that I'm sticking to going forward.
(Apologies if this is illegible at all. I'm typing this on a phone whilst walking my dog)
Dick Dastardly said:
No problem. I've had some great advice from people on this forum in the past so happy to pay it back.
Office blocks are mainly my thing. Nothing against industrial, it just doesn't really come my way that often. The only industrial unit I have done to date was a really cool vacant old listed building in a city centre that used to be a factory. It had been up for sale with an agent for years but they weren't pushing it, so I tried my luck and went in with an offer of about 60% asking price, which they said yes to! It had lapsed planning permission to develop it into 12 flats so I paid to get that reinstated. I would absolutely love to build them out though in reality it's too big a job for me and the listed status gives me shivers, so I'm in the process of selling to a developer.
For investment purposes, I think you'd benefit from having tenants stick around a lot longer in industrial units. Moving a factory is a huge job, so they'd stay put until they absolutely had to go. I think the rents are lower, though that'll be reflected in lower asking prices.
Something that might be worth considering is semi-commercial. I.E. A shop with accommodation above. There's loads of it out there and then you get the benefits of residential as well as commercial. Might be something to consider as a step into this side of the property world?
Regarding your hypothetical situation, I'd use the money to buy an office building with multiple floors to accommodate 2-3 tenants. That way there would likely always be some businesses in paying for things and the risk of an empty building taking you to the cleaners is reduced. You have the added hassle of finding tenants more frequently but that is a price I'm willing to pay for the peace of mind.
To get started, I'd take a look at auctions. If you are outside of London then the commercial units in your area probably come up in local property auctions as well as the big auctions in London. Register on their websites for catalogues, so they send you the stock beforehand. I'd then get to know the local surveyors and property agents. Meet up with them to let them know you are in the market for purchasing some units and then will also need help letting them. They can advise you on the areas where units are hard to tenant, as those are the ones to avoid. If you can make friends with some of these guys then that's a must-do, it's where the best deals usually come from. Off-market transactions are regular and the two best deals I've ever done happened in this way, where an older investor was selling off stock and asked his favourite surveyors to find a buyer.
I'd also try to find older buildings that are renting out at low £-per-square-foot rents in areas where they should be higher. One building I bought had three tenants in place all paying under £10 psf. The leases were all close to ending and the property was shabby, so it went for a low-ish asking price. I then did the place up but it wasn't much work - new lighting, decorated communal areas, new carpets, better wiring, etc. You just need to get the property to "landlord spec" which is a workable empty shell that the tenant is then responsible for furnishing and decorating to their tastes. All the newer offices nearby to that building rent out at closer to £20 psf so I charged £15. That was an easy way to increase the value and income from this property by 50%. You can then use this increase in value to pull equity out for use as deposits on other properties. If you can find similar, then I would strongly consider it. It's the business model that I'm sticking to going forward.
(Apologies if this is illegible at all. I'm typing this on a phone whilst walking my dog)
ETA - where is this located? - family firm does this so could be of interest (happy to take a PM) Office blocks are mainly my thing. Nothing against industrial, it just doesn't really come my way that often. The only industrial unit I have done to date was a really cool vacant old listed building in a city centre that used to be a factory. It had been up for sale with an agent for years but they weren't pushing it, so I tried my luck and went in with an offer of about 60% asking price, which they said yes to! It had lapsed planning permission to develop it into 12 flats so I paid to get that reinstated. I would absolutely love to build them out though in reality it's too big a job for me and the listed status gives me shivers, so I'm in the process of selling to a developer.
For investment purposes, I think you'd benefit from having tenants stick around a lot longer in industrial units. Moving a factory is a huge job, so they'd stay put until they absolutely had to go. I think the rents are lower, though that'll be reflected in lower asking prices.
Something that might be worth considering is semi-commercial. I.E. A shop with accommodation above. There's loads of it out there and then you get the benefits of residential as well as commercial. Might be something to consider as a step into this side of the property world?
Regarding your hypothetical situation, I'd use the money to buy an office building with multiple floors to accommodate 2-3 tenants. That way there would likely always be some businesses in paying for things and the risk of an empty building taking you to the cleaners is reduced. You have the added hassle of finding tenants more frequently but that is a price I'm willing to pay for the peace of mind.
To get started, I'd take a look at auctions. If you are outside of London then the commercial units in your area probably come up in local property auctions as well as the big auctions in London. Register on their websites for catalogues, so they send you the stock beforehand. I'd then get to know the local surveyors and property agents. Meet up with them to let them know you are in the market for purchasing some units and then will also need help letting them. They can advise you on the areas where units are hard to tenant, as those are the ones to avoid. If you can make friends with some of these guys then that's a must-do, it's where the best deals usually come from. Off-market transactions are regular and the two best deals I've ever done happened in this way, where an older investor was selling off stock and asked his favourite surveyors to find a buyer.
I'd also try to find older buildings that are renting out at low £-per-square-foot rents in areas where they should be higher. One building I bought had three tenants in place all paying under £10 psf. The leases were all close to ending and the property was shabby, so it went for a low-ish asking price. I then did the place up but it wasn't much work - new lighting, decorated communal areas, new carpets, better wiring, etc. You just need to get the property to "landlord spec" which is a workable empty shell that the tenant is then responsible for furnishing and decorating to their tastes. All the newer offices nearby to that building rent out at closer to £20 psf so I charged £15. That was an easy way to increase the value and income from this property by 50%. You can then use this increase in value to pull equity out for use as deposits on other properties. If you can find similar, then I would strongly consider it. It's the business model that I'm sticking to going forward.
(Apologies if this is illegible at all. I'm typing this on a phone whilst walking my dog)
Dick Dastardly has covered it very well.
Other things to bare in mind are that commercial property and also mixed use (commercial/ residential when bought as one) don't attract Stamp Duty surcharge of 3%.
Also, if you are looking to put the property into a SIPP there can be quite substantial management charges which can reduce the return.
Other things to bare in mind are that commercial property and also mixed use (commercial/ residential when bought as one) don't attract Stamp Duty surcharge of 3%.
Also, if you are looking to put the property into a SIPP there can be quite substantial management charges which can reduce the return.
Dick Dastardly said:
No problem. I've had some great advice from people on this forum in the past so happy to pay it back.
Office blocks are mainly my thing. Nothing against industrial, it just doesn't really come my way that often. The only industrial unit I have done to date was a really cool vacant old listed building in a city centre that used to be a factory. It had been up for sale with an agent for years but they weren't pushing it, so I tried my luck and went in with an offer of about 60% asking price, which they said yes to! It had lapsed planning permission to develop it into 12 flats so I paid to get that reinstated. I would absolutely love to build them out though in reality it's too big a job for me and the listed status gives me shivers, so I'm in the process of selling to a developer.
For investment purposes, I think you'd benefit from having tenants stick around a lot longer in industrial units. Moving a factory is a huge job, so they'd stay put until they absolutely had to go. I think the rents are lower, though that'll be reflected in lower asking prices.
Something that might be worth considering is semi-commercial. I.E. A shop with accommodation above. There's loads of it out there and then you get the benefits of residential as well as commercial. Might be something to consider as a step into this side of the property world?
Regarding your hypothetical situation, I'd use the money to buy an office building with multiple floors to accommodate 2-3 tenants. That way there would likely always be some businesses in paying for things and the risk of an empty building taking you to the cleaners is reduced. You have the added hassle of finding tenants more frequently but that is a price I'm willing to pay for the peace of mind.
To get started, I'd take a look at auctions. If you are outside of London then the commercial units in your area probably come up in local property auctions as well as the big auctions in London. Register on their websites for catalogues, so they send you the stock beforehand. I'd then get to know the local surveyors and property agents. Meet up with them to let them know you are in the market for purchasing some units and then will also need help letting them. They can advise you on the areas where units are hard to tenant, as those are the ones to avoid. If you can make friends with some of these guys then that's a must-do, it's where the best deals usually come from. Off-market transactions are regular and the two best deals I've ever done happened in this way, where an older investor was selling off stock and asked his favourite surveyors to find a buyer.
I'd also try to find older buildings that are renting out at low £-per-square-foot rents in areas where they should be higher. One building I bought had three tenants in place all paying under £10 psf. The leases were all close to ending and the property was shabby, so it went for a low-ish asking price. I then did the place up but it wasn't much work - new lighting, decorated communal areas, new carpets, better wiring, etc. You just need to get the property to "landlord spec" which is a workable empty shell that the tenant is then responsible for furnishing and decorating to their tastes. All the newer offices nearby to that building rent out at closer to £20 psf so I charged £15. That was an easy way to increase the value and income from this property by 50%. You can then use this increase in value to pull equity out for use as deposits on other properties. If you can find similar, then I would strongly consider it. It's the business model that I'm sticking to going forward.
(Apologies if this is illegible at all. I'm typing this on a phone whilst walking my dog)
Office blocks are mainly my thing. Nothing against industrial, it just doesn't really come my way that often. The only industrial unit I have done to date was a really cool vacant old listed building in a city centre that used to be a factory. It had been up for sale with an agent for years but they weren't pushing it, so I tried my luck and went in with an offer of about 60% asking price, which they said yes to! It had lapsed planning permission to develop it into 12 flats so I paid to get that reinstated. I would absolutely love to build them out though in reality it's too big a job for me and the listed status gives me shivers, so I'm in the process of selling to a developer.
For investment purposes, I think you'd benefit from having tenants stick around a lot longer in industrial units. Moving a factory is a huge job, so they'd stay put until they absolutely had to go. I think the rents are lower, though that'll be reflected in lower asking prices.
Something that might be worth considering is semi-commercial. I.E. A shop with accommodation above. There's loads of it out there and then you get the benefits of residential as well as commercial. Might be something to consider as a step into this side of the property world?
Regarding your hypothetical situation, I'd use the money to buy an office building with multiple floors to accommodate 2-3 tenants. That way there would likely always be some businesses in paying for things and the risk of an empty building taking you to the cleaners is reduced. You have the added hassle of finding tenants more frequently but that is a price I'm willing to pay for the peace of mind.
To get started, I'd take a look at auctions. If you are outside of London then the commercial units in your area probably come up in local property auctions as well as the big auctions in London. Register on their websites for catalogues, so they send you the stock beforehand. I'd then get to know the local surveyors and property agents. Meet up with them to let them know you are in the market for purchasing some units and then will also need help letting them. They can advise you on the areas where units are hard to tenant, as those are the ones to avoid. If you can make friends with some of these guys then that's a must-do, it's where the best deals usually come from. Off-market transactions are regular and the two best deals I've ever done happened in this way, where an older investor was selling off stock and asked his favourite surveyors to find a buyer.
I'd also try to find older buildings that are renting out at low £-per-square-foot rents in areas where they should be higher. One building I bought had three tenants in place all paying under £10 psf. The leases were all close to ending and the property was shabby, so it went for a low-ish asking price. I then did the place up but it wasn't much work - new lighting, decorated communal areas, new carpets, better wiring, etc. You just need to get the property to "landlord spec" which is a workable empty shell that the tenant is then responsible for furnishing and decorating to their tastes. All the newer offices nearby to that building rent out at closer to £20 psf so I charged £15. That was an easy way to increase the value and income from this property by 50%. You can then use this increase in value to pull equity out for use as deposits on other properties. If you can find similar, then I would strongly consider it. It's the business model that I'm sticking to going forward.
(Apologies if this is illegible at all. I'm typing this on a phone whilst walking my dog)
Thank you once again, this is PH at it's best, really appreciate the effort to write this (epic multi-tasking skills) and share your experience and insights. I'm living outside of the UK at present but keen to get started on the research and take the first steps to get things ready for later this year.
One thing to consider if you are doing multiple units and there is a landlord where i am based that sticks to their guns on this - is not dropping the rent on an empty unit to fill it if you have other units close by as they will use the lower rent against you...
I tried to rent a shop @ £15k pa and they refused to reduce as they owned the Tescos building next door and couldnt see the rent drop as a review was due. They left it empty for over a year before securing a tenant at the figure they needed...
Try the portals (Zoopla has a good commercial selection) as well as the Auction houses, Allsops, Acuitus, Barnet Ross, Savills etc..
I tried to rent a shop @ £15k pa and they refused to reduce as they owned the Tescos building next door and couldnt see the rent drop as a review was due. They left it empty for over a year before securing a tenant at the figure they needed...
Try the portals (Zoopla has a good commercial selection) as well as the Auction houses, Allsops, Acuitus, Barnet Ross, Savills etc..
jamescodriver said:
One thing to consider if you are doing multiple units and there is a landlord where i am based that sticks to their guns on this - is not dropping the rent on an empty unit to fill it if you have other units close by as they will use the lower rent against you...
I tried to rent a shop @ £15k pa and they refused to reduce as they owned the Tescos building next door and couldnt see the rent drop as a review was due. They left it empty for over a year before securing a tenant at the figure they needed...
Try the portals (Zoopla has a good commercial selection) as well as the Auction houses, Allsops, Acuitus, Barnet Ross, Savills etc..
We do the same with resi. I tried to rent a shop @ £15k pa and they refused to reduce as they owned the Tescos building next door and couldnt see the rent drop as a review was due. They left it empty for over a year before securing a tenant at the figure they needed...
Try the portals (Zoopla has a good commercial selection) as well as the Auction houses, Allsops, Acuitus, Barnet Ross, Savills etc..
In some areas we have quite a dominant presence and tenants know each other. We can’t and don’t drop rents.
I think in the last ten years we have let a single property at less than the previous similar property. It was £7pw less.
jamescodriver said:
One thing to consider if you are doing multiple units and there is a landlord where i am based that sticks to their guns on this - is not dropping the rent on an empty unit to fill it if you have other units close by as they will use the lower rent against you...
I tried to rent a shop @ £15k pa and they refused to reduce as they owned the Tescos building next door and couldnt see the rent drop as a review was due. They left it empty for over a year before securing a tenant at the figure they needed...
Try the portals (Zoopla has a good commercial selection) as well as the Auction houses, Allsops, Acuitus, Barnet Ross, Savills etc..
And rightly so. If there was a chance of even a minimal uplift in rent from Tesco it would have a significant effect on capital value that could outweigh any ‘loss’ in rental income from leaving the adjacent unit vacant.I tried to rent a shop @ £15k pa and they refused to reduce as they owned the Tescos building next door and couldnt see the rent drop as a review was due. They left it empty for over a year before securing a tenant at the figure they needed...
Try the portals (Zoopla has a good commercial selection) as well as the Auction houses, Allsops, Acuitus, Barnet Ross, Savills etc..
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