Getting into commercial property

Posted on Friday, February 14 2014

Investing In Commercial Property

 

The simplest form of ownership is direct ownership where an individual or family trust owns the property in its own name.
The advantages are that you obviously have complete control over the process in terms of how you handle the tenants, rent reviews and so forth. You will also reap 100% of any gains on the property.
The disadvantages are you will be responsible for any day to day management of the property and having to deal with routine and major maintenance items, tenant issues, lease expiries and renewals, statutory compliance issues etc. Also, you will be exposed 100% to any fall in value of the property resulting from vacancy.

Many owners choose to have their properties professionally managed to avoid this “hands on” approach and workload. It can also lead to savings for individual owners and their tenants as most commercial property managers bundle up the individual properties into a portfolio for tender purposes in areas such as insurance, fire protection, security and so forth thereby achieving sizeable discounts which can (and should) be passed onto individual owners and their tenants.
Further, in today’s litigious society with an absolute minefield of legislative compliance matters affecting commercial property, it almost becomes a commercial imperative to distance yourself as an owner from such areas through the employment of a professional property manager.

Perhaps though, one of the biggest considerations in engaging in direct ownership is liquidity. If you invest say $500,000 in a commercial property and borrow a similar amount from your bank, you may (in Tauranga) end up with 2 retail tenants (say paying $50,000 a year each in rent) or 3-4 smaller industrial tenants paying $25,000-$33,000 a year each in rent.

Now, the problem with this scenario, particularly with the 2 tenants example, is that if one tenant goes your income halves and you still have a mortgage to service.
Again, even fully tenanted and in a “good” market you still need to find a willing buyer for your property if you want to sell. In other words, someone with a million dollars to invest or at least the ability to raise that amount.

Of course, this happens everyday in the market but never underestimate the fact that you have to find that buyer.

Next Time I shall talk about the nature of indirect investment and the various options open to investors.
Until then, have a great day.

 

NZ Commercial Property

 

 

 

 

 

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Expert's Bio

Denis McMahon

Brought to you by Property Managers Ltd: Pacific Property has been formed with the aim of building, over time, a diversified portfolio of Industrial, Retail and Commercial properties to provide strong sustainable returns to investors which will be managed by experienced property manager, Property Managers Limited (PML). The directors of Pacific Property Fund are Denis McMahon and Philip Tushingham, who together have over 45 years of experience in investing in, and managing commercial properties. “Pacific Property presents an opportunity for investors to invest in a brand new quality industrial building in Mount Maunganui and to join us as we build a quality commercial property portfolio diversified both geographically and across industrial, retail, and commercial assets.”

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