Build A Million Dollar Real Estate Portfolio (In less than 3 Years)

A beginner's guide to commercial property

COMMERCIAL property investment is not just about investors with deep pockets and buying tall buildings. Ordinary people can own a slice of commercial real estate for only a few thousand dollars, but like all investments they need to do their homework.

There are more things to consider than with residential property investment. Do you go for a tiny piece of a shopping centre by buying shares in Westfield Group? Do you pool your resources with friends or strangers through a property syndicate? Or do you go it alone, either inside or outside of your super fund?

CB Richard Ellis director Philip Rundle says there are four key financial questions every investor should ask before taking the plunge.

Firstly, is the lease secure? "Always read the lease and ask questions where there is any uncertainty," Rundle says.

Secondly, what will the stamp duty cost you?

"Stamp duty can often be a big amount and get forgotten in the purchase calculations," he says.

Thirdly, is the rent net or gross?


It is important to know what the property's outgoings are and, more particularly, who pays for them. The final question is: Does the yield reflect the quality of the improvements to the property, the terms of the lease and the strength of the tenant?

It's likely to be a lot tougher to find a new tenant for your office or warehouse than a three-bedroom townhouse on the city fringe.

Going solo

As most commercial properties won't give you much change from $1 million, this is the most expensive way to get into commercial property investment.

But investors can be creative. For example car park spaces are a form of commercial property and can be bought for less than $50,000 a space.

Solo investors tend to stick with what they know. Savills national head of research Tony Crabb says they often target "the ever-popular bank branches, fast food outlets, occasionally a service station, and the street-front shop".

"Sometimes they run their own business out of it," he says.

"These properties are regarded as having stable returns.

"Most remain occupied for a long period and are rarely vacant."

Sean Ryan, director of specialist property law firm FR Law, says research is a key to success, as is "good financial and accounting advice about the correct vehicle in which to structure the investment".

Location

People often think of inner-city high-rise, but there's a substantial amount of investment that occurs in the fringe CBD and even the suburbs-investors can add value by choosing a site that has flexible development guidelines.

People should look for properties in busy areas specific to a particular sector.

Look for opportunities in locations that have been appropriately zoned for a specific use and which are near larger development sites or land users which may require expansion in the future - Google Earth can represent a commercial property investor's best friend.

At the push of a button, Google Earth will give you an instant snapshot of the entire surrounding area, nearby development and major space users. It may also highlight potential liabilities in the area which makes it an invaluable tool when making a major purchase in property.

Syndicates

Pooling your financial resources with others to buy commercial property through a syndicate is a common starting point. These are typically run by either specialist syndicate companies or organised through an accounting firm.

Getting into a syndicate can cost as little as $10,000.

Property syndicates have grown in popularity in recent times as many investors became disillusioned with the share market.

Most syndicates are made up of between two and 10 investors -Beyond 10 it becomes a bit unwieldy.

Anyone investing in a syndicate needs to make sure everything is documented -A handshake doesn't cut it anymore -It's very much a corporate marriage and a corporate divorce.

You need to decide how you are going to run it and how you are going to get out when it's time to get out or things go wrong such as death, disability or dissatisfaction.

Syndicates can offer great opportunities but investors should be cautious.

It's best to only get involved with a professionally structured syndicate that has an experienced manager involved.

Syndication usually requires a long-term commitment and does not offer a lot of flexibility to individual investors in the event their circumstances change. Being locked into a syndicate when an unexpected personal financial event may occur can be devastating.

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