Things to consider when looking to invest in commercial property

Posted on 10 July, 2018 by Bailey Clarke

With any type of property purchase, there are always benefits with risks attached. We look at the options available for property investors looking to explore the commercial property investment market.

Commercial property investment fund guide

The benefits of commercial property

Any major investment will always have an element of uncertainty, for example, a housing market crash could have a major impact on property investors financial position and portfolio. This was evident in the 2007 financial crisis where some towns house prices have still not recovered from the crash.

There are many investment opportunities available for property investors, a commercial property could be one option. The benefit of this type of investment is that it could help expand a property portfolio with lower risks attached.

Another benefit of commercial properties is that the lease length is generally much longer than private home rentals which can see new tenants leaving after just six months whereas an office building could have a lease length of 12 years if not more.

Potentially an investor of a commercial property fund would have more financial security and a guaranteed income for a long period of time.

Commercial property funds

For many property investors buying a commercial property would be unattainable due to the cost involved so a commercial property fund would be an achievable alternative.

Commercial property is categorised as follows:

  • Industrial property
  • Retail
  • Office buildings

Investing in a commercial property is not an expensive gamble as any investor can start with a low lump sum of under £1000, an alternative option is affordable monthly payments.

When investing into a commercial fund the property investor will receive returns based on an increase in value and rental income. Another example is that the investment will be used to purchase shares in property companies, again paying earnings based on financial growth in the value of the shares and payment of dividends.

Bricks-and-mortar funds

You may come across bricks-and-mortar funds these are simply funds that are a direct commercial property investment.

In basic terms this type of investment fund is used to purchase various commercial properties, therefore, the risk is dramatically decreased because if one of the purchased properties is not leased there will always be others within the fund that will be producing income.

As well as income from increased value, the rental income provides a yearly return once the investment is cashed in.

Advantages and disadvantages of commercial property investment funds

The many positives include long lease lengths compared to short-term residential rental with less risk of a payment default on commercial buildings. Another consideration is that an investor does not need to be concerned with property management or sourcing new tenants as this reasonability falls with the manager of the property investors fund.

The downside is that selling or buying commercial property can take time which could impact selling a share in the fund.

Indirect commercial property fund

The main three types of indirect property investment are land banking schemes, shares in property companies and real estate investment trusts. One of the benefits is that the shares are listed on the stock exchange so the investor at any point can choose to leave or stay in the fund but with any stock market investment there will be an element of market risk.

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