The Do's & Dont's
6 Do’s and Don’ts For Commercial Property Investment
There can be several things that might cause you to lose sleep over a property. One is over-borrowing, and the others are making a poor assessment of the market and the property itself. Below are some tips to think about when investing in commercial property.
6 tips on what you should do:
- Always maintain sufficient cash reserves in order to cover several months’ mortgage repayments — just in case you were to lose a tenant, or the tenant is simply late in paying for some reason.And keep a sharp eye on smaller items like any equipment and maintenance bills, which can quickly add up.
- Make sure you have an investment plan you’re comfortable with, and then follow it. In other words, set realistic goals and go after them. More goals have been missed through lack of planning than through the plan itself failing.
- Get yourself a financial calculator or access to a good software program. And learn to use it to generate a realistic projected cashflow on an after-tax basis.
- Always keep yourself up to date with various trends within the marketplace. Make sure you monitor the news and legislation affecting real estate, undertake courses, attend seminars and read books on commercial property. Knowledge will reduce your risks and improve your profits.
- Identify and engage a top team of consultants (property, legal, finance, construction, etc). The money you pay them will be more than returned to you through the deals they will help you put together.
- Wherever possible ensure your mortgages to not require you to provide a personal guarantee. Always strive to make them non-recourse loans.
6 tips on what to avoid:
- Do not be tempted to invest a large proportion of your funds into speculative investments. They may appear glamorous on the way in, but they are often painful on the way out.
- Never do deals on a handshake — always put them in writing, for your own protection.
- Avoid entering into joint ventures or partnerships without taking detailed advice from your advisors.
- Never commit funds from the sale of one property to finance another until settlement on the first one occurs. Too many “sure deals” have an uncanny habit of coming unstuck.
- Avoid mortgages with variable payments. There are too many elements outside your control, such as a sudden surge in interest rates. Ideally, choose a fixed- rate mortgage. But at worst, have a 50/50 split between a fixed-rate and variable-rate mortgage.
- Shy away from properties that have substantial negative cash flows (where your expenses considerably exceed your income from the property). The return on equity may be greater, but you can leave yourself rather exposed — much like share traders discovered with their margin calls. Just settle for neutral gearing; and then maximise your depreciation benefits.
Bottom Line: With commercial property investing, always live within your means and reinvest profits. It is far better to be inconspicuously wealthy than ostentatiously poor.
This article first appeared on Property Observer