Finding the best commercial property investment to boost your portfolio is essential when investing in commercial property. Here, we look at the most profitable commercial property types to consider.
A wide range of property types fit under the banner of commercial properties, but finding the right one to boost your portfolio profits can be difficult. Furthermore, each type offers varying rental yields, demand, and associated costs.
Understanding which property investment is right for you is essential. In this blog, we look at:
- The commercial property investment types to explore
- How profitable each property type is
- What to consider before investing in commercial property
- The common mistakes to avoid
- When to contact a commercial broker
Commercial property investment types
Several property types and sectors fall under commercial property. The top three investment types include:
- Commercial investment – Owning and renting out an existing commercial premises
- Owner-Occupier – Owning the property your business operates from
- Semi-commercial – A property that consists of both commercial and residential elements
Then, you have the most popular sectors to explore:
- Industrial
- Retail
- Offices
- Special purpose (commercial properties that don’t fit other categories, such as garages, scrap yards, and theatres)
Which is the most profitable?
The most profitable commercial property investment type will depend on your individual circumstances. Below, we highlight the top-yielding opportunities to explore, but it’s best to speak with a commercial broker to find out the best option for you.
Industrial properties
Investing in industrial space, such as warehouses, distribution centres, or storage facilities, typically offers generous yields due to several factors:
- Longer-term leases, allowing you consistent income and stability
- Steady cashflow from tenants
- Low maintenance costs
As a result, these investment types can allow you a high, stable income compared to other commercial properties.
Office and self-storage spaces
Both office spaces and self-storage facilities typically offer long-term tenancies and a generous monthly income. However, there are differences between the two property types.
Office spaces often generate higher gross rental incomes than self-storage, but the latter can offer higher yields due to low maintenance costs.
Companies within office spaces require several facilities, such as lighting, ventilation, and technical capabilities, which all affect maintenance costs.
However, don’t forget that the value of office space properties typically increases over time, which may compensate for these added costs.
Retail units
Before investing in a retail unit, there are some elements to consider, which all impact your profitability, such as:
- Is there a high footfall at the location?
- Is the property large enough for the type of retail you/the tenant will be running?
- Is the property easily accessible to the public?
- Is the property in good condition?
- What would the utility and maintenance costs be?
There are other factors to consider, so it’s worth speaking to an expert about the property you’re interested in. Retail is a versatile industry, and trends can change, impacting the property's intended target audience and profitability.
What factors to consider before investing
When choosing to invest in commercial property, you must consider several factors to ensure success, including:
- Your strategy and goals
- The profitability of the property
- The economic trends in the area
Your strategy and goals
Firstly, do you intend to rent this property to a commercial tenant or run your own business from it?
Secondly, what is your short and/or long-term plan for this property? Do you want to supplement your monthly income now, or your retirement income? Do you want to renovate the property for a quick profit, e.g. convert a commercial unit into residential accommodation? Or are you looking for an asset your children can inherit and benefit from, too?
Once you’ve got answers to the above, you can think about the type of commercial property that will fulfil these goals.
If you plan to run your business from the property, does it meet your company’s requirements? If you intend to rent to commercial tenants, what types of companies would want to rent this space? How versatile is it?
Calculating profitability
Calculating your expected annual yield from the property will help you assess how profitable an investment could be.
To do this, you take the projected gross rental income and subtract costs, such as:
- Mortgage payments
- Letting fees (if applicable)
- Ground rent
- Property insurance
- Maintenance costs
This will give you the ‘net rental income’. Divide this by the property’s value, and you will have the expected annual yield of the property as a percentage.
The economic trends and market in the area
Where you choose to invest is just as important as the property you’re looking to invest in, as it will impact the investment’s performance. It’s common for investors to choose an industry they have experience in and a location with higher potential yields.
You need to consider the demand in the area. Will there be a large pool of tenants to choose from? Having a good selection of tenants means you’re more likely to find someone with clear evidence of long-standing business profits and strong future business prospects.
These factors will either positively or negatively impact your investment and its likely profitability.
Common mistakes to avoid
Commercial investment can be highly profitable, but there are some common mistakes that we see often. Here, we look at how to avoid them.
Overspending on the purchase
Hiring an appraiser to assess the property’s market value will prevent you from overspending when investing in commercial property.
If you plan to renovate the property, create a realistic budget for the cost. If you spend too much, earning it back on the rent will take a while. Likewise, you may struggle to attract the right tenant to occupy the business premises if you don't spend enough.
Poor property management
Saving money by avoiding property maintenance will only cost you more in the long run. Minor issues with the property will deteriorate and become more expensive to fix, so it’s best to act quickly with any problems that arise.
Furthermore, ignoring tenants will cost you more money than you think. Ideally, securing long-term, stable tenants who pay their rent on time will keep your investment ticking along. If they look to leave because of poor communication, it can take weeks to find replacement tenants, meaning you could lose out on rent.
Poor due diligence
Before purchasing the property, instruct a surveyor to assess the property’s condition and factors such as:
- The structural quality
- The state of the electrics
- The plumbing
- Risk of flooding, etc
- The property's EPC rating
Setting aside a contingency fund for any unexpected issues is a good idea.
When to speak to an expert
Navigating the commercial property market alone can be difficult. Once you’ve found a property you’re interested in, or if you’d like to learn more about the process, it’s important to speak to our commercial mortgage experts.
We can discuss the market you’re interested in and give you an idea of how much you could borrow for your property investment journey. We’ll also support you along the way with any questions or issues you face.
Speak to one of our experts
To speak to our team, call us on 0345 345 6788 or submit an enquiry here.
