Where Do Your Profits Come From With Commercial Property?

You need to anticipate your Tenant's needsAS AN INVESTOR in Commercial property, you need to fully appreciate where your profits actually come from.

In most cases, the key lies with your tenants … who provide you a steady stream of income.

So finding reliable tenants is crucial; which means understanding their needs, and providing them an suitable premises.

Therefore, it is essential that you continually anticipate exactly what your tenants are expecting.

And because good tenants are a vital part of the profit equation, you need to look for ways to inexpensively improve the value of your property by adapting it — with a simple upgrade, or perhaps a change of use — in order to attract better tenants going forward.

In any event, your net income from Commercial property will generally be 2 to 3 times that for a residential property.

Lease Terms are equally important

You’ll find a good lease usually provides for rental increases at least in line with inflation. It may well also include conditions that limit rental falls, in times of an economic downturn.

The lease will usually include provision for regular rental reviews based upon market conditions.

The length of the lease may well vary — with smaller premises often attracting shorter lease periods, but with probably at least three years.

For larger Office buildings, a typical rent period might be for five to 10 years, with an option to renew for a further period. For a large or purpose-built Industrial properties, the lease period may be 10 years — with an option to renew for a further 10 years.

The other main source of your profit is capital growth.

This may not always be as high as from residential property — because the supply and demand equation is different. Nonetheless, good opportunities are certainly present themselves — if you know what you’re looking for.

Bottom Line: Just as certain suburbs can go in and out of fashion with homeowners, so Commercial properties in a particular area can enjoy very strong demand.

For Shops, that would be in a high-growth area. Whereas, improved transportation facilities tend to boost the value of Offices and Warehouses — because of the easier access.

Next week, will run through some short-term Investment Strategies you may care to explore.

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