7 Costly Mistakes First Time Commercial Property Investors Make

A high rental yield naturally gets attention.

But a higher yield does not automatically mean a better investment.

Before getting excited about a 5% or 6% yield, ask:

Why is the yield this high?

It could be because the property is genuinely attractively priced.

But it could also reflect factors such as a weaker location, shorter tenancy, unusual rental arrangements or a smaller pool of future buyers.

Yield should be a starting point for investigation, not the final reason to buy.

Gross yield is useful, but it doesn't tell you what you will actually keep.

A simple gross yield calculation does not necessarily account for costs such as property expenses, vacancy periods, financing costs, taxes or the transaction costs involved in buying the property.

For example, two properties can both show a 4% gross yield but have very different underlying characteristics.

One may have a strong tenant, a long lease and good future demand.

The other may have a lease expiring soon and require significant work to secure the next tenant.

The same yield does not necessarily mean the same investment.

One of the easiest mistakes is to think:

"The property costs $3 million, so I need $3 million."

The actual capital required can be higher once you consider items such as Buyer's Stamp Duty, GST where applicable, legal fees, financing costs and renovation or fit-out requirements.

Financing also needs to be considered carefully.

Before committing to a property, understand how much cash you need upfront and whether the financing structure is comfortable for you.

A property can be affordable on paper but uncomfortable from a cash-flow perspective.

A property with a good tenant can be attractive.

But the tenant's current lease has an expiry date.

Before buying, I want to understand:

• How long remains on the lease?
• Is the current rental sustainable?
• Is it close to market rent?
• What is the tenant's business situation?
• How difficult would it be to find a replacement tenant?

The question isn't simply:

"Is this a good tenant?"

It is:

"What happens to my investment if this tenant leaves?"

A strong investment should ideally have a reasonable leasing story beyond the current tenancy.

A property can look perfect for a particular business but still not be suitable for the buyer's intended use.

Depending on the property, you may need to consider approved use, planning requirements, change of use, building restrictions and other regulatory or management requirements.

This is especially important when looking at F&B, retail and industrial properties.

Before committing to a purchase, make sure the property can support the intended use.

Don't assume that because another business is operating there today, your intended use will automatically be approved.

Freehold is attractive.

But it doesn't automatically make a property a better investment.

A freehold property may command a higher purchase price because buyers value the longer tenure. If the rental income does not increase proportionately, the resulting rental yield may actually be lower.

A leasehold property may sometimes provide a higher yield because of a lower acquisition price.

So instead of asking:

"Is it freehold?"

I would ask:

"What am I paying for the tenure, and does the investment still make sense at that price?"

Tenure is important, but it should be considered together with price, rental income, location, demand and exit potential.

Many first-time investors spend a lot of time asking:

"How much rent will I receive?"

But not enough time asking:

"Who will buy this property from me?"

Commercial property is a long-term decision.

Eventually, you may want to sell.

The future buyer could be an investor looking for rental income, an owner-occupier looking for a business premises, another investor attracted by the location or someone looking at the property's longer-term potential.

If the property only appeals to a very narrow group of buyers, your exit may be more difficult.

Before buying, understand not only why you want the property, but why someone else might want it from you later.