Commercial Property Investment Risks
Updated: Oct 25, 2020
Any investment has risks! Research of the types of risks and future expenditure on an investment should be part of an investor’s consideration and due diligence processes prior to proceeding with a commercial property purchase.
Many investors see a commercial property as all income and minimal cost to the owners. This is not necessarily an accurate view. Yes commercial tenants generally pay rent plus outgoings and these outgoings can include municipal rates and levies, water rates and levies, water usage, public liability insurance and reimbursement of the landlord’s insurances including building and loss of rent insurance. Therefore the owner has minimal outlay.
BUT what is often forgotten is a capital expenditure requirement to maintain a commercial property, or upgrade to meet current tenant and business requirements, in addition to maintenance of the capital building and property structure. As buildings age, plant and equipment breakdown and requirement for capital replacements can incur major capital expense. Repainting if not included in the terms of a lease as the Tenant obligation, should be set up as a programmed maintenance expenditure item. Concrete, bitumen or gravel hardstand and driveways. Who is responsible for damage or fair wear and tear? Most lease terms hold the landlord responsible for repairs and replacement for “fair wear and tear” on fixtures and fittings; this can include plumbing fittings, electrical wiring and fittings, floorcoverings, door furniture and other items. Emergency breakdowns also occur such as floods and other events which may not be covered by insurance.
Therefore it would be prudent for the commercial property owner to make provision for a capital repairs fund and have a program in place to maintain their valuable asset over its life.
A stellar piece of advice from an industry expert “Maintain and present your property in its most saleable state at all times”. Excellent advice.