To the commercial property investor, profit is key. The ancient, tried and tested business model for commercial property investment is as good today as it has always been. That is to say, purchase a property, acquire tenants to cover financing costs, allow the property to appreciate over time and then sell at a profit.
Now of course, there are many pitfalls that can stand in the way of success here – otherwise each and every one of us would be making vasts sums of money with a commercial property portfolio.
As such, this article is not going to delve too deeply into the basic building blocks of commercial property investment. To be frank, if our reader is at the very beginning of their commercial real estate journey, then allow us to save them some time.
A quick navigation around this site will show you numerous articles on the positives and negatives associated with investing in commercial property, but at the heart of all of them is one key message – get the right team behind you.
Commercial real estate investment is not for the faint of heart, and it’s important to surround yourself with a team of experts to help you maximise profits whilst, at the same time, minimising risk and expenditure.
Such experts will include commercial mortgage brokers, solicitors and accountants at the very least. Beyond that, it’s likely that any commercial landlord will want to keep a list of good maintenance contractors on file – builders, decorators, plumbers, electricians, air conditioning specialists, IT cabling consultants, telecommunications companies – the list goes on.
Naturally, there are many commercial landlords who are a little more ‘hands on’ when it comes to the upkeep of the building. Many tradesmen enter the world of commercial property investment as they’ll be able to either maintain the building themselves, or have access to fellow tradesmen who will work for them at reduced rates.
But in this article, we’re going to take a look at some other ways in which a commercial property investor can make money through his investment, and truly maximise profits – both in terms of operating income, as well as final sale price.
Let to more than one company
If we consider retail property as an example, the majority of high street stores are occupied by a single tenant. Even if the store in question offers an eclectic mix of services – which is becoming more and more commonplace – there is still a single tenant.
However, when we look at office space, there’s a real opportunity to maximise operating profits by leasing to more than one firm. In fact, let’s take another look at our retail example from above. A good number of high street retail units are ground floor stores with office space above. Now in many cases, the tenants of the store will want to make full use of the office space above, in which case there will be a tenancy agreement in place for both floors to be utilised by a single tenant.
However in other instances, the tenants of the store simply don’t need extensive office space. The company’s administration needs extend to a single computer in a small room at the back. As a result, the first floor offices can be rented out to an entirely separate company.
This arrangement brings a number of advantages. Firstly – should one business not turn out to be successful, the commercial property investor would not lose all of their income in one go.
Second, the sum total of rental income from two tenants is likely to be higher than what would have been paid by a single tenant occupying both floors.
Increases in laptop power and broadband speeds mean that more and businesses are being started up by entrepreneurial people who don’t need that much space to operate but, at the same time, would prefer not to simply work from home.
Therefore, a number of commercial property investors, particularly the landlords of office spaces, are essentially ‘tearing down the walls’ and providing a community workspace, often referred to as an incubator.
Such spaces are particularly popular amongst creative organisations. Tenants enjoy the buzz of working amongst other creative people – they feel more inspired and, as a result, more productive.
Community work spaces appeal to new start ups, in the first instance, because they come with much shorter lease contracts. Rather than be tied to a new business premises for up to five years, commercial tenants can lease space for as little as a few months.
The temptation, when offering shorter lease agreements, is to charge a higher monthly rent. Granted, there is no law against this, but as an incubator, the commercial landlord needs to be seen to be supporting their tenants as much as possible. However, beyond the rent itself, there is more that can be done to maximise the monthly operating profit of an office space.
Operating a hosted telephony package on the premises means that tenants can use soft phones or VOIP handsets. The use of these lines, along with the accompanying data access, is a service that can be charged at a mark up to the costs incurred by the commercial property owner.
Boardrooms and meeting rooms could be rented by the hour, and many small businesses simply don’t require them all that often, hence it’s an attractive proposition to have access to them on a short term basis, and therefore, the hourly rate pales into insignificance.
Providing food and drink on site can also add an additional income stream to an already lucrative commercial property investment.
And in terms of support, many commercial property investments operate extensive portfolios. Hence, when an incubator tenant feels ready to expand their business to the next level, their landlords may well have the perfect commercial unit ready and able to house them.
In an age of digital marketing, it’s easy to think that print advertising, or in this case, billboards, are a dead media. Nothing could be further from the truth. A little under £4billion pounds is spent every year on outdoor advertising, and of that total, 62% of it comes from billboard advertising.
What this can mean for a good proportion of commercial property owners, is the opportunity to essentially rent out some of the exterior space of the property as media space.
Naturally, the location of the property itself is important – placing a billboard on a remote industrial park to only be seen by a handful of people each week would not make a lot of sense. However, office space on a busy road is going to be subject to a lot of passing foot traffic, and this presents an attractive proposition to advertisers.
Assuming that the space is in a prime location, there are two forms in which revenue can be generated. The first is to own a billboard outright and then sell to advertisers directly. The major advantage here is that the commercial landlord has control over the content and is able to set whatever rates are deemed acceptable.
However, without the proper experience, the commercial property investor will find themselves at the beginning of a steep learning curve. They’ll need to learn about large scale printers, advertising standards and sourcing the best people to actually put the adverts up.
A second, and more realistic approach is to work in partnership with a specialist outdoor media agency. They will essentially become tenants of an exterior wall and will manage every aspect of the media there. This really is a perfect solution for the more remote commercial landlord who would prefer a building which, for want of a more accurate description, practically runs itself.
Advances in technology can mean the housing of a digital media board, hence a series of scrolling or even fully animated billboards from a variety of clients. Such advertisers will pay a premium to see their products on these boards, and many agencies will pay good prices for a partnership with a commercial landlord like this.
Much like investing in residential property, it’s incumbent on the commercial property investor to add as much value as possible to their commercial units. This works on two levels. Primarily, a property in a good state of repair is more likely to attract a greater array of potential tenants. This means that the commercial landlord can assess each company on its own merit, rather than simply letting out the property to the first people to make an offer.
Moreover, preparing a property in this way could well mean lower maintenance costs down the line. Many commercial tenants assume the upkeep of the building as part of their lease contract. Again, this is perfect for the less ‘hands on’ landlord who is not going to be in a position to attend to every single problem as they arise.
But, should they choose to remain ‘hands on’, then, like investing and maintaining any property, prevention is better than cure. The cost of building maintenance, be it commercial or residential, only compounds itself over time. The single leak on the first floor can be repaired for the cost of a single hour of a plumber’s time. Left alone, the water from that leak could gather beneath the floorboards and eventually destroy the ceiling below – a repair which will prove expensive on a number of levels.
First, the repair itself but secondly, tenants could claim damages against an interruption to their business, and all of this will cause the commercial landlord’s insurance premiums to rise.
Whilst this article is entitled Five Ways to Make Money from Commercial Property, we would argue that a large part of the equation of making money is putting in steps to ensure that that same money is not lost either.
Be Tax Efficient
There are a number of articles throughout the Prideview Group site that will advise you on the tax implications of investing in, and thereafter selling commercial property.
Throughout each of them, we advise that no single article, or indeed, collection of article, can replace the value of a relationship with a qualified accountant, specialising in tax.
Much like the advice we just gave regarding property maintenance, tax efficiency is not so much about making money as it is about having to spend less of it. In a binary system of profit and loss, that which isn’t one is quickly viewed as the other, and handing over less money to the Government by way of tax is considered by many to be a profitable enterprise.
Even if the commercial property investor is starting out with a single commercial unit, it’s wise to make the smaller, additional investment of setting up as a limited company. As an individual, the rental income from the commercial property will be subject to income tax at up to and including 40%.
As a limited company, that figure can be halved to 20%. More importantly, should it become necessary to sell the commercial property in question, individuals are subject to Capital Gains Tax, currently set at either 10 or 20% of the gain, depending on a series of criteria.
Corporations and limited companies are not required to pay Capital Gains Tax. The gains form part of their operating profit, and are thus subject to the Corporation Tax mentioned above only.
In addition, a number of other operating expenses connected to the maintenance of the commercial property will be regarded as taxable expenses, and this would extend beyond the most obvious costs such as plumbing and electrical maintenance.
As a commercial landlord, the acquisition of tenants requires advertising, and usually the appointment of a commercial agent. These will undoubtedly be seen as minor expenses in the grand scheme of making a profit from commercial property, but they are expenses none the less, and as such, should be declared when submitting tax returns and thus, ultimately reducing the commercial property investor’s tax liability.
Five simple ways to make money from commercial property, and at Prideview Group, our expert team have been helping our investment clients do just that for years. We’re excited to work with you, so please get in touch and let us know your commercial property investment plans.