MYTH - Commercial property is very high risk

All property investing carries risk, and commercial property is no different but it not as bad as you think.

Commercial property is normally secured behind the rental income of your tenant. So, if rent is coming in on time and you’ve strong reason to believe it will continue to do so, you’re in a great position and on your way to build a solid investment portfolio.

Larger commercial investments might have an ASX-listed and national (or even international) business as a tenant, which would mean the probability of them going bust is very slim. Should they want to break the lease for whatever reason (also a very slim chance), if your lease is airtight which it should be, chances are you will be paid or re-imbursed compensation for any monetary loss until you find another tenant. Larger corporations tend to not re-nig on leases because for them its just bad business.

Many successful investors will agree that commercial property has an important place in a balanced portfolio. However, many property investors start off in the residential space and after their first commercial purchase, they tend to stick to commercial property due to their returns with very few going back to residential.

Most small to medium sized commercial leases are typically three to five years and some can be secured up to 10-15 years. So, a lease renewal normally happens every 3 or 5 years in most cases, unlike a residential investment where it’s 6 or 12 months. Whilst its quicker to find a residential tenant, its also quicker for them to vacate. Commercial tenants on the other hand normally have a clause in the lease that stipulates 3 to 6 months intent to vacate notification and sometimes even longer.

Commercial tenants also tend to be a lot more ‘sticky’ in their tenanted locations because to move a business, its not only a considerable cost for the actual move (moving plant, machinery, storage racking and stock to name a few) chances are the new premises will need a new fit out, and then there’s the marketing/print costs of notifying all your customers and suppliers of the move.

In summary, if you know how to mitigate against risk by doing your due diligence when you purchase, find a quality tenant and understand the peaks and troughs of the commercial property cycles, you could have peace of mind for many years. And the risk involved is no greater than with residential property.