Commercial property yield greater than resi buy-to-let?

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26 Jan Commercial property yield greater than resi buy-to-let?

Why commercial property?

Commercial property yields are generally higher. While a buy-to-let landlord might expect the value of their property to increase as well as taking the rental income, commercial property yield will be higher from rent, but price increases are less reliable.  Another bonus is that typically tenants take on many of the costs that a landlord would have to deal with in the residential market.

These include the cost of insurance and repairs as well as business rates.  Tenants also sign up for longer leases, meaning a more reliable income – though void periods can also be longer.

Choosing a property

Retail units and small offices are the most popular asset types for buy-to-let converts.  Mr Walker said that shops form around 70pc of the auction house’s lots. “Leisure” – which includes restaurants, cafes and gyms, makes up 10pc.

Offices and industrial lots such as small factories each make up a further 10pc of the total.  The quality of a tenant business is very important. Download their accounts from Companies House, or ask the seller for them.

Make sure the business looks in good shape and ask the seller about his relationship with his tenants.  If it’s a shop or restaurant you’re looking at, visit the location to see how busy it is. Think about what hours it is open for and how much demand and competition there is in the area.  It’s also essential to find out the terms and length of the lease, rent paid and when the next rent review is due.

Getting a mortgage

High street banks can be inflexible when it comes to commercial lending,  They are less likely to offer interest-only mortgages and will often only lend for the period of an existing lease, which can be too short to repay the whole loan.

Typically they will allow for an interest-only period at the beginning, after which capital must also be repaid.  If a lot is vacant, you might struggle to persuade a high-street bank to lend. A good surveyor can assess the area and property and draw a conclusion about how easily the property will be let.

Challenger banks can be a bit more flexible, but rates tend to be higher  Don’t assume that a portfolio of residential loans with a high street bank will support your case for a commercial mortgage with the same bank – these divisions do not often talk to each other.

good rate for a commercial mortgage would be around 5 to 5.5pc, rising to 7 or 8pc at the very highest.

Risks and pitfalls

It’s important to hire a good solicitor with experience in commercial property, to examine the terms of the lease and title and organise the sale quickly and correctly.  If you are planning to buy at auction, go to an auction day to experience the process and see what’s on offer.

Once you’re ready to buy, be prepared. Examine the terms well in advance and arrange any finance if you need to borrow to buy the property you have your eye on.  Once the hammer is down, you are contractually obliged to buy the property, and the auction house takes 10pc of the price on the day you buy – so don’t rush in blind.

Investors also need to understand that they have significantly less protection with commercial mortgages than with buy-to-let or residential mortgages.  Lenders can call in the loans at any point and hike rates depending on market conditions.  Mortgages also tend to be variable, with a margin over Bank Rate or Libor. If the rate is not fixed, you are vulnerable to market fluctuation.

Source: Telegraphclick here for full article

Contributor: Julia Hardy

Julia Hardy

Julia Hardy

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