What is Commercial Property?

What is commercial property?

Commercial property is any form of property used for a business activity or to generate profit. In law, commercial is defined by the property not being used for domestic dwelling. 

Typically, commercial real estate is leased to tenants for them to generate income activities. The broad range of commercial property includes everything from a single shop to a giant shopping centre. 

Commercial property also includes categories such as office space, hotels and resorts, restaurants, and any health care facilities. 

Key takeaways:

• Commercial property refers to properties used for a business or to generate income.
• The four main classes of commercial property include office space, industrial units, multi-family rentals, and retail shops. 
• Commercial income can provide rental income as well as the potential for some capital appreciation for investors.
• Commercial property usually requires more sophistication and more significant amounts of lending from investors than residential real estate. 

If you're interested in investing in commercial property, or purchasing a commercial unit for your business, you'll need finance. Like in residential property, there are lots of different lenders in the market who will offer different rates and terms and have varying levels of expectations around you as a borrower.

To help you maximise the offer you receive, work with Rangewell to secure commercial property finance. We'll talk through your goals and help you find a lender, negotiate a deal and successfully finance your project. 

The basics of commercial property

Commercial property, alongside residential property includes two categories of real estate property. First, residential properties will consist of spaces reserved for human habitation and not for commercial use.

Commercial property is used in commerce, and multi-unit rental properties that act as residences for tenants are classed as a commercial activity for the landlord. 

It’s important to note that sites used for manufacturing or producing goods, especially heavy goods, are still classed as a subset of commercial real estate. 

Commercial leases

Some businesses own the buildings that they occupy. However, it’s more common for commercial property to be leased. Usually, an investor owns the buildings and then collects the rent from businesses that operate in them. 

Commercial leases will generally run from around one to 10 years or more, with office and rental spaces; the typical rental term is five and ten-year leases. This can be contrasted with short term, yearly or month-to-month residential leases. 

What is commercial real estate management?

Owning and maintaining leases for commercial real estate will need full and ongoing management by the owner. You'll be responsible for maintenance costs. Property owners may sometimes employ a commercial real estate management company to help them find, manage, and retain the tenants, oversee both leasing and financing options, and help coordinate with property upkeep and marketing. 

The specialised knowledge of commercial property management companies will be helpful as the rules and regulations of property may vary by region, industry, and size. 

A landlord needs to strike a balance between maximising rental coats and minimising the rent turnover. A high turnover can be costly for commercial property owners because adapting the space to meet new tenants can be significant - for example, if a restaurant moves into a property that a yoga studio may have once occupied. 

To find out more about monthly rent costs, get in touch with Rangewell. We'll provide you with everything you need to know. We can source the right commercial property funds for your needs. 

How to buy commercial property

Investing in commercial property can be lucrative and serve as a hedge against the stock market’s volatility. Property investors may make enough money through property appreciates as and when they decide to sell, but most of the return will come directly from the tenants.

Here are some examples of the different types of investment: 

Direct investment 

Investors can use direct investments. They’ll become landlords through the ownership of the physical property. The landlords who are best suited for direct investment will have a considerable amount of knowledge about the industry, or they’ll employ a firm who do. Commercial properties are a high risk-high reward investment. 

Finding the ideal property in an area with low supply and high demand will produce the best rent rates. It’s essential to look at the area’s local economy, affecting the property’s value. 

Indirect investment 

Alternatively, investors may decide to invest in the commercial market indirectly through the Real Estate Investment Trusts or exchange-traded funds that will invest in commercial property-related stocks or invest in a business that caters to the commercial property market such as banks and realtors. 

To find out more about commercial property investment funds, speak to Rangewell today. 

Buying your business premises

Many of the guides related to commercial property focus on investment where the buyer has no previous affiliation with the building. Some businesses find that they can better secure their future and break free of landlords by purchasing the premises they occupy. 

As with other routes to buying commercial property, you'll likely need to raise finance to accomplish your goals. Approaching your landlord with an offer requires doing plenty of research to make sure you are making a sensible financial decision. 

Read our full guide to get up-to-date with everything you need to know about buying your business premises. 

Advantages of commercial property

One of the most significant advantages of commercial property is the attractive leasing rates. Suppose a business invests in areas where the amount of construction is limited by land or law. In that case, commercial property can bring impressive returns and a considerable increase in monthly cash flows. 

Industrial buildings typically will rent at a low rate, but they will likely have lower heads costs than an office tower. 

Commercial property will also benefit from long lease contracts with tenants than residential real estate. Long leases will give the leaseholder a high amount of cash flow stability, providing that long-term tenants will occupy the building. 

In addition to commercial property providing a rich and steady source of income, commercial property will offer the potential for appreciation, as long as the property is maintained and kept up to date.

The disadvantages of commercial real estate

The rules and regulations are sometimes enough to deter people from wanting to invest in commercial real estate. The taxes, purchasing prices, and maintenance and responsibilities for commercial properties can be overwhelming. This is why most investors in commercial property have specialised knowledge or employ a team of people who do. 

Another risk is the increased risk of high tenant turnover, especially when it comes to an unexpected retail close, which leaves properties vacant with little notice. 

When it comes to commercial property, the facilities required by one tenant might differ from the previous. It is down to the building owner to adapt the space to accommodate the tenant’s specialist trade. A property with a low vacancy but high tenant turnover could still lose money when it comes to the cost of renovations for incoming tenants.

The bottom line  

For those who may be looking to invest directly, buying a commercial property is likely going to be much more costly than a residential property. 

On average, commercial properties tend to be far more expensive than residential properties and will cost more to maintain. However, for investors with the money to risk, commercial properties can lead to higher dividends than residential properties that are rented out or sold.

If you’d like to find out more information about commercial property mortgages, speak to our experts are Rangewell today.