26 November 2020/ sale_commercial_property_guide

How to build a commercial property portfolio

Find commercial property to rent at Realla

Investing in commercial property can be highly rewarding, but a profitable portfolio may feel out of reach if you’re at the start of your journey. Whether you’ve got a big budget or have a modest amount to invest, getting started doesn’t need to be complicated. Here’s our step-by-step guide on how to build a commercial property portfolio.

146642-24

1. Pick a great location

Commercial property investment can generate a healthy income, but you’ll need to do your research before buying. It may not be the case that your local area is the best place for high commercial rent yields. Different types of commercial property will also fare better depending on where you’re looking to buy.

For example, out of town industrial units that are within easy reach of a key motorway for good transport links will be ideal for many businesses. However, a retail unit in the same location isn’t going to be as appealing, meaning it’s not a particularly savvy investment. Similarly, if your local area is viewed as a quiet residential spot, it’s going to be more lucrative to build a property of homes instead.

Doing your research can be time-consuming, particularly when you’re eager to get started on building your portfolio, but it’s an important step. If you skip it, you could end up with properties that don’t generate the returns you were hoping for.

2. Set a sensible budget

You need to be realistic about how much you can afford for your first commercial property. Commercial properties can be harder to secure funding for (we’ll talk more about this in a minute) so you may need to have a more conservative budget. Prime commercial properties can sell for millions and most people simply don’t have access to that kind of cash.

To get your foot in the door, it’s likely you’ll have to lower your sights to include properties that are older or may need maintenance work. If you don’t mind putting in the hours to get them up to scratch, or are happier with modest rent, this could be a great way to start your property portfolio. With a solid form of security, you may be able to access funding and begin building your property empire.

3. Research expected rent

Before you purchase any properties, you need to get an idea of the rental income it could generate. This step is particularly important if you’re financing some or all of your purchase with a loan, as you need to make sure you’ll make enough to cover your payments and generate some extra income for you to live on. Your chosen lender will also ask for this information, so you need to have a solid idea of what current or future tenants will or are likely to pay.

If your commercial unit is in a sought-after location with high footfall, you’ll be able to command a premium rent. But if it’s in a quieter part of town or one that lacks public transport links, the rent you can charge will be significantly lower. Rent can also inflate or deflate depending on the state of the economy, though this is less likely to be an issue if you choose properties in areas with a good level of customer demand.

Average rental prices will also vary significantly in different parts of the UK. According to Statista, the average annual cost of renting prime retail space per square metre (psqm) in London’s West End was a staggering £14,600 in 2019. By contrast, prime retail space in the city of Manchester, which is still a vibrant, bustling location, costs just £1570 psqm per year on average.

You could speak to local commercial lettings agents if you’re not sure how much the type of property or location could command in rent. Alternatively, browse sites like Realla to get a sense of how much certain types of property in locations across the country are on the rental market for.

4. Secure your funding

Most investors don’t have enough cash lying around to purchase their commercial properties outright. Instead, you’ll need to find another way to begin building your portfolio. Business loans and commercial mortgages are the most common funding options. However, if you need to borrow more than £25,000, a mortgage is your best option, as lenders will generally require some form of security to reduce the risk of giving you a significant sum.

Commercial mortgages are generally offered over five to 25 years. Unlike residential mortgages, where mortgages for up to 95% of the purchase price are available, it’s unlikely you’ll be able to borrow more than 70% of the purchase price. Interest rates also tend to be higher, as commercial mortgages are considered riskier by lenders.

As this type of loan is more complex, it’s best to speak to a specialist commercial mortgage broker rather than attempt to do it yourself. They will find you the best deal and guide you through the process, which may include producing a business plan and proof of any existing lease/tenancy agreements.

5. Visit a property auction

Purchasing properties at auctions is a great way to start building your commercial property portfolio. Buildings sold here, as opposed to via estate agencies, can be significantly cheaper as they often require renovations to make them suitable for occupants. If you don’t mind getting stuck in to a bit of DIY, auction properties can be a fantastic option. You can find a regulated property auction in your chosen area using NAVA’s Find an Expert tool.

However, if you don’t want to waste time or precious budget carrying out potentially extensive renovations, you’ll find plenty of commercial properties to purchase right here at Realla. Filter to find the ideal property class, location, price point and more and start your property investment journey without the hassle.

6. Find a trustworthy lettings agent

Generally, commercial property tenants are not managed by the landlord – though there’s no reason why you can’t deal directly with tenants. But if you’re trying to build a career out of your property portfolio, leaving the time-consuming tenant admin to an experienced agency will cut out a lot of the hassle. You may find it tricky to balance chasing rent, managing lease renewals and maintenance with your other commitments.

Carry out thorough research into commercial lettings agents in your area, taking into consideration things like:

  • Previous client reviews
  • Trustpilot reviews
  • The size of their portfolio
  • Areas of specialism
  • Management fees

7. Diversify your property classes

To make your commercial property portfolio as robust and resilient as possible, it’s a sensible idea to invest in a number of different property classes. Let’s say you choose to invest in retail properties only. Unforeseen circumstances like 2020’s lockdowns or a bad recession could affect your income badly. But if you spread your investments across several different property classes, including offices, industrial and leisure space, your income will be safeguarded against sector-specific declines.

Want to find out more about investing in property? Read our other investment guides.