Commercial property investing simply requires common sense: Chris Lang

Let's go right back to basics and break down a commercial property investment into its fundamental components.

You see, very few investors seem to spend enough time to fully understand what's involved.

Your Investment = Equity + Debt + Ideas + Time

And you may care to explore each of these aspects in a little more detail.

Equity

When first starting in commercial property, most people assume equity simply means available cash. But that doesn't necessarily always need to be the case.

Naturally, every deal should stand on its own, from a financing perspective. In other words, you shouldn't allow your lender to control multiple properties as collateral, for just one loan.

However, that doesn't mean you can't arrange a line of credit on your home (or another residential property) to provide all, or part, of the equity required to secure the commercial property.

Debt

The lender for your new purchase doesn't really care where your equity (say 30%) actually comes from — so long as the income from the commercial property provides at least 1.2 times coverage, for your interest payments.

When arranging your finance, you need to pay particular attention to the loan structure. There are several things you should keep in mind, like:

• Not just focusing on the rate and fees;
• Building in flexibility for the future; and
• Taking control of the actual valuation.

But right from the outset, you should always be considering clever...

Ideas

For you to enjoy "super growth" on your investment, you should continually be looking for properties where you can add genuine value.

And this comes in a variety of guises:

• Bringing under-let tenancies up to proper market rentals;
• Planned and progressive upgrading during your ownership;
• Subdividing ONE title into two or more smaller components; or
• Identifying change-of-use opportunities, to generate a higher net income from basically the same property.

No doubt you will come up with even more ways of your own, as to how you can add some further value.

Time

If you have bought well, your commercial property will generally grow in value (with inflation) over time. That's even if you do nothing by way of adding any value yourself.

So really, it all comes down to your attitude towards property management. And here you have several choices:

• File and forget;
• Maintain the property only when required;
• Maintain the property in original condition; or
• Adopt an ongoing program for upgrading.

If you're a bit of a scrooge, you will opt for either of the first two — and probably try to manage the property yourself.

However, this could prove a rather foolish approach, particularly given the current-day statutory compliance requirements.

As such, you would not only be missing out on growth opportunities but also running the real risk of incurring significant fines.

Engaging a professional property manager will allow you to implement, and benefit from, tax-deductible improvements, for which the market will ultimately reward you handsomely.

Bottom line: commercial property investing simply requires common sense, not rocket science.

Chris Lang is an advisor to commercial property investors and gives keynote speeches and regular seminars on the best way to invest in commercial property. He maintains a blog, his-best.biz, which he updates regularly about the best way to get the most out of your commercial property investment.