Do so many of us stick with residential investments because we feel at home with them?
No, the pun is not intended, but I do want to encourage you away from a concentration on the residential market. Why not think of investing elsewhere, in other types of property?
In commercial investment many of the parameters are still the same. You still have to balance risk with yield. Our old friend location is still pre-eminent. The state of repair may not be quite as important, but the quality of covenant is. There are many quite serious advantages, however. How often do domestic tenants vacate compared with business ones? 5,10,15 and even 20-year leases are very common for offices, shops and factories. Rent reviews are usually on similar or shorter anniversaries and are much easier to negotiate than those of a domestic nature.
Certainly, I feel a strongly- influencing factor in those negotiations is the fact that the rent is a business expense and, therefore, of much less emotive concern than if the money is coming direct out of the tenant’s own pocket. Just think how, since the rent and other expenditure will be treated as a business expense to the tenant, that old friend of ours the tax collector is helping him to pay as well! I know that businesses can, and do, go bankrupt, but then with care over your selection of the tenant this should not occur too often. If you happen to have a bad tenant, distress for outstanding rent is often a wonderfully effective, and quick, remedy. To regain possession, if that becomes necessary, is much, much easier than from a domestic tenant and, if you have chosen the location well, re- letting may also be easier.
Consider Alternative Property Investments
But then you will tell me that gross yields are less, and you will be correct. Furthermore, the chance of capital appreciation might also be less – but are you sure that in the present domestic property market future appreciation is going be as beneficial as is has been in the recent past?
With business properties, your income is less likely to be subject to the number and amount of residential property deductions. Most business leases provide for the tenant to pay all rates and council tax; to meet the insurance premiums on the building; to carry out some, if not all, of the repairs and decorations; and (often quite a “nice little earner”) to compensate the landlord at the end of the lease for any failure to repair the structure; “dilapidations” is the term.
The need to set aside a sinking fund for long-term maintenance is, frequently, less necessary and certainly agents’ fees are much lighter. Further, businesses are, generally, much more willing to pay their rents by standing order; think how much easier that makes management if you decide to do it yourself.
So, start thinking shops, offices, factories, retailing, warehouses etc. What are the angles you might go for? Perhaps you are going to think again about which auctions you should patronise. Don’t neglect your research. Look about in your own secondary shopping areas and watch the trends. Retailing has changed, but I am not thinking you are yet ready to build the next Trafford Centre or Meadowhall. In the suburbs, there is a movement for many of the secondary shops to become occupied by service users rather than retailers. At the same time capital values have drifted downwards.
Think how bars have proliferated in the local shopping streets. Think always of the possibility of adding value to your purchase by developing any vacant parts or by building out, cheaply, at the back of a shop to add to its retailing floor area. Shops often have a large vacant area of land at the rear that might give you scope for further development. Have you explored the tax concessions on the provision of empty living accommodation above shops? Look up at those vacant upper stories with their bleak, blank, dirty windows and reflect on the wasted opportunities behind them. Can they be used as offices, which is even better than converting into flats? This is a market that seems to be returning, as planning restrictions have eased. So has the conversion of wholly residential accommodation into offices. It’s not necessarily an easy prospect, but maybe you can come across such a possibility in the area you know well. If the opportunity looks feasible, a free, exploratory chat with the Planning Control Officer in the Local Authority Planning Department is only a telephone call away, and they’re usually very open and helpful.
The building of industrial developments is not, perhaps, yet, your cup of tea, but why not start exploring industrial estates and industrial investment lots? As a starter, you might be better to buy an industrial building ready let. Still look for that good location and good covenant. Don’t necessarily be put off by untidy surroundings, but do beware of cheaply-built buildings. Avoid individual users or estates where pollution seems likely. Don’t be put off by successful small tenants that are too busy to maintain everything scrupulously, but do bear in mind that a build up of pollution on your land could be a time bomb under your future increase in capital or rental value.
I hope this provokes you into wider investment thoughts.