Commercial property investment: a starter’s guide

Higher rental yields, longer leases and tax benefits are some of the many reasons commercial properties can make for appealing investments. But, as with any asset, there are risks.

Many investors are taking a closer look at commercial property investments as residential property yields moderate across the country.

So if you've taken the leap, or you're thinking about entering the fray, Steadfast has put together a guide to insurance and risk management considerations.

1. Identify property risks

All commercial properties carry inherent fire, safety, theft and public liability risks, but your risk exposure may be higher if you purchase an older, unrenovated building.

An experienced insurance broker can help you identify risks on your property, as well as affordable risk mitigation solutions.

“To get a good insurance premium rate – let alone acceptance – you need quality control and detection systems within the property” says John Clark, Steadfast's Broker Support Manager.

“For example, a sprinkler system or suppression system would be very good, rather than waiting for the fire brigade.”

2. Choose the right tenant

The tenants you choose also have a big impact on the risk to your investment, says Clark.

“If you have a tenant that's got various flammable products inside the business, they will present a much higher risk to an insurance company than a business that's storing bricks” Clark adds.

 “To get a good insurance premium rate – let alone acceptance – you need quality control and detection systems within the property” 

3. Protect against damage or total loss

Loss or damage to your building could cripple you financially if you're underinsured compared to current standards.

For example, say a fire breaks out and razes your 20-year-old building to the ground.

“The local council may say 'when you rebuild it you have to put water tanks in, you need specific toilets, and you need car parking space'” Clark says.

“Now, you've only insured it for its $2 million value, but it might cost $3 million to rebuild. You've lost your asset, you've lost your yields, and you're short $1 million. All of a sudden you're a lot worse off.”

4. Protect your revenue

“If the building has a mortgage on it, who pays the mortgage? If it hasn't got a mortgage and you're using it for income, can you survive without that income?” Clark says.

How long you should insure that income will depend on how long it would take to both rebuild the building and obtain a new tenant, Clark notes.

“You might rebuild it in 12 months, however it might take another six months to get a tenant” he says.

5. Understand public liability

When it comes to public liability on the premises, both you and your tenant have responsibilities – so it's important to know what yours are and maintain the premises accordingly.

As the property owner, you can be liable for any bodily injury or property damage that arises from the ownership of the property, explains Clark, which may include a slip and fall or  a balcony giving way.

The tenant on the other hand would likely be held responsible for a slip and fall that involved something being left on the floor, such as a stock item.

6. Talk to the experts

While owning a commercial property definitely has its perks, your investment can be fraught with risk if you adopt a 'she'll be right' attitude.

That's why it's important to seek the assistance of an experienced insurance broker.

They'll not only help you mitigate the risk of something going awry, but can line you up with the right kinds of cover in case they do.

 

Before you dive into commercial property investment, get the experts by your side – including your local Steadfast broker.

Important note - the information provided here is general advice only and has been prepared without taking in account your objectives, financial situation or needs. Steadfast Group Ltd (ABN 98 073 659 677, AFSL 254928)
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