How to build a portfolio of commercial investment properties

By Zarah Mae Torrazo 20 April 2022 | 1 minute read

Thinking of building a commercial property portfolio? Here’s our step-by-step guide on how to create a profitable and sustainable one. 

When people talk about the American dream, it’s the belief that anyone – regardless of where they were born or what class they were born into – can reach their own version of success in the US. 

But in the land down under, the “Australian dream” ultimately means buying property. In its narrowest sense, it’s the belief that property ownership or home ownership can lead to a better life and is an indication of success and security.

With that, it’s no wonder that the residential property market is a hot-button topic: everyone from your parents to your local barista has an opinion on it.

Residential purchases have long been regarded by property investors as being (pardon the pun) “as safe as houses”. Brand new houses, townhouses, and apartments are often purchased for investment purposes by first-time investors due to their relatively low risk, great taxation incentives, and low entry cost, among other benefits. 

A solid residential property portfolio also promotes capital growth and a sustainable income, which is a means to attain financial freedom. 

But when talking about commercial real estate, it’s an entirely different scenario. 

While this property type is full of opportunities and promises greater returns, the case of investing in commercial property is not a common conversational topic among Aussies. Commercial properties are perceived to offer more financial rewards than residential properties, but there’s a catch: the high rewards often come with higher risks for investors. 

Investing in commercial real estate can be a highly rewarding venture, but a profitable portfolio may seem unattainable if you’re at the start of your investment journey. 

For investors who are looking to get the most out of this investment opportunity, here’s our step-by-step guide on how to start building a commercial property portfolio.  

How to build a portfolio of commercial investment properties

1. Set your goals and investment strategy

The entire point of building a commercial real estate portfolio is to reach your financial goals, which is why you need to be decisive about what you’re trying to achieve. Your financial objectives can range from getting a steady stream of passive income to securing an early retirement. 

Your goals will ultimately dictate your investment strategy. When it comes to commercial property, you can look into several strategies, such as a fix-and-flip strategy, a buy-and-hold strategy, or even purchasing a property and renting it out for profit.  

Whether you’re buying commercial or residential properties, having a well-thought-out property investment strategy is key for property investing success. According to one expert, here are the top questions you can ask to help keep you on track.

2. Create an investment business plan

Once you have your investment strategy in order, the next step is to create a plan.

This will initially seem like a tedious process, but the time and effort that you put into this will pay off in the long run. It’ll help you to define your short-term goals and bring you closer to your long-term objectives. 

Apart from this, the business plan also comes in handy if you are planning to form a business partnership and bring someone on board. When you put effort into a plan ahead of your first commercial investment opportunity, it helps convince potential partners that you are committed to the cause. 

3. Set a budget

One important step that those looking to build their commercial property portfolio often overlook is to review their financial position.

First off, you need to be realistic about how much you can afford for your first commercial property. Commercial properties can be harder to finance compared to residential properties, so you may need to have a more conservative budget. Prime commercial properties (particularly those located in the heart of central business districts) 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 a good idea to lower your sights to include properties that are older or may need maintenance work. It’s also advised to invest in property that is situated in locations that are set for capital growth. 

If you don’t mind putting in the effort and time to get them up to scratch, or are content with a modest rent, this could also be a great way to start your commercial property portfolio. With a solid form of security, you may be able to access funding and begin building your commercial property empire.

Seasoned investors know that finance is king when it comes to investing. But you don’t need to hear that from us – get it straight from the horse’s mouth. Tune in to The Smart Property Investment Show for strategic tips on how to secure funding for your real estate investment, as well as other practical investing insights from successful investors. 

4. Research expected rent

Before you purchase any commercial properties, you need to get a ballpark figure of the rental income it could generate. 

This step is particularly important if you’re funding some or all of your commercial property purchases with a loan, as you need to ensure you’ll make enough profit to cover your payments and generate some extra income for you to live on or to grow your wealth.

More importantly, your chosen lender will also require this information, so you need to have a good idea of what current or future tenants will or are likely to pay.

If your commercial property is in a sought-after location with high foot traffic, chances are you’ll be able to command a premium rent. 

However, if it’s in a quieter area or one that lacks vital amenities such as public transport links, the rent you can charge will be significantly lower. Rent can also rise depending on several factors such as the state of the economy, interest rates, supply and demand, etc., though this is less likely to be a problem if you select properties in areas with a steady level of customer demand. 

Average rental prices will also vary significantly in different parts of Australia. Additionally, the rent can vary depending on the commercial property type you choose to invest in. Therefore, it’s a good idea to talk to local commercial lettings agents if you’re not sure how much the type of property or location could command in rent. You can also check out the latest rental reports provided by trusted property data providers. 

5. Time to buy your first property

It’s the moment you have been waiting for – buying your first commercial real estate property. 

If this is your first commercial real estate transaction, don’t rush into a decision without doing your due diligence. Before you seal the deal, there are some essential things you need to consider so you are on the right footing when you build a portfolio of commercial properties. 

Read our article on the things every investor should consider before making their first commercial real estate investment

6. Accumulate more commercial properties 

As time passes, it’s critical to invest in more commercial properties and grow your portfolio.

However, this is easier said than done. Research shows that while many investors start their real estate investing journey with the intent of building a multiple-property portfolio, few get beyond that first purchase. It’s estimated that around 70 per cent of all Australian property investors get stuck at just one property.

As you accumulate more properties, monitoring and managing different properties can quickly become a challenge. It’s critical to ensure you’re always on top of your portfolio and keep it organised. 

Luckily, there are many ways you can organise your portfolio and simplify the task of managing it. A real estate investment spreadsheet can help you monitor your income and expenses regularly and evaluate your investments’ profitability.  

However, a word of caution: the day-to-day management of several commercial properties can be a difficult, if not impossible, undertaking for some investors. In this scenario, an experienced and reputable commercial property manager can help. 

Commercial property managers typically oversee multiple buildings for a property management agency. For larger buildings and complexes, these professionals may work exclusively for the owner at a single location. 

Their daily responsibilities may vary according to property type but generally involves the following: 

  • Building maintenance 
  • Rent collection
  • Finding and keeping commercial tenants 
  • Preparing and reviewing commercial leasing agreements
  • Managing and reporting property finances 
  • Providing advice on legal and regulatory matters
  • Overseeing relationships with relevant vendors, suppliers, contractors, and other trades professionals 
  • Supervising employees for larger commercial properties 

Having a dependable property manager on your team will make a significant difference to the success of your commercial property portfolio. So, finding a company with the right background to achieve your goals will strengthen your bottom line.

7. Diversify your asset classes

“Don’t put all your eggs in one basket” is a popular adage among investors. And it has stood the test of time for a reason: if you channel all efforts and resources in one area, you risk losing everything when things go south. 

To make your commercial property portfolio as solid and resilient as possible, it’s advised to invest in several property classes.

For example, you started your portfolio by investing in retail properties only due to their solid performance in the last few years. However, unprecedented circumstances such as the recent pandemic lockdowns or a bad recession could be detrimental to this asset class.

But if you spread your investments across several different property classes, including offices, industrial and leisure spaces, your profit will be protected against sector-specific declines.

8. Measure the success of your portfolio

To build a portfolio that is profitable and sustainable, you will need to measure its success over time. 

Of course, you can opt to hire a portfolio manager to assess how your commercial property portfolio is performing. But those who are fans of the DIY approach can also use the following metrics to get a general idea of how their investments are faring:  

  • Net cash flow: This refers to the annual difference between your property’s income and expenses. It also keeps track of expenses, e.g. utilities or unit maintenance, as well as debt service payments.
  • Economic vacancy rate: This helps determine whether you should increase your rent. To have a more accurate estimate, you can also compare it to the average vacancy rates for other similar properties in the vicinity.
  • Cash-on-cash return: By dividing your cash flow by the initial investment, you can determine how your investment is doing financially. You can weigh up this metric to other similar properties in the area to gauge how your income is doing.

Once you have a clear picture of your portfolio’s performance, it’s advised to make the necessary adjustments that will maximise your profitability. For this step, it’s recommended to seek professional advice from a financial adviser or a portfolio manager. 

Bottom line

Most investors are wary of banking on commercial properties due to their perceived risks and higher costs. However, once you find your stride, you’d be surprised commercial real estate can boost your investment strategy.

While building a commercial property portfolio isn’t an easy task, it leads to significant rewards. By following the steps above, you can get started on building your commercial real estate portfolio and start getting a steady stream of income from this property class.

Disclaimer: The information provided is of general nature and should not be considered as financial advice. It is not to be acted upon without advice from a qualified professional who understands your particular circumstances. 

For a regular analysis of the biggest themes impacting Australia’s commercial sector, join Scott O’Neill and Phil Tarrant on the Inside Commercial Property series as the duo unpack the latest trends affecting investors in the commercial market. 

RELATED TERMS

Commercial Property

- duplicate, see Commercial Real Estate

Commercial real estate

Commercial real estate or commercial property refers to buildings or land used for business activities and workspaces to generate income.

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How to build a portfolio of commercial investment properties
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