INSIGHTS | Risk vs reward: Tips for evaluating the business case of an investment property

Determining the value of a commercial property, whether an investment or owner-occupied property, might feel like an art, but in reality it is more of a science.

Tas Costi, Director of Costi Cohen, Australia’s leading commercial property buyers agency, says that navigating a fast-moving property market is tough, and the metrics used to determine whether the property will meet an investment goal are specific to each person or organisation; however, there are several techniques and tips that might be referred to when determining whether to proceed with a commercial property purchase.

The basic premise of this strategy is to base the value of the property on the income it is expected to generate. This is useful for income-producing properties such as apartment buildings, office buildings and retail.

Determining a property’s net operating income can be found by subtracting all operating expenses such as maintenance, tax, and insurance from the rental income. It is helpful to understand approximately how long the property will be held for and vital to look at comparable properties in the area to gage if your projected rental yields are realistic or wishful thinking.

Capital growth
Whether you’re investing in or occupying a commercial property, the future growth potential of the site should be considered when purchasing.

Looking at future zoning potential, infrastructure improvements, and the general growth trends of the location you’re purchasing in should all be taken into account. Of course macroenomic conditions will impact overall market movements, yet some locations are still primed to grow more than others.

Investors and purchasers should also evaluate what improvements they can make to the property itself to increase value in the medium-to-long term. Design and construction costs should be carefully assessed to ensure you’re not overcapitalising.

Due diligence
Thoroughly researching and evaluating all aspects of a property and its surrounds before purchasing is imperative, as any hidden qualities can have a material impact on the current and future value of the property.

Some examples of due diligence include:

  • Inspecting the property to determine its condition and understand any repairs or renovations necessary.
  • Determining whether the property complies with zoning and land use requirements.
  • Are there any environmental concerns or remediation required? For example, does the property contain asbestos? Have any chemicals from previous tenants seeped into the ground?
  • Are there any existing leases or tenancy agreements that may impact your rental yield, or access to the property for your own purposes?
  • Is the property free of any liens or encumbrances? Does the seller have the legal right to sell the property, or does another organisation have a claim to it?

Tas Costi said that people often think that commercial property purchasers or investors would be less emotional and more focused on the numbers- but that isn’t always the case.

“We often find that commercial property purchases involve just as much emotion as someone purchasing their own home. Having a commercial property buyers agent on your side will help make sure you’re buying the right property for the right price.”