Commercial property can be one of the most lucrative investments in real estate as it offers investors the ability to acquire more clients while growing their business interests. However, it is crucial to keep in mind that the dynamics of investing in commercial property differ from that of residential property since its more complex and involves more risk.
What is commercial real estate?
Commercial real estate refers to buying or leasing/renting out a property with the aim to generate income. It involves leasing or renting out residential and office buildings; hotels, restaurants, and bars; shopping malls and retail shops; agricultural farms and ranches; land or plots; industrial buildings; garages and storage facilities such as warehouses
Factors to consider if you are looking at investing in Commercial Property
1. Find a suitable location
Location is critical. You will want to ascertain that the property is situated in an area that is conducive for business activity. Indeed, the location of the property can positively or negatively impact your rental income or the profits accrued from the sale of the property. Therefore, you will need to consider the following: (a) the potential tenants/the buyers you desire to attract (b) the crime rate in the area (c) the costs of electricity and water connections in the area (d) the proximity to the major highways and the accessibility of the commute routes (e) accessibility to social amenities such as shopping centers, hospitals, and schools.
2. Familiarize yourself with the zoning laws and building regulations
It is prudent to familiarize yourself with the zoning and building regulations permitted in the property you seek to purchase. Zoning laws are the rules and regulations that the county government uses to identify which land uses are permitted or prohibited in a specific area. The type of zonings imposed by the Government involve residential, commercial, agricultural, and industrial zones. This means if the land is designated for residential, agricultural or industrial purposes it cannot be used for commercial purposes unless a change of user is undertaken.
Certain areas impose building regulations that should be adhered in construction of commercial property. For example, the Kenya Civil Aviation Authority (KCAA) has strict regulations that must be adhered to by developers in the erection of properties situated near airports so as not to obstruct the smooth operation of airplanes when landing and taking off.
3. Acquire adequate finance options
Investing in commercial property can be very costly and without reliable and adequate financing options in place, it is simply impossible to bring your dream into reality. There are several ways to finance a commercial property investment, it is therefore important for you to work with the right professionals so as to assess the possible risks and expected rate of return of the investment.
4. Lease, License, or Tenancy Agreements
It is fundamental to understand the different rights and obligations imposed by the various commercial property agreements. Lease, license, and tenancy agreements may seem the same on paper, but they confer different rights and obligations on the different parties involved. The type of agreement and the term(period) imposed by the agreement may have a significant impact on your ability to generate income from the property. For example, when it comes to the review of rent and termination of an existing agreement, tenants in controlled tenancies enjoy more protection and rights as compared to tenants in lease and license agreements. Therefore, engage the services of a commercial real estate lawyer to advise on what agreements to get into to avoid incurring losses in your investment.
5. Know the outgoings payable on the property
It is prudent to familiarize yourself with the outgoings payable on the commercial property and whether you can afford them. Some of the outgoings on the commercial property include land rent, land rates, charges, insurance premiums, service charge, taxes, management fees, operation costs and maintenance costs. As a landlord, understanding the outgoings applicable to your property will greatly aid you in how to price the rent and ensure that you comply with the law.
6. Obtain an insurance cover
Since commercial property owners are exposed to a myriad of risks, it is advisable to acquire rental property insurance. Rental property insurance is a special type of home insurance designed to cover the risks a property owner faces when they rent out their properties to third parties.
Rental property insurance insures the building itself (structure), the fixtures and fittings against fire; acts of God such as storms, lightning, and earthquakes; flooding as a result of bursting and overflowing water tanks or pipes; human causes such as riots, strikes and malicious damage and other unforeseen events. Notably, the policy also covers the lost income suffered by a landlord and injuries suffered by tenants while in occupancy of the property.
Written by Cynthia Kitolo
Legal Officer & Advocate of the High Court of Kenya