Purchasing a Mixed-Use Commercial Investment Property in the UK – 7 Essential Steps
Purchasing a Mixed-Use Commercial Property in the UK – 7 Steps
Investing in a mixed-use commercial property in the UK can offer the best of both the residential and commercial property market and has been a popular investment choice for savvy commercial property investors for many years.
What is a mixed-use property? As the name suggests, a mixed-use property is a property that is used for both commercial and residential purposes. In other words, it is a property that caters to people who both work and live there. A good example is a building that has a ground floor hairdressing salon premises with a 2-bedroom flat above. Ideally the flat will be self-contained (have a separate entrance that does not affect the commercial premises).
The owner will strive to have 2 separate letting agreements on their mixed-use property and hence 2 sources of income.
1 – A long-term full repairing and insuring (FRI) commercial lease agreement on the ground floor – normally 5,10,15 or 20 years
2 – An assured shorthold tenancy (AST) residential agreement for the flat above – normally 6 months to 1 year.
Having two sources of income, ideally from two separate tenants, makes this a more secure and risk-averse investment. Additionally, it maximizes the returns on the investment.
This type of investment comes with unique considerations.
At Lansley’s Commercial, we specialize in valuing and marketing Mixed-Use Investment Properties in Reading, Berkshire and the surrounds. We have identified the following factors as crucial to the profitability and viability of such purchases:
- Location
Evaluate the mixed-use property’s surroundings, considering proximity to motorways, public transport links (train and bus stations) and parking availability.
Proximity to local amenities such as shops, restaurants, schools, parks and places of worship are also very important. These factors will play a major role in determining rental and occupancy rates.
- Market Demand and Trends
Understanding the local market is essential for gauging demand for both residential and commercial spaces. Speak to local commercial and residential agents, look at rental rates of similar properties on commercial and residential estate agent portals. Be aware of any planned infrastructure or property developments in the vicinity which may impact future demand and property value.
- Property Condition and Layout
A thorough inspection of the property’s structural integrity is recommended. Employ the services of a local chartered surveyor for this.
Ensure that the spaces are adaptable for different tenant needs – both the residential and the commercial. We recommend that the commercial property be kept basic yet clean, with all services in good working order. It is best to maintain it as a blank canvas, as business occupants will typically renovate according to their specific operational requirements. See our blog on how to prepare your commercial premises for letting.
As mentioned before make sure that the flat has a separate access, and if not, an ability to create one without significant expense. The flat should be neat and tidy, light in colour, airy and equipped with separate utility meters from the commercial property. We also recommend not supplying white goods such as refrigerators, ovens etc as this can become a management headache in the future.
Ensure that the property has a good EPC rating and that it has an up to date EICR certificate and a Gas Safety Certificate.
- Financial Performance
Evaluate the property’s financial viability by examining the existing leases and rental income currently achieved. We would recommend a return on investment (ROI) of 7% or more.
As previously advised, it is recommended to have separate leases for the commercial and residential parts with different tenants. This approach allows you to maximize rental income and diversify risk by not relying on a single tenant.
Analyse all operating expenses and outgoings such as maintenance, upkeep of access areas, mortgage repayments and interest rates payable.
- Tenants and Lease Structure
The type and reliability of your tenants can significantly impact the investment property’s stability and profitability.
Where the commercial property is concerned, having a tenant who is experienced at their chosen business (i.e. preferably not a start-up) who has an already operating business and who may be expanding or re-locating, is recommended. Acquiring a tenant who is operating a business that provides value and whose services are in demand in the area is also a must. Lastly, a business whereby there is not too much competition from other similar businesses in the area is recommended. Once an ideal tenant has been sought, the longer the commercial lease, the better, with perhaps the flexibility of a break cluse.
For the residential property, it is crucial to assess the tenant’s financial stability. This includes verifying their income and ensuring they can comfortably afford the rent. Additionally, obtain references from their previous landlord to evaluate their rental history, including punctuality with payments, property maintenance, and overall reliability as a tenant.
- Property Management
Effective management is key to maintaining the property’s value and ensuring tenant satisfaction. Decide between:
- self-management – whereby you can save on management fees but will require significant time and expertise
- employing the services of a professional management agency – which will incur certain fees however take on the burden of dealing with maintenance, lease renewals, rent reviews, rent collection, gas and electric certificate renews, repairs etc.
- Appreciation Potential
Consider the property’s potential value to appreciate in the future.
The mixed-use property’s potential for appreciation is dependent on its location, rental income and the condition of the property. By purchasing the correct property, maximising its rental income and maintaining the property throughout your ownership, you will enhance its appreciation and the rewards of your efforts.
Another way to increase rental income and property value is through renovation opportunities. However, ensure that the expenses are justified and will genuinely enhance the property’s value and rental income.
Conclusion
Investing in a mixed-use commercial property in the UK requires diligent research and careful consideration. By evaluating the 7 points mentioned above this can be a very satisfying and lucrative investment.
Should you wish to have a chat about this or any other commercial
property matter, please contact Lansley Commercial