Real estate is always an exciting investment opportunity. Both commercial real estate investing and residential are viable options, although, in terms of cash returns for your money, commercial properties can be expected to offer greater profits. Of course, with these greater profits are some higher risks that the investor must be fully aware of, if they hope to walk away with a winning.
Following is a rudimentary overview of the various Pro’s and Con’s of commercial real estate investing. Review this well if you hope to make savvy investing decisions in this profitable marketplace.
What is “Commercial Real Estate”?
Not to put too fine a point on the topic, commercial real estate refers to the properties that will be leased for commercial purposes, as opposed to those leased for living spaces. Commercial properties can be restaurants, office buildings, shops, work shops and more.
The common practice is to sell off a building whole as a single office building, factory or restaurant. On the other hand, the same property can be split up into many smaller units and sold individually as well. This usually happens because the developer has plans to expand the project or wishes to see returns on his investments sooner rather than later.
Why Commercial Real Estate Investing could be a Good Idea?
Following are the major advantages of commercial real estate investments that should be handled with skill to maximize their benefits.
1 – Greater Profits
The primary reason commercial real estate trumps residential real estate is the higher returns on investment that can be expected. Residential properties have an average annual return on investment of about 1% to 4%, whereas the figure from commercial properties can be as high as 15% but usually range between 5% and 8 % depending greatly on the location.
2 – Convenient Professional Relationships
When dealing in commercial real estate it is most common that the tenants leasing your property will be LLC’s, meaning the interactions will be considerably more professional than when dealing with individuals in their homes.
3 – Top Notch Presentations
While residential properties are left to the diligence of the residents (or lack thereof), commercial properties are (almost) always kept looking their very best. The tenets of a retail outlet have a vested interest in keeping the property as impeccable as possible and this is terribly convenient.
4 – Convenient Working Hours
Businesses typically operate during the regular business hours and retire for the night. Unlike residential properties that see all their action in the nights when the people are home. Other than the odd chance of a break in or fire at your commercial property you will never have to address anything after dark. Such as the need for a new water heater, set of keys, etc.
Because you will likely own a piece of a much larger structure, there will probably be an improved security system keeping your investment safe from vandalism, which is a constant threat that must be budgeted for.
5 – Objective Price Evaluations:
It will be easier for anyone to ascertain the true value of a commercial location. All that is needed is an income statement from the current owner and this will give you an accurate idea of the value. If the seller is doing business with an experienced property broker, the asking price will be ideally set where the buyer can still earn the cap rate for the area for the type of business they are planning on setting up.
Residential Properties, on the other hand, are often fudged over with sentimental value and discerning the intrinsic value can be difficult for even the most experienced real estate investors.
6 – Triple Net Leases
Residential real estate will require the property owner to handle all the expenses for the property. In commercial real estate, triple net leases say the party leasing the location handles these bills, the only bill the owner must concern themselves with is the mortgage. Chain corporations like CVS, Starbucks and others will often make arrangements like this as the feel and style of the location must follow company standards, ergo they cover these expenses.
7 – Flexibility in Lease Terms
Commercial Leases are controlled by fewer protection laws than residential property. State laws like termination rules and security deposit limits in place for residential locations are not applicable. This in itself can have many advantages.
Why Investing in Commercial Real Estate Investing MIGHT NOT be a Good Idea
Just as there are many advantages to the commercial real estate option, there are certain specific dangers that must be avoided if an investment is going to be profitable.
1 – Time Commitment
If you are leasing out commercial retail locations to five different tenants you will be doing significantly more administrative work than in the residential world. You can’t expect to be making optimal profits if you are not paying attention to your investments.
In addition to multiple leasing there will be the consideration of public safety, CAM adjustments and plenty more maintenance issues than with residential real estate. This will all be more work for you the manager.
2 – Professional Services Required
You might be one of those confident DIY types, who have no qualms about tinkering with the plumbing until you get it going, you may even be very good at that. But in the commercial real estate world, licensed professionals are required for many of the tasks at hand. This means that unless you are a licensed repair worker, many of the situations will call for the professionals and their professional rates.
This arrangement is less than ideal for sure, but it is a cost you had better save up for to properly maintain your company. Be sure this is an expense you take into consideration when deciding on the best price for a commercial property.
Property management professionals can do this for you as well, they will typically charge between 5% and 10% of the rent value for this service. Outsourcing these responsibilities can reduce your income but it could also save you time and failure,if you are somewhat inexperienced.
3 – Larger Initial Investment
The resources you will need to acquire your commercial property will be significantly higher than you what you would need for a residential property right next door. This makes it a bit more difficult to get started. Once you get the investment rolling, you can expect superior returns for your investment.
For a couple months you may feel like nothing can beat you before out of the blue come bills for repairing the boiler and maintaining the roof. With many more people occupying a commercial location there are plenty more expenses for reparations and regular services. This is where it take the balance of a tightrope walker to make sure the higher revenues are not drowned in the plenty more pressing bills.
4 – Greater Risks
Because commercial real estate is open to a much higher quantity of visitors, there are also much higher chances that something or someone will get hurt or damaged. Parking lots can be death traps, stairways can be lawsuits waiting to happen and beautiful white walls can be the canvas for obscene vandalism!
Conclusion on Commercial Real Estate Investing
These kind of things are not isolated events, but the chances of being the victim of such atrocities rises significantly when you invest in the commercial real estate market. If you feel you are more inclined for risk free investments, this real estate market may be a bit too upsetting for you.
On the other hand, if you have a head for planning, an eye for details and nerves of steel, you might find a glistening future in commercial real estate investing.
What do you think about Commercial Real Estate Investing? Do you have any experience? Or you just want to step into this world of possibilities…? Let us know through the comments section below.