Any type of property, whether it be commercial or residential, can be a great investment opportunity. For your money, commercial properties typically offer more financial report than Residential Properties do, such as rental apartments or single-family homes but there are also more risks. Understand the full pros and cons of investing in commercial real estate is important so you can make the investment decision that’s right for you and your business.
What is a commercial Property?
Commercial properties may refer to the following:
- Retail buildings
- Office building
- Industrial buildings
- Apartment buildings
- Mixed-use buildings
Each of these types of properties have different nuances to management. To paint a general picture of what it’s like investing in commercial real estate let’s examine the pros and cons of investing in a single story commercial retail building.
Pros Of investing in Commercial Real Estate
Here are some of the pros of buying commercial real estate over a residential property.
One of the best reasons to invest in commercial / residential rental properties is the earning potential. Commercial properties generally have an annual return of the purchase price between 6 and 12% depending on the location, which is substantially higher than the typical exists for single-family home properties which is between 1 and 4%.
Small business owners generally take pride in their business and want to protect their livelihood. Owners of commercial properties are usually not individuals but llc’s, and operate the property as a business. As such the landlord and tenants have more of a business-to-business customer relationship, which help helps keep interactions professional and can build strong relationships with successful tenants.
Retail tenants have a vested interest in maintaining the way they’re store and storefront look because if they don’t it will affect their business. As a result commercial tenants and property owner interests are aligned in keeping the building’s looking good which helped the owner maintain and improve the quality of the property and ultimately the value of their investment in the long run. With residential real estate sometimes the interests aren’t aligned and the value of a home May decrease.
Limited hours of operation
businesses usually go home at night. In other words you work when we when they work. Taking emergency calls at night for break-ins or fire alarms that have been set off, you should be able to rest at night without having to worry about receiving a midnight call because the tenant wants repairs or lost the key late at night. For a commercial properties it is also more likely you will have an Alarm Monitoring surface so that if anything does happen at night your alarm company will notify the proper authorities and you don’t have to be the one taking the call late at night.
Triple net leases
triple-net-lease Lisa’s have many variations but the general concept is that you as the property owner do not have to pay any of the expenses of the property as you would with the case in residential real estate. The Lecy handles all property expenses directly including real estate taxes the only expenses you’ll have to pay is your mortgage. Companies like Walgreens CVS in Starbucks typically sign these type of Lisa’s as they want to maintain L look and feel in keeping with their brand so they manage these costs and you was an investor get to have one of the lowest maintenance income producers for your money. Strip malls have varieties of net leases and triple mats are not usually done with smaller businesses, but these lease types are optimal and you can get them with Residential Properties.
More flexibility in leasing terms
in commercial real estate there are fewer consumer protection laws. Unlike the dozens of laws surrounding residential real estate such a security deposit limits and termination rules that cover residential real estate. Commercial real estate much more flexible in this section.
The Downside of investing in a commercial property
While there are plenty of positive reasons to invest in commercial real estate over residential, there are also negative issues to consider before you proceed.
if you are the owner of a commercial real estate building which has 5 tenants or even just a few tenants, you have more to manage than you do with the residential investment. which commercial real estate you cannot be a absent landlord and maximize the return on your investment. Was commercial you’re likely dealing with multiple leases, annual adjustments and costs that tenants are responsible for, more maintenance issues, and public safety concerns. In a nutshell you have more to manage than you would with in a invest. And just as your tenants have to worry about the public eye you do as well.
Professional Help Required
if you are a do-it-yourself type of person, you better be licensed if you’re going to handle the maintenance issues at a commercial property. The likelihood is you will not be prepared to handle maintenance issues yourself and you will need to hire someone to help with emergencies and repairs. While this added cost is an ideal on your business you’ll need to add it onto your set of expenses in order to properly care for the commercial property. Remember you need to factor in Property Management expenses when evaluating the price to pay for a commercial investment property. Property management companies can charge between 5 to 10% of your monthly rent revenue for their services, which include lease Administration. Evaluate before and if you want to manage Leasing and the relationship yourself or if you want a Outsource company to be responsible for the leasing.
A Bigger initial investment
Acquiring a commercial property typically requires more Capital upfront than requiring a residential rental in the same area, so it’s often more difficult to get your foot in the door with commercial real estate. Once you acquire a commercial property, you can expect some large Capital expenditures to follow. Your property might be coming along for a few months and we’re here comes the $10,000 bill for a roofing repair or a new furnace with more customers. you will have more facilities to maintain and therefore Mark costs what you hope is that the games in Revenue outweigh the games and cost, to support purchasing a commercial property over a residential one.
Properties that are intended for commercial uses have more public visitors and therefore have more people on the property each day that can get hurt or that can do something to damage your property. Cars can hit people in the parking lot, people can slip on Ice during the winter and vandals and spray paint the sides of the building. Incidents like this may occur anywhere, but the chances of experiencing something like this go up when you’re investing in commercial properties. If your risk adverse, you may want to look more closely at putting your money in Residential Properties.
Please feel free to contact us at any time with any real estate questions you may have we would love to help!