Commercial or residential property of any kind may offer profitable property investment prospects. Compared to residential properties like single-family homes or rented apartments, commercial buildings often provide greater financial advantages but also more hazards.
It’s critical to fully comprehend the benefits and drawbacks of real estate investing in commercial to make the investment choice that is best for you.
Positive Motives for Investing in Commercial Real Estate
Here are some advantages of purchasing commercial property over residential real estate.
Earning potential
The earning potential is the best justification for choosing commercial rentals over residential ones. Depending on the location, the state of the economy, and outside variables, commercial properties often have an annual return on the purchase price between 6% and 12%. That is a far wider range than is typical for single-family house properties, which typically range from about 1% to 4%.
Professional connections
Small business owners frequently take great interest in their operations and seek to safeguard their financial security. Commercial real estate buyers are typically LLCs rather than private people that run their investment as a business. Because of this, there is a stronger business-to-business customer relationship between the landlord and the tenant, which helps interactions remain polite and professional.
Public interest in the location
Retail tenants have a stake in keeping their establishments and storefronts in good condition because failing to do so would hurt their bottom line. The interests of commercial renters and property owners are so aligned, assisting the owner in maintaining and enhancing the property’s quality and, ultimately, the value of their real estate investment.
Limited operating hours
Most companies close up shop at night. That is to say, you are employed when they are. You should be able to rest without worrying about receiving a midnight call because a tenant needs repairs or has lost a key, barring emergency calls like fire alarms or break-ins. Commercial premises are also more likely to have an alarm monitoring service so that, if something does occur at night, your alarm provider can alert the appropriate authorities.
More impartial price assessments
Because you may ask for the existing owner’s income statement and figure out what the price should be based on that, it’s frequently simpler to assess the pricing of commercial property than residential property. If the seller is working with an experienced broker, the asking price need to be set at a level where real estate buyers may profit from the current cap rate in the neighborhood for the kind of commercial property they’re considering (retail, office, industrial, etc.). Pricing decisions for residential properties are frequently more subjective.
Net triple letting
Although there are certain variants, the fundamental idea behind triple net leases is that you, as the property owner, are not required to cover property expenses (unlike in the case of residential real estate). All property costs, including real estate taxes, are solely managed by the lessee. Your mortgage will be the only expense you have. These types of leases are frequently signed by businesses like Walgreens, CVS, and Starbucks because they want to keep up with their brand’s look and feel. Because they handle these expenditures, you as an investor get one of the lowest maintenance income producers for your money.
Although triple net leases are uncommon for smaller businesses and there are many different net lease options available in strip malls, these lease types are the best and are not available for residential properties. See Commercial Leases: Negotiate the Best Terms and associated articles in the Your Business Space & Commercial Lease part of this website for additional information on typical lease terms, such as net leases.
More latitude in lease conditions
Contrary to the dozens of state statutes that apply to residential real estate, such as security deposit caps and termination guidelines, fewer consumer protection laws apply to business leases.
While there are many advantages to investing in commercial property versus residential, there are also drawbacks to take into account.
Commitment of time
You have more to handle than a home property if you own a commercial retail complex with five tenants or even just a couple. Being an absentee landlord is incompatible with maximizing your investment’s return. With commercial, you may have to deal with several leases, annual CAM adjustments (costs for common area maintenance that tenants are accountable for), more maintenance issues, and issues relating to public safety. In a word, you are responsible for more, and you share the same concerns about the public eye that your tenants do.
You need professional assistance
If you plan to handle the maintenance concerns at a commercial property, you need to be licensed even if you are a do-it-yourselfer. It’s likely that you won’t be equipped to tackle maintenance concerns on your own and will instead need to hire assistance for urgent situations and repairs. Even though this extra expense isn’t ideal, you’ll need to include it in your budget if you want to properly maintain the house.
When determining the price to pay for a business property investment, don’t forget to account for property management costs. The cost of a property management company’s services, which include lease administration, can range from 5 to 10% of the rent collected. Plan and decide whether you want to handle leasing and the connections yourself or delegate them.
More upfront investment
It’s frequently more difficult to get your foot in the door when buying a commercial property because it typically demands more money up front than buying a residential rental in the same neighborhood. After purchasing a business property, you might anticipate making some sizable capital investments.
After your home has been operating smoothly for a few months, a $10,000 bill for roofing work or a new furnace may suddenly appear. More clients mean more facilities to operate, which means more expenses. You want to be sure that the financial benefits of buying a business property over a residential one outweighs the financial ones.
More dangers
Commercially zoned properties receive increased daily foot traffic from the general public, which increases the risk of accidents and property damage. In parking lots, patrons may be struck by cars, wintertime ice may cause slips and falls, and building facades may be vandalized with spray paint.
These kinds of incidents can happen everywhere, but buying commercial property increases your chances of encountering one. If you’re risk-averse, you might want to think again before investing in residential real estate.