Pros and cons of investing in commercial property

Everyone will agree that any property whether it is commercial or residential is a good investment. But if choosing between these two, commercial property presents better financial opportunities than the residential one, although it possesses some risks too. So let’s analyze all the pros and cos of such investments to make the right decision.

The notion “commercial property” includes:

·         Industrial buildings

·         Office buildings

·         Apartment buildings

·         Warehouses

·         Retail buildings

·         “Mixed use”.

Let’s start with the benefits.

The potential revenue. It will give you the chance to earn, as the annual return of commercial property is 6-12%, depending on the location. Compare this with 1-4% of residential property income.

Business-to-business customer relations.  The interaction is courteous and professional as the owners of such property are usually LLCs and not an individual.

Publicity. The tenants are interested in maintaining their building so as not to affect their business. The same is with property owners, who understand the necessity to maintain and improve their property.

Limited work schedule. You operate only when your tenants work, but usually all the firms are closed at night. So you will not be waken up in the middle of the night by an alarm clock or the call of your tenant who needs urgent repairs. Furthermore, commercial properties are equipped with special alarm monitoring service.

Better price estimation. The price is calculated due to the income statement of the current owner. With the help of a good broker, the stated price ought to be set at a price where a buyer can earn the place’s prevailing cap rate for the commercial buildings they are looking at.

Triple net leases. There are several variants of them, but the main principle is – the owner does not pay any expenses on the property, only the mortgage. All other expenses are handled by the lessee. This type of leases is not applied to residential property.

Flexible lease terms. On the contrary to residential property, which is governed by state laws, security deposit limits and termination rules, commercial property is free of this.

The drawbacks of such investments

Time commitment. There are more things to manage for the owners of commercial buildings with 5 or more tenants than for the owners of residential property. You are not allowed to be an absentee owner and get the maximum return from your investment. You will have to deal with multiple leases, annual CAM adjustments, some maintenance problems and concerns as to the public safety.

The necessity of professional assistance. You should have a license if you are going to deal with maintenance issues yourself. But it is better to apply for professional help in this situation and hire somebody. Do not forget that these expenses should be included into the cost. You will pay 5-10% of your rent to property management companies, including lease administration.

Be ready for larger initial expenses.  After buying a commercial property, you may face the necessity to spend more on its repairs or new appliances. The larger is the property, the higher are the expenditure to follow. The thought about your future income is the only thing that can calm you down.

Higher risks. Commercial property is used by the larger amount of users, who can get hurt or damage the property.  If you are afraid of such risks, turn your attention to residential property instead.

Article sourced

Leave a Reply

Your email address will not be published. Required fields are marked *