Pros and Cons of Investing in Commercial Real Estate
When you are considering investing in commercial real estate, it is essential that you take the time to learn. Educate yourself on the process, on financing, on your target markets, on applicable laws. And do not forget to investigate the pros and cons of entering the commercial real estate investment game. It’s a crucial first step.
The Benefits of Commercial Property Investment
There are a host of advantages to consider, including:
- Potential for income. Commercial properties offer an annual return of between 6 and 12 percent, on average. While residential investments can also be favorable, they tend to have a lower return (1 to 4 percent).
- Invested tenants. When you lease or rent a commercial space, it is in the tenant’s best interest to keep it looking its best. They’re running a business, and they need to attract and welcome customers/clients/guests with a professional appearance. You can eliminate some of the worry of residential renting and property damage.
- Manageable hours. Now, there will always be things that go bump in the night – broken pipes, break-ins, etc. – but because tenants typically operate during normal business hours, you work when they work and reduce those midnight calls.
- Greater flexibility. There are fewer consumer protection laws in place for commercial leases. This means you can set higher security deposit limits or more stringent termination clauses, if you need.
- Possibility for triple net leases (or NNN leases). Under this type of agreement, the tenant assumes responsibility for real estate taxes, insurance, maintenance, as well as rent and utilities. You are responsible for the mortgage only. Triple net leases are attractive to companies that want to make sure the look and feel of a property aligns with their brand (e.g. Starbucks, CVS).
Potential Drawbacks of Investing in Commercial Real Estate
Always weigh the pros and the cons, which can include:
- Time. Commercial properties may have more tenants than a residential setting; even if you are only dealing with a few, though, you still have more to manage in terms of leases, maintenance, upkeep, public safety concerns, etc..
- You need help. You can’t DIY commercial real estate management. For example, you may not be licensed to inspect crucial HVAC systems or experienced in fixing large-scale electrical issues. You’ll need to rely on contractors and subcontractors to ensure optimal upkeep and safety.
- Bigger initial output. Commercial properties typically require a larger capital investment up front. Even after you purchase, you may also have a long list of expenditures (roof, heating system, safety upgrades, etc.) to consider.
- Risk. While a part of any investment, you take on added risk because there are more people (including the public) on the property. While accidents like slip-and-falls or damage like vandalism can happen in residential settings, more people with access to the property means more risk.
An effective way to turn cons into pros, or at least reduce the risk, is to work with an experienced property management service. They can take on the day-to-day, nitty gritty, details so you free up your time and energy for other projects. Ask us how we can help.