What are the pros and cons of investing in commercial real estate?

August 11th, 2022 by Administrator
real estate

Any type of property, whether it is residential or commercial, can be a good opportunity to invest. If you are simply investing to increase your wealth and get a high return on investments instead of running a business, investing in a commercial property can provide you with a range of benefits and limited drawbacks. Since we want to help you make the right decision for you, we are sharing the pros and cons of investing in commercial properties. Let’s dive in.

Pros of Investing in Commercial Real Estate

Higher Income Potential

The first and foremost reason to invest in a commercial property is the higher earning potential. Commercial properties can provide an annual return off the purchase price ranging between 6% and 12%, depending on the location, current economy, and other factors. On the other hand, residential real estate investment can provide only 4-6% return at best.

Maintain the Condition of Property

Retail tenants are more interested in maintaining their stores and storefront to attract more customers. If they don’t do it, it will only affect their business. Thus, the interest of commercial property owners and commercial tenants are aligned in this area. This ultimately helps in improving the quality of your commercial property, and eventually the value of your investment.

Limited Hours of Operation

Most businesses are usually open during the day and close at night. This means you don’t need to worry about a midnight call because a tenant needs emergency repair at night or has lost a key. For commercial properties, you can have an alarm monitoring service so that if anything goes wrong, your alarm company will notify the relevant authorities.

Objective Price Evaluations

It is easier to evaluate the prices of commercial properties than residential ones because you can request the current’s owner income statement and then determine what the price should be. When you or the seller seek the assistance of a knowledgeable commercial real estate agent, the asking price is set at a price where you can earn the area’s prevailing cap rate for the commercial property type you are looking for (such as retail, office, industrial, etc). However, residential properties are often subject to more emotional pricing.

Triple Net Leases

While there are different variations of triple net leases, one of the major benefits is that, as a of commercial property owner, you don’t have to pay expenses on the property. The tenant leasing your commercial property will handle property expenses directly, including real estate taxes. In most cases, you just need to worry about paying your mortgage. More and more businesses are typically signing these leases because they want to maintain the look and feel so that it matches their brand. However, triple net leases are not usually done with smaller businesses.

Cons of Investing in Commercial Real Estate

1. Commitment

Just like your tenants have to worry about public attention and reputation, you also have a lot more to manage to maintain your reputation and keep your property always an attractive option for tenants. With the commercial property with several tenants, you will be dealing with multiple leases, annual CAM adjustments, more maintenance issues, and public safety concerns.

2. Need professional help

If you are thinking about fixing maintenance issues at a commercial property yourself, you’d better be licensed. Otherwise, you will need to hire a licensed professional to take care of emergencies and repairs.

3. Bigger initial investment

Obviously, buying a commercial property typically requires more capital upfront than acquiring a residential rental in the same area. Besides, you should expect large capital expenditures.

4. More risks

Commercial properties have more public visitors and more people on the property each day means a higher chance of getting someone hurt or someone damaging your property.  

Still, the interest of investors doesn’t go down in commercial properties because of the more positive benefits and higher returns on investments. So, if you have got the capacity to invest more and are interested in buying an office, retail store, warehouse, or any other kind of commercial property, don’t hesitate to schedule a meeting with a local commercial real estate agent.