Commercial real estate requires a different strategy than residential real estate, but it’s a valuable way to make money if you know what you’re doing. Before getting started it’s important to understand the potential upsides, the risks of commercial real estate investing, and everything in between.
How Commercial Real Estate Differs From Residential Real Estate
Real estate is real estate, right? Not exactly. Commercial real estate refers to specific types of properties – those used for commercial purposes. Instead of having tenants who live on the property, you’ll typically have business owners using the space to run their business, whether it’s collecting white-collar workers together in an office building or producing goods in an industrial application.
Several types of properties fall under the “commercial real estate” umbrella, including warehouses, office buildings, and more.
The Pros of Commercial Real Estate Investing
What are the advantages of commercial real estate investing?
1. Total income potential
First, the total income generating potential of commercial properties tends to be higher than their residential counterparts. There are several reasons for this. For starters, commercial spaces tend to be inherently more valuable than residential spaces, since people use them for business purposes. On top of that, many commercial properties are large or capable of hosting multiple tenants simultaneously, multiplying your income potential.
2. Professional tenants
You’ll also enjoy the benefits of having more professional tenants. Since most of your tenants will be business owners and executives, you won’t have to worry about them failing to pay rent or damaging your property – at least, not as much as you would a residential tenant.
3. The public eye
Many commercial properties are in the public eye, incentivizing tenants to take good care of the property no matter what. They want to keep their storefronts clean and undamaged, which helps to keep your property in better condition.
4. Emergency interruption potential
Most businesses have limited hours of operation, such as working 9 to 5. This means you’ll receive fewer emergency notifications in off-hours; in other words, with commercial real estate, you’ll get fewer late-night calls if something goes wrong.
5. Logical, steady pricing
Business owners tend to make more rational financial decisions, focusing on economic logic and profitability rather than conforming to the whims of the market. This helps to keep the prices of commercial real estate a bit more stable and predictable, especially when compared to residential real estate.
6. Triple net leases and decreased expenses
In commercial real estate, many of your arrangements will be with a triple net lease, meaning the tenant will be responsible for all the expenses associated with the property, including real estate taxes and maintenance. This can greatly reduce your cost basis and help you make more money (with fewer responsibilities).
7. Flexible terms
Terms of commercial leases tend to be much more flexible than those in residential leases. Accordingly, you can create lease agreements that are much more closely aligned with your personal goals and negotiate with tenants to find something mutually beneficial.
8. Flexible buying options
In the realm of commercial real estate, there are many different types of properties you can buy. For example, you could invest in factories, warehouses, office buildings, storefronts, or even mixed-use buildings that serve a residential purpose. This makes it much easier to diversify your holdings, thereby improving the consistency of your earnings.
The Cons of Commercial Real Estate Investing
There are also some risks and downsides associated with commercial real estate, including:
9. Time requirements
Commercial real estate requires more due diligence than residential. You’ll need to become familiar with local laws and regulations and inspect properties thoroughly before buying. It often means spending much more time on commercial real estate.
10. Monetary requirements
Commercial properties tend to be much more expensive than residential properties, representing a bigger barrier to entry. Even if you take out a loan, you’ll still need to provide a down payment – which can be a problem if you don’t have a lot of capital on hand.
There are also bigger risks associated with commercial real estate. More money’s at stake, you’ll be working with bigger, more important tenants, and there’s always the possibility that a commercial area faces plummeting demand.
12. The need for professional advice
Most commercial real estate investors feel the need to consult with others for advice and direction. Commercial property management companies are incredibly valuable, but they do represent an additional expense.
If you’re new to the world of real estate investing, commercial real estate can seem intimidating. It’s not always favorable to newbies, due to the high capital requirements and risks involved. However, with the right team of advisors and managers on your side, almost anyone can enter the game and reap the rewards.