Deciding whether or not to invest in commercial real estate is a big decision. It requires a long term, high money investment, as well as time, patience, and licenses in certain areas of property maintenance and management. Learning about the pros and cons of commercial property investment will help you make such an important decision.
How to Invest in Commercial Real Estate
You may ask yourself: What is commercial real estate? Well, there are several types of commercial property that you could invest in, including:
- retail buildings
- office buildings
- industrial buildings
- “mixed use” buildings (this includes properties that can be used for more than one purpose, like a store on the first floor and apartments above that)
To decide what kind of commercial property you want to invest in, you need to consider the pros and cons of each, as well as the pros and cons of commercial property investment. See the lists of each below to decide if investing in commercial real estate is right for you.
Pros of Commercial Real Estate Investing
Good rate of return on investment.
Right off the bat, a great reason to invest in commercial property is the high earning potential. Unlike residential investments, which bring in around 1-4% return annually, commercial real estate can bring in anywhere from 6-12%, depending on the type of property and where it’s located.
Flexible lease terms.
As a commercial property owner, you have a lot less hoops and red tape to worry about than investors in residential properties. There are many government laws that want to make sure renters in apartments and homes are safe, so you need to be a lot stricter with lease terms. For the commercial property investor, you are able to negotiate terms that best fit yourself and the lessee.
Triple net lease.
One of those lease benefits is the triple net lease. This means that the property owner doesn’t need to pay any expenses on the property as long as the lessee is renting out the space. This works really well for larger companies like chains, franchises, and corporations, as opposed to smaller businesses. Larger companies tend to have high standards that they adhere to. You’ll know based on the integrity and past performance of the company’s other locations how they’ll treat your property. This also takes the maintenance, management, and real estate tax burdens off of you, so you end up walking away with a lot more money with a lot less of the headache.
Cons of Commercial Real Estate Investing
High initial investment.
If you want a commercial property that will bring in a large return on investment, you will need more capital up front. With commercial real estate, you not only will have to pay more because the property is zoned as commercial, but you may need to invest money into fixing a roof, building a parking lot, and shoring up areas from potential flooding, all on top of the usual permits and licenses you may need to obtain to lease out the property. Depending on the type of business you want leasing your property, the costs could go up. If more people will be on the property the more money you’ll likely have to put into it to make it safe and ready to handle large amounts of foot traffic. Hopefully the property you’re considering (as well as your business plan) shows that the gains will eventually outweigh these costs, and a profit will be made.
If you own many commercial properties and have multiple leases–especially in a strip mall property–you are more likely to be busy managing common use areas, keeping track of costs that tenants owe, and emergency repairs. As a commercial property investor, you have even more on the line than a residential property owner. Not only do you have to worry about your tenants, but you also have to worry about public safety issues. Keeping up on the long list of items to maintain your properties and to keep everyone safe will definitely take up a lot of your time.
Hire professional maintenance and management services.
As mentioned above, owning commercial property means fixing emergency repairs, regularly scheduled building maintenance, and replacing larger ticket items. These are for the good of your investment and the safety of all. It takes time and knowledge of maintenance and property management. Sure, you may know how to fix plumbing issues and are excellent at managing multiple properties at once. But chances are that at some point, you will need to hire professionals to install a new furnace, replace a roof, and to help keep everything running smoothly and in a timely manner. This will give you peace of mind and keep your tenants happy. The downside is that it will take money away from your profits. But this is just one of the costs you should expect with commercial real estate. In the long run, you’ll be thankful you maintained your property to keep the value up.
When businesses come in and rent your property, that means many people will come onto the property. This includes everyone from customers to employees–many more than on a residential property. This means an increased liability risk to you as the property owner. Car accidents can occur in your parking lot, people can slip on ice on the sidewalk, and a building may get vandalized. If you’re okay with taking on that kind of risk, then you should be okay taking on a commercial property. If this kind of maintenance stresses you out, then you might want to think twice.
Hire a Professional Restoration Service to Repair Your Commercial Property
Contact Alpha-Omega. We have trained, certified, and licensed professionals ready to help you 24/7. We’ll come assess your situation, make a plan, and work directly with your insurance company, as well as your tenant’s. Our team wants to restore your rental property quickly and safely to allow you to open up again to customers. We want to give you and your tenants peace of mind, and help get your business back to normal.