Whether it’s commercial or residential, real estate investing can be a lucrative opportunity for the savvy investor. Most independent investors look to enter the real estate market through residential properties such as townhomes, single and multifamily homes. Although riskier, commercial real estate can yield larger gains on your investment with the potential to generate multiple income streams from a single property.
Commercial property is a piece of real estate used solely for business purposes rather than for a living space. Examples include shopping malls, office buildings, restaurants, etc. These buildings are typically owned by an investor who leases out the space to businesses for monthly rental income. To discover if this type of investment is right for you, let’s further examine the advantages and risks associated with owning commercial real estate.
Advantages of Investing in Commercial Property
The biggest advantage gained by investors choosing commercial over residential real estate is a higher earning potential. Commercial properties often see annual return on investments that range much higher than that of residential properties investments. In areas where demand is high, owners of commercial buildings receive substantial monthly cash flow from tenants paying high leasing rates.
Another advantage is the stability in cash flow. Tenants in commercial buildings typically enter into longer-term lease contracts since they are using the space for a business venture. It is not uncommon for this type of lease to extend for several years or more.
This leads to yet another benefit of commercial real estate investing, which allows for a longer period of appreciation. Such investments tend to increase in value over time, allowing investors to pocket more money on a consistent and long-term basis.
Drawbacks of Commercial Property Investment
The greatest risks in commercial real estate investment come into play during economic downturn. In the event of a recession, investments in commercial property may produce little or no income as unemployment surges and businesses suffer.
Commercial real estate owners also incur costly renovation expenses associated with tenant turnover. Since no two businesses are going to be operated exactly the same, building owners have to adapt the building space in order to accommodate each new tenant’s unique needs and specialized trade.
The complexity in regulations is another deterrent for most looking to invest in commercial real estate. Taxes, maintenance responsibilities and the method of purchase can radically shift dependent on state, industry, building size, zoning rules, etc. This type of investment sees the greatest ROI with someone who is knowledgeable and experienced in the industry.
For the experienced investor, the high-risk, high-reward commercial real estate market could be the next step in expanding your investment portfolio. If you are lacking the capital to invest in commercial real estate, there are options available to you. REITS, or real estate investment trusts manage the terms of purchase, maintenance and other details, allowing smaller investors to buy a share of the property.
There are many facets to consider when securing a viable commercial real estate investment. To be successful as an investor, it’s important that you conduct thorough research and seek out a qualified commercial real estate broker to lead you to the best investment option for you.