Advantages and Disadvantages of Investing in Commercial Real Estate
Commercial real estate is a property used for business and retail purposes, which is different than residential real estate. Investors in commercial real-estate either construct or buy a building for the purpose of generating a monthly rental income, or for operating their own business in that property. Commercial real-estate investors may also partially lease out their property then collect rent from business owners who are using the space in the building.
Types of Commercial Real Estate
There are several commercial properties; before investing in commercial real estate, it’s important to understand each type. Commercial properties include:
1. Industrial –manufacturing companies rent industrial buildings; they are spacious enough to have a warehouse for storage purposes. The buildings are mostly located in industrial areas, which are just outside urban areas.
2. Retail –retail buildings are mostly located in urban areas. They include strip malls, banks, retailer shops, restaurants, and supermarkets. The buildings are different in size, specified to suit the purpose served.
3. Office –office space is the most common type of commercial real estate. Office space can either be a single-tenant or multi-tenant office. Office spaces have three classes:
Class A offices: these are offices located in newly built and high-quality standard buildings. Premier users mostly occupy these offices, and the rent is above average.
Class B offices: these are offices found in old but well-maintained buildings. Most users compete for these buildings, and the rent is average.
Class C offices: these buildings are poorly located, very old, and require significant development to improve infrastructure and appearance. Most offices in these buildings are vacant.
4. Multifamily –multifamily properties include apartments, townhomes, and condominiums. Tenants in multifamily properties have a shorter leasing term as compared to office and retail tenants. Before investing in a multifamily property, you should consider tenants turn over.
5. Special purpose –special purpose properties serve a specified purpose; they include; churches, car washes, schools, amusement parks, bowling alleys, and self-storage facilities. These properties cannot serve a different purpose apart from the specified one.
Advantages of Investing in Commercial Real Estate
Investing in real estate has a lot of financial and personal benefits. Here are some of the benefits of investing in commercial real estate:
1. High income –there is high potential income when you invest in commercial real estate. Commercial properties give six percent to twelve percent profit annually off the purchase price. The returns you get depends on the location of your commercial property.
2. Less competition –there is relatively low competition in the commercial real estate field. Investing in commercial real-estate requires large capital and lengthy processes; most investors find it difficult, thus reducing the commercial market.
3. A constant cash flow –investing in commercial real estate provides you with a constant and reliable source of money from rent income. Rent can be paid monthly or yearly, depending on your terms and conditions.
4. Multiple streams of cash flow –in commercial properties, you can offer tenants other services not included in monthly rents. For example, you can charge for parking space around your office building; you can offer charged garbage collection services for your tenants, you can have workout rooms for office tenants, and charged laundry services for your tenants.
5. Professional relationships – commercial real-estate investors always have a business-to-business relationship. The investor can interact with business owners who have rented space in their building and create a business network. The interactions always create a professional network and help the investors understand the environment of their work.
6. Enough resting time –commercial property owners have a boundary between working time and their regular life. They have enough time to rest because tenants cannot call for maintenance late at night.
Disadvantages of Investing in Commercial real-estate
With the many advantages, investing in commercial real estate also has its disadvantages. They include:
1. Large initial capital requirements – whether you are buying or constructing your building, the capital required for commercial real estate is significant. Although the returns in commercial real estate are huge, most investors still shy away from investing in commercial real estate because of the amount needed as initial capital. Other expenses like electricity bills, repair, and maintenance are also costly in commercial properties.
2. Need for professional help – as an investor, you cannot do all the things in your commercial property. Most times, you will need to hire professionals when doing repairs and maintenance. The cost of maintenance can be expensive, and you cannot evade it because you need maintenance to keep the building in good condition for renting out.
3. Time commitment – for your business to do well, it needs proper management. As a landlord, you need to commit your time to your business to ensure it is well maintained and everything is in good condition. When your property is in good condition, you can maximize returns because leasing periods will be more extended, and chances of having many vacant spaces will be low.
Mistakes To Avoid When Investing in Commercial Real Estate
There are a lot of mistakes made with investors in commercial real estate. To succeed as an investor in commercial real estate, there are several things you need to avoid, and they include:
1. Financial ignorance –in commercial real estate, investors have to understand their financial state. This will enable them to know which type of commercial real-estate they can venture into, how to manage their funds, and what to cover first.
2. Improper valuation –each commercial property has a different value. Investors need to know the property's value, how long it will last and what returns they will get. Failure to undertint the value found in an asset can lead to a financial breakdown.
3. Neglecting due diligence –when evaluating an investment, it is essential to conduct due diligence. An investor has to take enough time to understand the property's risks before investing in it.
If you've previously filed bankruptcy or are planning on filing for bankruptcy, you'll still be eligible to get a mortgage again in the future.
Investing in commercial real estate can give you significant returns. Before investing in commercial real estate, an investor has to learn the risks associated with it, its advantages and disadvantages. A good understanding of commercial real estate will help you know if it is the best investment for you or you should try another type of asset. Would like to know if you have what it takes to become a landlord? Take a look our new landlords guide.
If you are ready to start or continue your real estate investment journey gives us a call to go over our lending programs. Out toll free number is 1-866-257-2973, our loan consultants will be glad to help you.