Perhaps you’ve heard there’s money to be made in commercial real estate investing. Like a lot of investments, it can actually go either way. While some owners certainly make more off commercial than they do strictly residential, there’s a set of unique factors that can impact your decision to invest in a property in the first place.
Advantages and disadvantages of commercial real estate investing
When investing directly in real estate, there are basically two different types of real estate in which one can invest. On the one hand, there are real estate in the form of single or multi-family houses that can be rented out as residential properties. On the other hand, investments can also be made in so-called commercial real estate.
These are properties that are used by tenants or lessees for commercial purposes, for example office buildings or shopping centers. Like any type of real estate investment, investing in commercial real estate naturally has its own advantages and disadvantages. With the “correct” selection of tenants or lessees, who could be a larger company, for example, the income that has been contractually guaranteed for many years should be mentioned as an advantage.
Commercial properties are almost always rented / leased for a period of at least ten years. There is therefore no possibly high fluctuation as is the case with rented residential buildings, where the tenant can cancel within three months. Especially in the case of larger companies, one can also assume that no loss of rent etc. is to be feared, even if there is of course always a risk in this regard.
Another advantage of commercial real estate investing, especially compared to residential buildings, is the fact that external influences have little or no negative impact. For example, it would have no effect on the use of an office building if a garbage dump were built in the immediate vicinity, in order to stick to the previous example in connection with the apartment buildings and the effects there.
A positive aspect of commercial real estate investing is certainly the very good return that can be achieved. Of course, this also includes tax advantages, as you can deduct many costs related to the property. A disadvantage of a commercial property is that it cannot always be calculated exactly to what extent the property will actually be used. If you take the example of an office building, then at the beginning of the rental it is usually quite uncertain how much of the office space will actually be rented in practice. The same applies to a shopping center, where it depends on how much business space can be rented here.
Mainly because of the size, there is usually a significantly higher entrepreneurial risk with commercial real estate investing than is the case, for example, with rented apartment buildings. In comparison, you can usually find a new tenant for an apartment much faster than one or more tenants of commercial or office space. The main disadvantage of commercial real estate as such is, above all, the size of the properties, which can ultimately lead to an increased risk and a certain “confusion” in some areas.
This also applies, among other things, to the financing, which is usually very tightly calculated. For example, if a total of 30 offices are to be rented in the office building and an initial occupancy rate of 60 percent was calculated, then an occupancy rate of only 40 percent can in practice “tip” the entire financing. Due to these facts, the capital investment in commercial real estate is much less suitable for private individuals, but in practice it is mostly companies or very financially strong private individuals who use this type of real estate investment.
The 6 key factors to consider in commercial real estate investing
Consider these six things before you embark on commercial real estate investing.
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The surrounding area
Chances are, you don’t want to invest in a property that’s sitting in an area experiencing a downturn. Ideally, your commercial properties would play to the area’s strengths, and takes on some kind of role in serving trends forecasted to be of benefit to the surrounding neighborhood. This is of particular importance if you plan to develop property yourself.
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The tenants
When you’re taking on a building or buildings that are already occupied by businesses, the type of business they do can be a factor in your decision to buy those commercial properties. For instance, many food service establishments commonly find themselves in a position where their rent will have to be late. Consider the financial stability of any tenants operating on the property, and whether or not you can cover expenses if they fall behind.
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The work involved
You might think you’re dodging a bullet by not becoming someone’s landlord, but commercial real estate investing still demands regular involvement from you. Think about all of the hours the businesses on your property will be open, and consider these your working hours as well. These hours are most likely to be when structural problems, utility failures, and damage will occur.
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The market
Businesses find their ideal spaces through JGM Properties commercial real estate. When you’re looking for a commercial space to purchase and lease, you too have to think about what the market suggests about this property. If you’re going retail, how will online shopping impact your ability to procure and retain a quality tenant? Are the kinds of businesses your office space attracts apt to move online as well?
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Time and money
Ultimately, your involvement will have a huge say in whether or not the property is profitable. This takes quite a bit of patience at the start, as commercial real estate investments do not come together as quickly as other types of real estate. But as long as you invest in the right properties and own some percentage of frasers commercial trust dividend, there is a good chance of high returns to be enjoyed. If your property includes apartments, those might be easy to fill, but keeping a tenant in the retail space below, and performing important renovations and additions won’t be an overnight venture.
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The risk
High traffic is what we want, right? Yes, but with this comes enhanced risk. Anywhere where there are more people, there’s a greater chance of accidents, like slip and falls. Commercial spaces are also more prone to vandalism. Be sure you’re ready to deal with the pitfalls of popularity.
Conclusion
Some experienced commercial investors avoid many risks by utilizing a property manager, or diversifying their investments to ensure one tenant doesn’t somehow leave them high and dry. No matter what plan you put into place, first think critically about the area you’re buying in, the industry you’ll be counting on to make rent, and the personal investment – including time – you’ll have to make to enjoy any success.
