Most people think that investing in real estate means purchasing a house or an apartment. What about commercial real estate?
Whether it's a commercial or residential property, any real estate can be a good investment opportunity.
“Typically, commercial properties such as rental apartments or single-family homes offer more financial rewards than residential properties for your initial investment.”
Before enumerating the reasons why commercial real estate can be a profitable investment, let's define what it is.
Retail buildings
Office buildings
Warehouses
Industrial buildings
Apartment buildings
Mixed-use buildings (ex: retail, office and apartments together)
The pros that this type of investment offers is:
1/ Income potential
Commercial rentals earn a much higher income over residential ones. Commercial properties typically have an annual return off the purchase price between 6% and 12% while single family home properties ordinarily return 1% to 4% at best. These numbers can fluctuate depending on the area, current economy, and external factors (such as a pandemic).
2/ Better care of your investment
Business owners tend to take pride in their businesses and want to protect their livelihood. Tenants have a vested interest in maintaining the property (retail, restaurant, ...) they rent in great shape because if they don't, it will affect their business. As a result, commercial tenants and property owner interests are aligned, which helps the owner maintain and improve the quality of the property, and ultimately, the value of their investment.
3/ Limited hours of work
Commercial tenants work when you do. So you are less likely to receive after business calls to fix issues. Unless of course, you invested in apartment buildings. Management of commercial real estate is also usually managed by a company that specializes in commercial real estate management.
4/ Fairer pricing
Homeowners are usually emotionally invested in their property which makes them harder to negotiate with as they are less willing to let go of their property. They might try to price it higher than its actual value and less likely to accept a lower price, closer to market value.
Additionally, you can determine what the price should be based on the current owner's income statement.
5/ Triple net leases
There are variations to triple net leases, but the basic concept is that the property owner of a commercial real estate property doesn't have to pay expenses on the property. The lessee takes care of the property expenses directly, including real estate taxes. Your only expense will be the mortgage.
6/ Flexibility in lease terms
There are fewer consumer protection laws that govern commercial leases. While residential real estate properties have dozens of state laws, such as security deposit limits and termination rules, commercial real estate laws are less cumbersome.
In conclusion
While commercial real estate properties require a larger initial investment than residential real estate and that they bear more risks in terms of liabilities, they offer very good returns. It is always advised to meet with a knowledgeable real estate agent to consider your options and evaluate if this is a smart voice to develop your investment portfolio.