Nowadays, investing in commercial real estate is highly profitable. However, there are the pros and cons of investing in commercial real estate you should know.
Commercial real estate investment opportunities can look to be a bit far off for new investors. But there is the potential for investors to make money if they can break into the market.
Investors need to learn about the pros and cons involved in commercial real estate going into it. This will offer you the opportunity to determine if this is the right option for you as an investor.
#1] Pro: Great income potential for investors
There is the potential for a lot more of a return on commercial properties compared to residential properties. In general, residential properties lead to a four percent return annually, while commercial properties can bring in between six and twelve percent.
Plus, there is the potential for triple net leases. Basically, the commercial real estate owner doesn’t have to pay any expenses on the property. The only thing they have to cover is the mortgage.
Potential investors should learn more about this and how it can benefit them. Those interested in commercial real estate can get a lot more information when they go to cochraneng.com today.
#2] Pro: Commercial tenants usually maintain property
With residential real estate, it’s possible to have tenants who will not really care about the property and create quite a bit of damage while they’re renting.
With commercial real estate, the tenant has an interest in maintaining the property. So, it’s less likely the investor will end up with a tenant that is going to cause them to lose money on repairs and renovations at the end of the lease.
Commercial tenants need to make sure their storefront looks good at all times to bring in more customers. Therefore, they’ll tend to take much better care of the property.
Also, the tenant may be responsible for repairs and maintenance depending on the lease terms. So, this means they have a financial incentive to keep everything in great shape.
#3] Pro: More flexibility in lease terms
There are standard lease terms for commercial properties. However, there is a lot more flexibility in what commercial property owners can or cannot do. This is because local and federal laws don’t tend to be as detailed compared to residential tenant laws.
Also, landlords can look forward to longer lease terms. This is because commercial leases are generally at least three to five years. The fact is that businesses aren’t likely going to want to move frequently.
They will need to make sure their customers are aware of the move and able to find the new place. So the commercial property owner won’t have to worry about looking for a new tenant every year.
#1] Con: Larger initial investment
One of the cons of commercial real estate is that it does require a larger initial investment. However, there are ways for investors to minimize their initial investment.
A potential commercial real estate investor will have to understand the requirements for getting a mortgage to purchase a commercial property, as they can be quite different from residential real estate loans.
The investor may need a larger down payment ready even if the percent needed is lower than what they would need for residential property, and they might need a higher credit score to be approved for the mortgage.
Commercial mortgages are also generally shorter than residential leases, so they’ll likely have higher monthly payments to consider as well.
#2] Con: Higher risks
Commercial property owners have a higher risk because of how many people enter the property every single day. Depending on the circumstances, it’s possible the owner of the property could be held liable if someone is injured on the property.
Injuries can happen if someone falls in the store, if someone gets hit by a car in the parking lot, or if there is another accident on the property.
The owner will also have to deal with the potential for damage to the property from those who visit the store, as there may be times when the owner has to cover repairs due to vandalism or burglary.
There is simply a lot that can go wrong that doesn’t normally happen with residential property, so the commercial property owner has a higher risk. Commercial property owners can offset the risks by having business insurance as well as property insurance.
They will also want to make sure they speak with a lawyer about their liability and what they can do to minimize the liability for the property.
While liability cannot be completely eliminated, there may be ways for the commercial property owner to reduce it so they don’t have as high of a risk.
#3] Con: Bigger time commitment
Depending on a variety of factors, commercial real estate can require a larger time commitment to handle properly.
It’s not possible for the commercial investor to take a hands-off approach with their property, as there is a much larger chance for something to go seriously wrong. They’ll need to manage multiple leases, maintenance costs and adjustments, public safety concerns, and far more.
The investor will want to make sure the property is taken care of properly to make sure they can minimize their liabilities. The good news is that most of the time commitment will be during regular business hours, as that is when the tenant will be at the property.
Plus, there are a number of ways to reduce the time commitment as long as the investor is willing to spend money. For instance, they can have a property management company to handle the leases and more on their behalf.
If you’re ready to invest in real estate, it’s a good idea to make sure you understand the type of real estate you want to purchase and get more information about what to expect when you get started.
If you’re considering commercial real estate, make sure you consider the pros and cons carefully. This will enable you to make sure you’re making the right choices for your financial future.