Commercial real estate can be a great investment, as it tends to provide greater financial returns when compared to residential and other types of properties. However, like all investments, there are some risks involved. Educating yourself on all aspects of the commercial real estate market is important as you move ahead.
The following are some key consideration to make related to finances, professional relationships and the time commitment involved in commercial real estate investing:
Finances and budgeting
1. Income: When you invest in commercial real estate, as opposed to residential, income is generated by the property's cash flow. The yearly return from the purchase price is, on average, between 6 and 12 percent.
2. Triple net leases: As a property owner in residential real estate, you are responsible for paying property expenses. This is not typically the case with commercial real estate, in which your only expense is a mortgage because the lessee is responsible for most property expenses and real estate taxes.
3. Initial investment: The upfront capital required for a commercial property is significantly more than a residential purchase. Not only that, but you may eventually have to deal with expensive repairs to your building, such as a plumbing or roofing issue. The more facilities you own, the greater the potential there is for you to spend money on maintenance and repairs.
1. Working with others: In commercial real estate, properties are operated purely like businesses. Landlords and tenants must maintain a professional rapport, which is not always easy with small business owners whose company is their livelihood.
2. Reputation: Retail tenants depend on maintaining a positive reputation, and a significant factor is keeping the storefront attractive to consumers. They understand that poor upkeep of a property can negatively impact business, encouraging them to keep things in good shape overall.
3. Outside help: Chances are, when maintenance issues arise, you will have to hire professionals to take care of them. It's important to consider the cost of property management when budgeting for your commercial real estate. Decide ahead of time if you want to outsource leasing and other responsibilities or if you will handle everything yourself.
1. Hours of operation: In commercial real estate, your property is likely to keep normal business hours, which should decrease the likelihood of all-hours emergencies or requests that come with residential properties. However, you may still have to deal with some of these issues if your tenants wish to operate at night and on the weekends.
2. Commitment: With a commercial property, you may have multiple tenants and leases. If this is the case, you'll likely need to address heightened maintenance and safety concerns, which results in a larger investment of your time and energy.
These are some of the primary variables that may influence your decision to purchase a commercial property. It's important to make an educated decision on the commercial real estate market and demographics in your area before investing. If you do decide to move forward with this investment, consider working with a professional property management provider to achieve greater efficiency for you and your commercial tenants.