Pros and Cons of Investing in Commercial Real Estate

Investing in commercial real estate is always a proven method of generating wealth. Big investors and businessman plunge themselves into great deals and purchase space for office, warehouses, retail shops and other business. But while investing in such property, thorough research is necessary to understand the market trends. It will help to obtain the best deals with a higher number of benefits without any risks. Moreover, it will help to figure out where you would like to put your money in the individual organizations that specialize in commercial properties.

That’s why moving forward with a thorough understanding of the entire process will help to make the right decisions towards working deals. So, in order to make a wise and well-informed decision, it is important to understand the pros and cons of investing in commercial properties. This write-up will give wide detail on this discussion. Let’s have a look:

Pros to Invest in Commercial Real Estate

Here are the following reasons for buying commercial real estate.

• Stable, Fairly, High Potential ROI:

The top advantage of investing in commercial real estate is high potential ROI. Generally, commercial properties offer a greater annual rate of return in the range of 6-12%, which is much better than others. If the location and condition are good, it can even be 12-14 per cent. The income from commercial property is usually regular and consistent as compared to a residential one.

• Property Appreciation:

A well-located commercial property often provides a large amount and appreciate over time. New developments increase the value of the property. Moving businesses to the town can generate housing and retail demands for your property. All these things will give a high income.

• Professional Relationships:

While owning the commercial property, businessman protect and operate the property under LLC. This will typically keep all things easier, simple, and more professional with tenants. These business-to-business customer relationships help keep interactions professional and courteous.

• Triple Net Leases:

The overall concept of triple net leases is about to do not have to pay any expenses for the property as a property owner. It includes Property Insurance, Real Estate Taxes and Common Area Maintenance (CAM). It means the lessee will handle all property expenses, including real estate taxes. And, an investor will pay only for their mortgage expenses. Many large business entrepreneurs typically sign these types of leases in order to maintain a look and feel in keeping with their brand. Therefore, the owners will manage the cost and an investor has one of the lowest maintenance income producers for his/her money.

• Accurate Cost Evaluation:

In regards to evaluate the commercial property price, an investor can request the current owner’s income statement and determine what the price should be based on that. If any owner is selling the property under a knowledgeable agent, then the asking price should be set according to the market price where an investor can earn a huge amount of profit.

Also Read: Tips to Invest in Property at a Young Age

Cons to Invest in Commercial Real Estate

Here are the following issues generated while investing in commercial real estate:

• Heavy Investment

Acquiring a commercial property typically requires a much larger up-front investment, which is a bit harder to break into the market. Along with this initial capital, an investor can expect for large pocket expenses throughout the course of ownership, including the roof and electrical repairing, or other costly expenses. With more customers, an investor needs to maintain all the services accordingly, which in return reach high costs.

• Sensitive to Economic Conditions

With the commercial real estate market continuing to boom, it is difficult to find a commercial property where the numbers all make sense. Businesses flourish and demand for commercial properties generally rises when the economy is strong.  But when there is an economic downturn, demand for commercial premises usually falls.

• Values Can Drop Sharply

The value of commercial properties closely interconnected with the lease on the property. If the lease is about to expire, or commercial property becomes vacant, then the value of the property would generally fall.

• Costlier Loans:

The loans for commercial property are higher than the residential property. It includes the interest rates and terms & conditions, which all depends on the kind of property, investors’ profile, location and the tenure of repayment. The availability of the loan is more complex as it takes longer time to sanction it.

• Zoning

Also Read: Invest in Real Estate Without Buying Property

Commercial properties are more strictly prepared with specific space and regulated than residential properties. If a property is zoned for a particular use, for example, manufacturing, and the owner wants to rent it to someone who has another use in mind, then zoning area of the room will affect the performance of the business. This leads to an increase in the cost and limits the number of uses to which the owner can put his/he building. The strictness and complexity of zoning regulations vary widely between municipalities, which generate low sales.

• Greater Risks

The commercial real estate requires regular investments in the repair and modernization of service communications. If you do not make any repairs, then greater risk of a slip and fall, property damage, or other liabilities. This will increase the cost of insurance and could affect your bottom line. Certain properties also require specific types of additional insurance. So, an investor should always be aware of depreciation costs, so replacing failed equipment should be a scheduled event, not an unpleasant surprise.

Overall Takeaway

The above-mentioned pros and cons will help you to make an informed decision over the choice of investing in commercial property. It is important to know all the nuances and pitfalls of this type of activity. With the help of a skilled and knowledgeable agent, an investor can make his/her process easy. If you want to increase your capital, investing in commercial real estate can be one of the best options. But it requires thorough research in regards to knowing the overall cost in the acquisition of the property, the taxes involved, the zonal laws and laws for renting out and the rental earning potential of that building or shop.