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Why Invest in Commercial Real Estate?

There are many good reasons to invest in commercial real estate, the primary one being income potential. Depending on the area, the type of structure, and the condition of the property, commercial rentals can generate an annual return of 6 to 12 percent of the purchase price, according to publishing giant Nolo. This is considerably higher than the expectation for most residential properties, and it is generally a fairly reliable income stream.

Traditionally, commercial real estate appreciates faster than other investments. Moreover, you can borrow against the property and use that money to make additional investments. Plus, real estate is one of the few investments that offers tax benefits. Both the mortgage interest deduction and the depreciation deduction can help lower an owner’s tax liability.

Consider too that commercial property lessees are usually business owners who take pride in their businesses and want them to thrive. This means they have a vested interest in maintaining their premises. In this regard, the tenants’ and owners’ interests are aligned, which makes it easier to maintain the appearance and improve the quality of the property.

Another advantage of commercial rentals is that businesses normally have set operating hours. Barring emergency break-ins or fire alarms, there are no midnight calls about plumbing repairs or lost keys. In fact, most commercial properties these days have alarm-monitoring services so that if problems arise at night, the alarm company can handle the situation.

In addition, it’s fairly easy to determine lease rates for commercial properties. Rental rates can be based on the previous owner’s income statement and prevailing pricing in the neighborhood.

Moreover, there is greater flexibility in security deposit limits, termination rules, and other contractual terms because consumer protection laws governing commercial leases are less stringent.

There are even certain situations in which a lessee will agree to pay all of the property expenses, including real estate taxes. With these triple net leases, the property owner is responsible only for the mortgage. Companies typically sign these types of leases when they want to maintain the premises in keeping with their brand.

While there are many positive reasons to invest in commercial real estate, there are some limitations and risks to consider as well. Acquiring a commercial property typically requires a greater up-front capital investment than does acquiring residential property. Additional expenses related to tenants may include fit-out costs or building-code upgrade requirements for certain types of businesses. And then there are the ongoing expenses of taxes, insurance, repairs, and maintenance.

Lastly, there is the risk potential to consider. An economic downturn could affect the viability of tenants as well as the marketability and the value of the property itself. The fundamentals of the area could eventually deteriorate due to zoning changes, infrastructure projects, and new-builds in the vicinity, which can sometimes create an oversupply in the market and lead to competition for commercial tenants.

Nevertheless, given both the pros and the cons, commercial properties typically have the potential to generate great financial returns. Contact me to learn more about investment opportunities that might suit your interests.

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