If you are looking to break into commercial real estate investment, it’s not a leap you will want to take blindly. It’s critical to research not only the market, but also the potential benefits and risks you may encounter. Moving forward with a thorough understanding of the entire process will help to ensure that you make sound decisions as you work towards closing on a deal.
The first step in making a successful commercial real estate investment is to understand what the term means. According to Wikipedia, commercial real estate refers to “buildings or land intended to generate a profit, either from capital gain or rental income”. This broad statement includes retail buildings, office space, warehouses, industrial buildings, multifamily units, multi-use properties, and land which is commercially zoned. Get clear on which type of property will be the best focus for you prior to beginning your hunt.
- Income Potential: The top advantage of investing in commercial real estate is much greater returns. Where single-family investments typically offer an annual return of between 1-4%, commercial real estate skyrockets with returns of between 6-12%.
- Aligned Interests: A tenant in your commercial property is much more likely to take impeccable care of the space than a renter in residential real estate. The reason for this is simple; tenants who don’t maintain their property are risking affecting the prosperity of their own businesses. This helps to keep their interests aligned with the property owner’s.
- Hours of Operation: With most businesses operating somewhere around the 9-5 range, commercial real estate investors are essentially off the clock at the same time (barring an unexpected emergency), whereas residential investors may need to work on a round the clock basis. Another advantage here is that commercial properties will typically employ property management companies and/or alarm companies which will handle any middle-of-the-night catastrophes which may arise.
- Longer Lease Terms: While residential leases average about a year, commercial real estate leases typically run much longer. This helps to ensure that you will be collecting tenant rents consistently and that the property is less likely to remain vacant for long periods of time.
- More Competition: With the commercial real estate market continuing to boom, you may find it difficult to find a commercial property where the numbers all make sense. If and when you do locate it, chances are high that there will be an increased number of other investors who are also looking to make a bid.
- Quality Professional Help: If you plan on being a more absentee investor, you will likely look to contract a property management company to aid you in maintaining your commercial real estate property. While this can be a benefit in respect to an even lower time commitment on your part, it’s not always easy to find a quality management company. Failure to do extensive research on a management company can lead to much greater headaches down the line. Take the time to diligently assess before you sign an agreement and monitor their progress month-to-month.
- Bigger Initial Investment: Most commercial real estate properties are going to require a much larger up-front investment, which can make it a bit harder to break into the market. Along with the initial capital, you are likely looking at far greater out of pocket expenses throughout the course of ownership. If the HVAC unit fails, the roof needs repairing, or any number of other costly expenses arise, it could leave you feeling blindsided. You can prepare for this ahead of time by conducting a thorough walk through to identify potentially costly damages, repairs, and replacements.
- Greater Liability: One of the greatest risks associated with commercial real estate is the influx of visitors on the property grounds and within the building itself. More people naturally means greater risk of a slip and fall, parking lot fender bender, property damage, or other liabilities. This greater risk will increase the cost of insurance and could affect your bottom line. Certain properties may even require specific types of additional insurance. Get clear on your budget and carefully assess any risk factors before you sign your closing documents.
Now that you are more familiar with the risks and benefits associated with commercial real estate investment, you can make a more informed decision on which property is right for you. Using a skilled, knowledgeable broker will also help you through the process. At SVN | Graham, Langlois, and Legendre, LLC, our team of dedicated Advisors is here to help you select the right investment property that will keep you moving in a positive direction. Take a look at our broad selection of properties today and call us to get started!