Investing in commercial real estate is a smart way to diversify your income streams and build your wealth. Traditionally, commercial real estate may refer to any property that is leased out to business owners, which can include retail, office, industrial, warehouse, apartments or mixed-use buildings.
Getting started with commercial real estate investment can be an exciting and highly rewarding endeavor, but it is not a decision that should be taken lightly. Before acquiring a commercial investment property, it’s important to educate yourself on the possible pros and cons of this investment strategy.
Pro 1: Passive Form of Income
Every real estate investor’s dream is a property that manages itself, requiring as few daily check-ins and to-do items as possible. Investing in commercial real estate (rather than residential properties) is one of the best ways to increase your odds of passive income.
Businesses usually have limited hours of operation, meaning you’re unlikely to receive a late night or early morning “emergency” phone call from the tenant – not always a guarantee for residential property owners.
Pro 2: Triple Net Leases
A triple net lease is a form of lease agreement where the tenant – rather than than the property owner – is responsible for paying ongoing property taxes, maintenance and insurance, in addition to monthly rent and utilities.
These leases are common with commercial properties, as businesses are often willing to cover these expenses in order to have more control over the look and feel of their store or office. For a property owner, this results in one of the lowest maintenance income streams possible.
Pro 3: High Earning Potential
Yet another benefit of commercial real estate investment is the higher income potential compared to residential properties. On average, commercial properties have an annual return on investment of between 6% and 12%. By comparison, single-family homes average between 1% and 4% return on investment per year.
Commercial real estate also offers a lower vacancy risk, as there are more available units to be rented out. Additionally, lease agreements tend to be longer than with single-family residential properties, meaning less tenant turnover.
Pro 4: High Appreciation Value
Compared to other forms of investments (such as stocks), commercial investment properties offer greater stability and security, as well as more opportunities for asset appreciation over time. The market is hot, and there will always be a need for more housing, more retail space, more office space, and more industrial warehouses.
Inflation and improvements on the property itself (including renovations, landscaping and rent increases) can positively impact the value of the property over time. Commercial tenants tend to be much more vested in maintaining or even improving the quality of the property compared to single-family tenants.
Con 1: Big Initial Investment
Acquiring a commercial investment property is no small expense, so obtaining the required capital and getting your foot in the door can be a challenge. This is especially true compared to non-real estate forms of investment, which usually require much smaller capital.
However, the goal is that your income gains will significantly outweigh these initial costs over time. You can increase the odds of this happening by making the smartest investment decisions possible right off the bat.
Con 2: Higher Possible Risks
Hiring an inefficient property management company; vandalism and other forms of damage; accidents and injuries – these are all risks that you may face as a commercial real estate investor.
It’s true that these same risks can occur on residential properties as well, but they’re more likely on commercial properties due to the greater number of tenants and visitors. If you’re highly risk averse, it’s worth considering these possible downsides before you invest.
Are you considering investing in commercial real estate? Cushman & Wakefield | CRESCO Real Estate offers investment property advising and consulting services. Contact our team for help maximizing your return on investment.
To learn more about how CRESCO, Greater Cleveland’s leading commercial real estate company, can help you with your property needs, contact us at 216.520.1200, or fill out the form below. A CRESCO professional will contact you shortly.