Whether it’s an office building, medical centers, hotels, malls, warehouses, or any other apartment buildings, the investment in commercial properties seems can be a great way to bring in passive or active income, depending on how you might use the building.
However, it’s important to realize with a potential investment comes some possible risks for you to have on your radar before taking your next step.
The pros of investing in commercial real estate include excellent income potential, flexibility in lease terms, and zero or little payment of expenses on the property. In contrast, the cons include more extensive initial investment, the need for professional help, and the follow-up of strict time commitments.
Like any type of investment, understanding the pros and cons is a must for you to know before deciding whether or not this path is right for you. Before moving ahead into the pros and cons of investment, here are some other essential things that you need to know:
Things you need to know before Investing in Commercial Real Estate
Here are some things to have on your radar as you think about potentially investing in commercial real estate.
1 — Before investing in commercial real estate, you need to know the demand and supply of a property’s market area.
2 — You must first understand the market cycles: GDP, unemployment rate, the health of the economy. All these factors contribute to the profitability of commercial real estate.
3 — Know that there is a wide variety of asset types, and not all properties are the same. Thus, the yield, supply and demand, and overall profitability of each style may significantly vary.
4 — You should also perform thorough research on tax returns, documents, feasibility studies, property inspection, profit and loss statements from the previous owner, and such.
5 — You must set out the cost contingencies to hedge the uncertainty of specific factors that negatively affect your overall yield.
6 — Finally, the wisest thing you could do is prepare your mind for the setbacks and any extended timelines you might have to face.
When you know all these things beforehand, there are decreased chances of you getting subjected to any loss for your potential commercial investment. This knowledge can help you get where you are doing more quickly, and with fewer hurdles.
The positive side of investing in Commercial Real Estate
Here are some pros of investing in commercial real estate know before taking further investment steps.
Great Income Potential
One of the most important and the best reason to invest in commercial real estate is the excellent income potential. This superb income potential is more evident in commercial properties than residential properties. Commercial properties are most commonly known to provide an annual return between 6% and 12% off the purchase price, compared to only between 1% and 4% in the latter.
However, this earning potential dramatically depends on the current economy, area, and several external factors.
Zero or Little Payment of Expenses
Another benefit of investing in commercial real estate is that you do not have to pay the expenses on the property. As a property owner, you do not have to worry about the payment as the lessee usually handles all the costs directly. These expenses also include real estate taxes, but the only fee you have to pay is that of your mortgage.
It is also known as the triple net lease for commercial real estate that keeps you at ease with the payment things.
Flexibility in Commercial Lease Terms
Last but not least, you’ll be amazed to know that compared to any other investment business, you get great flexibility in commercial lease terms. It is because there are only fewer consumer protection laws that govern commercial leases that keep you at ease with lease terms at many points.
The Negatives of Investing in Commercial Real Estate
As there are many pros of investing in commercial real estate, there are also some negatives that you need to know.
Bigger Initial Investment
When compared to residential property, a commercial property demands from you typically more capital upfront. Besides requiring some more significant investment capital, these commercial buildings might also require from you higher costs on maintenance and other things. So, it might become slightly tricky for you to get your foot in the door.
However, investing in commercial property also profits you with more significant revenue, which means the gains in revenue could very well outweigh the cost of these initial expenditure.
Need for Professional Help
If you think you can do all the maintenance at a commercial investment property yourself, you are probably not clear as to the level of need. There are certain emergencies and repairs issues at the property that you might not handle on your own. It is also important to have a licensed technician in certain areas of maintenance for compliance purposes.
You can also explore the idea of a property management company that handles all your needs. These entities usually charge between 5%-10% of monthly income.
To summarize, evaluating beforehand whether you want to handle the relationships and leasing yourself or outsourcing those responsibilities will be an important decision to make.
Investing in commercial real estate might be a great option for you! If you’re ready to learn more, contact us at ALPHA REAL ESTATE today and let us walk you through some options.