When it comes to investing in commercial real estate, it’s important to understand the advantages and disadvantages before you decide to move forward. You’ll be glad you did.
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On the whole, investors are attracted to commercial properties because they yield more of a return than, say a single-family rental property. Of course, there are a few challenges and risks that come with commercial, which everyone needs to consider, but the reward can be significant when you find the right property. Let’s take a look the pros and cons of commercial investment to find out if it’s right for you.
Oddly enough, it can be easier to finance commercial real estate because there are just so many options out there. In addition to banks and more traditional options, you can also turn to hedge funds or private lenders who are almost always looking for new investments. Many people also partner with several investors and use a shared capital to gain access to more financing.
Higher return on investment
One of the more attractive elements of commercial ownership is the higher return on investment. A commercial property can bring in an annual return of six-to-12 per cent of the purchase price, compared to one-to-four per cent for a single-family home. The difference here means much more money in the bank as a commercial owner.
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Commercial investing has a unique component in that owners can actually strategize and increase the value of their property rather quickly. Whereas a single-family home is only going to be worth as much as the homes around it—no matter how much someone spends on improvements—commercial properties are valued based on the revenue they generate. So, with a little creativity, commercial investors can force appreciation of their property by improving the building, attracting high-quality tenants or raising the rent. Any way you can raise the revenue will increase the value of the property.
The perfect lease
If you’re able to find the right deal, commercial investments can be extremely low cost. Find the right tenant who wants a variation of a triple net lease and your cost as an owner will plummet dramatically. Some larger retail companies prefer to take on many of the costs, such as property taxes, in order to have control over how the property looks so they can maintain the look and feel of their branding.
The benefits are there for commercial investment, but—as with anything—there is a downside. Owning a commercial building can take up a lot of your time, particularly if you have multiple tenants. You can always hire a property manager, but If you’re going to maximize your investment, then you may want to be as hands on as possible.
Maintenance costs are much pricier than with residential properties. Whether its regular upkeep or emergencies, the costs will be higher. But the work has to be done because, dealing with all these issues is the best way to keep tenants happy, which in turn brings in more money.
Up-front costs are also much higher than with residential properties. The return on investment might be higher, but coming up with the capital can be challenging because of the larger initial investment.
There are many benefits to investing to a commercial property, but it’s important to come up with a strategy before making this significant financial move. You need to know if you can cover the up-front costs. You need to know where you’ll get financing and whether you’re ready to commit to this kind of project. Make sure you find the right property and then make sure you know everything about it. A commercial investment can be a smart buy. Just do your homework.