If you have invested in residential real estate in the past and have been pleased with the outcome, you might be interested in exploring the world of commercial real estate.
What is considered commercial real estate?
Where residential real estate is exclusively used as a place to live, commercial real estate is property that is used for business-related purposes. This includes:
– Office buildings;
– Retail buildings;
– Industrial buildings;
– “Mixed-use” buildings where the property includes a variety of uses such as apartments and retail or office space.
The upside to investing in commercial real estate:
Here are some of the reasons you would want to consider commercial real estate in your investment strategy.
Higher rent yield
Commercial properties tend to come with higher rents and higher price tags, which results in higher potential returns. Instead of making a profit of a few hundred dollars on a residential property, there is a possibility of netting thousands on a commercial lease.
Commercial leases are also typically triple net. This essentially absolves the landlord of the most risk of any net lease. This means even the costs of structural maintenance and repairs must be paid by the tenant, in addition to rent, property taxes and insurance premiums.
A triple-net lease results in less overhead for the property owner, leading to a higher return on investment.
Longer leases and lasting business relationships
Commercial leases will typically run from one to 10 years and can run longer in some cases! This provides you with peace of mind in knowing you will have stable cash flow for a prolonged period.
Longer leases also means less costly turnover. As a new business occupies the property, it will need to adapt the space to its needs resulting in costly renovations.
Business owners also tend to take pride in their business and want to protect their livelihood. This helps to maintain a positive relationship with the property owner and tenant.
If you are already invested in residential real estate, commercial real estate can be a wonderful way to diversify your portfolio. In 2020, we learned that not all real estate is created equal.
Where your local nail salon and movie theatre might have struggled, your local pharmacist or grocer would have seen remarkable success.
Therefore, it is valuable to spread your investment across a wider range of assets.
Here are some of the barriers you might discover when investing in commercial real estate.
Most commercial tenants operate their business during typical working hours. This leaves evenings and weekends to conduct any maintenance at the property.
You also run the possibility of managing multiple tenants which results in more maintenance issues and costs.
It is risky
Commercial properties typically have more public visitors, which leaves more opportunity for damage to be done to your property.
Accidents can happen in the parking lot, retail space is more likely to be broken into and vandalism is extremely common. If you are risk-averse, commercial real estate may not be the best investment for you.
Commercial property typically requires more up-front capital than a residential property. A larger, more unique space could also come with more unexpected expenses with a hefty price tag.
You will need help from the experts
Commercial real estate comes with an extremely specific range of needs.
You will need access to many tradespeople and specialists to handle maintenance and administrative tasks. This can cut into monthly cash flow and is difficult to do on one’s own.
There are many benefits to investing in commercial real estate. However, it can be challenging for someone who lacks the expertise and time to do so.
If you are interested in learning how you can invest in commercial real estate without the headache of being a property owner, a private REIT that invests in CRE is something you might want to consider.
Many investment firms give everyday investors access to income-producing commercial real estate options without them having to acquire this expertise or the resources required to manage such properties. If you are interested in exploring this type of investment, it’s strongly recommended that you seek out a professional to guide you through the process.
Cliff Fraser is the chief business development officer at Equiton.