The following article is guest post by Robert Dekanski of The Robert Dekanski Team.
Commercial real estate can be a great investment for anyone looking to grow their portfolio. It can provide investors with stable and consistent cash flow while offering long-term capital appreciation potential. There are many things to consider when investing in commercial property, but it can be a lucrative venture with the right planning and research. Here we will discuss why investors should consider investing in commercial real estate.
What is Commercial Real Estate?
Commercial real estate is any property used for business purposes or for making money. This includes office buildings, shops, industrial complexes, warehouses, and multi-family properties. Unlike residential real estate, this type of property is typically leased out to businesses rather than individuals. Commercial properties tend to have a higher up-front cost and require more time to maintain — especially if there are multiple tenants — but the higher rents and lower vacancy rates often make up for the extra effort.
Why Commercial Real Estate Can Be a Good Investment
While real estate investments can be a good source of income whether it’s a residential or commercial property, several aspects of commercial real estate set it apart. Here are some of the things that help commercial real estate stand out as a top way to diversify your portfolio.
More Variety
One of the biggest advantages of investing in commercial real estate is the number of options. As mentioned above, there are a variety of different types of properties available. Each type has its advantages and disadvantages that must be weighed carefully before investing, and some types — like office space — are broken down into additional classes.
In general, retail is one of the lower-performing classes, thanks to the popularity of online shopping. There’s also the potential for longer periods of vacancy with retail, as with other types like warehouses, so some investors look to properties with multiple tenants to offset the risk.
Higher Returns
Real estate can be an excellent source of income, and commercial real estate tends to have a higher annual return than residential real estate. This is because commercial properties tend to have longer leases, and rental rates can also be higher due to the presence of businesses that generate more revenue.
Additionally, certain types of commercial properties can be eligible for tax incentives or deductions which can help reduce the overall cost of ownership and increase returns on investment. Depending on the type of property purchased, investors may be able to take advantage of deductions such as depreciation that are not available with residential properties.
Better Potential Locations
Location plays an important role in the success of any real estate investment. Retail properties or restaurants are often located near major roads or highways, making them attractive to potential tenants looking to grow their businesses. Being in highly-trafficked areas also makes the business owners more invested in keeping the property looking good.
Other properties might not care as much about being next to major roads, but they won’t want to be hidden by residential buildings either. Regardless of the property type, those in areas with strong job growth can help ensure that the commercial property stays rented and provides a steady source of income.
Quality Tenants
Because commercial tenants are typically businesses, it’s less likely that you’ll have issues like you could with individuals. Businesses have a vested interest in taking care of the property they’re leasing and maintaining their reputation. As a result, it’s less likely that you’ll need to go through evictions or major maintenance projects due to tenant damage.
Another advantage of having a business as a tenant is that the landlord-tenant relationship is more likely to stay all-business. You’re less likely to receive calls at odd hours about problems, and your conversations will be more professional.
Lease Flexibility
Since there aren’t as many laws associated with commercial real estate, landlords can have more freedom when setting up their leases. In many cases, leases for commercial properties are longer-term, meaning vacancies come up less often.
There’s also the benefit of triple net leases, which often appear in commercial real estate. Triple net leases are where the tenant pays the landlord a base rent plus any applicable taxes, insurance, and other fees associated with maintaining the property. This helps to minimize landlord costs and maximize income from the property.
Tips For Investing in Commercial Real Estate
Now that you’ve seen some reasons why commercial real estate can be a good addition to a portfolio, how can you get started? Here are some tips to help you on your way:
- Research: Researching the market is essential when investing in commercial real estate. Take time to understand different types of properties, rental markets, and potential locations. Learn about financing options and legal considerations that may apply.
- Develop a strategy: It’s important to have an investment plan that outlines what you hope to achieve and how you will manage the property. Consider factors like expected return on investment, cash flow, and financing options.
- Network: Building relationships with other investors, brokers, lenders and professionals in the field can help you better understand the market and make informed decisions.
- Get legal advice: Working with a qualified lawyer will ensure you understand the legalities and potential risks associated with commercial real estate investments.
- Invest wisely: When investing in commercial real estate, it’s important to invest in properties with the potential for long-term capital appreciation. Investing in undervalued properties can be more risky than other options, so invest with caution.
With these tips in mind, you can better understand the commercial real estate market and start investing.
Add Commercial Real Estate to Your Portfolio
Commercial real estate can be a great investment for those looking to diversify their portfolio and earn a steadier return on their investment. The reason for this stability is that commercial tenants are typically businesses, which means they are less likely to default on their lease payments than residential tenants.
Additionally, the long-term leases associated with commercial properties provide a level of predictability that can appeal to investors. If you’re considering investing in commercial real estate, it may be time to start researching and talking to an experienced broker to see if it’s the right move for you.
