The Pros and Cons of Investing in Commercial Real Estate

If you’ve invested in residential real estate and found some success, you might be interested in dipping your town into commercial real estate. There are good reasons for this. First, there’s definitely the potential for more revenue. However, that shouldn’t be all you consider when deciding. The truth is, with more possible revenue comes more risk, so you’ll have to be sure before you commit yourself. 

Only certain properties qualify as commercial. They are office buildings, retail buildings, warehouses, and industrial buildings. The key is that their primary purpose is conducting business or business operations. If you are looking at investing in these properties, then you would likely be planning on leasing them out as opposed to using them for your business, such as with a warehouse. Here are the pros and cons of investing in commercial real estate. 

Pro: Higher Rents

The main reason that people and companies invest in real estate is because of the income it can bring in. Residential ownership can bring in a few hundred in a month, whereas, with commercial properties, you can potentially bring in thousands. The leases that you can sign with commercial property are triple net. This means that the landlord does not carry the risks that they would with residential property. The tenant pays maintenance, structural repairs, and other costs on top of the rent. They are also responsible for insurance and taxes. This means you would have less overhead and a higher return on your investment. 

Con: Time and Effort

Owning a commercial property involves more effort that with a residential building. Whether you have several tenants or just one, there are more things to consider and manage. The leases are more complicated. There may be certain stipulations that you have to adhere to, for example. If you don’t pay attention, you could find yourself owing large sums of money or even in legal trouble. As a property owner, you may have to manage several leases, maintenance issues that the tenant is not responsible for, and even public safety. There are many balls in the air, and you can’t avoid them. 

Pro: Diversity

As an investor, you should always look at ways to diversify your portfolio. Investing in commercial real estate will do just that. While residential rentals might be struggling, your commercial investments may do well, and vice versa. If a business struggles in the location you invested in, another type of business may thrive. Diversity in your portfolio means you have some protection from certain changes in the market. However, if they are both firing on all cylinders, you can benefit from the big income you bring in. 

Cons: You Will Need Professional Help

You may be a very good DIYer. With a residential property, the tenant would call you, and you handled any repairs and renovations. However, with a commercial property, you can’t rely on yourself, no matter how good you are with your hands. Licensed professionals must do repair and maintenance work, otherwise, there could be penalties and insurance issues. This means you will have to increase your expense estimates. 

However, while there will be extra expenses, you can work that into your rent and lease agreements. You may not be responsible for repairs with a triple net lease, you will be responsible in between tenants. Everything must meet the most updated code. Also, while you might have a tenant, the fact is that it’s your investment and your property, and you want it to be at its best at all times. 

Pro: Public Perception

Businesses that have clients come to them, such as retail, want their storefronts or workplaces to look nice and professional. You want the same thing, meaning you have a mutual interest in maintaining the property well maintained. Residential tenants don’t necessarily care how the home looks, especially if they are moving out soon. Commercial tenants will do whatever they can to keep everything looking nice. On your part, you can keep the outside of your building looking professional by keeping the parking lot paved and filling in potholes. You can also contact a plant and tree nursery for flowers and trees to plant that will provide great curb appeal. 

Con: It’s a Big Investment

In the grand scheme of things, residential properties carry a significantly lower investment cost than commercial real estate. On the other hand, you will need to provide a lot more capital to purchase a commercial property because of their larger footprint and the potential revenue you could earn. Also, once you’ve purchased a property, you will have to spend big money to get it set up. There might be roofing issues, parking lot repairs, or you might need to replace the HVAC system. The hope with a commercial property is that you can recoup those costs with the eventual revenue you bring in. 

Pro: Longer Leases

Residential tenants tend to go year-to-year with their leases. They could leave at any time if they wanted to. It can be hard to track some tenants down after they leave. However, a business is looking to get a foothold and find success. While a new business might start out with a one-year lease, established businesses can sign multi-year leases. They also can’t as easily sneak off into the night. You will have to do less turnover, which means less work finding tenants. Turnover is pricey with commercial real estate since a new business often needs to renovate the space for its purposes. 

Commercial real estate can bring in much more income than residential properties. However, this also comes with several possible headaches. It’s a big commitment, so weigh the pros and cons before you dive in.