Commercial Real Estate - Essential Risks and Advantages You Need to Consider
When most people think about real estate investing, they imagine residential real estate investments. However, there is an alternative option – commercial real estate.
Commercial investments are vastly different from their residential counterparts and as a result, require a much different approach. As a result, some real estate investors choose to only invest in one form of real estate. Meanwhile, other investors take the plunge into both commercial and residential investments.
However, as with any investment, it is always important that before you invest you have an understanding of the risks and advantages you will be facing. So, to help you decide if the world of commercial investing is suited for you, here are some of the risks and advantages of investing in commercial real estate.
Before we get started, if you would like to further weigh the risks and advantages of commercial real estate on a financial level, click the link below to book a free strategy call with us to discuss how your commercial real estate deals can be made better with the right mortgage.
Risk: Expensive and Harder to Finance
One of the biggest obstacles that investors face when trying to invest in commercial real estate is the overall cost. As the majority of commercial properties are than residential properties, the purchase price for these pieces of real estate is typically much more expensive.
As well, the insurance and maintenance costs tied to commercial real estate are frequently higher, as there will often be one or more businesses with a wide variety of employees who are taken into consideration.
Additionally, commercial properties are often harder to finance. This is because many of the traditional mortgage lenders that are available during a residential purchase are not available for commercial clients. This can be due to the high costs, increased risk of defaulting, or lenders simply not deciding to lend on commercial land. However, unlike many residential investors, the majority of commercial investors have a company to leverage towards the purchase of their property, increasing their overall buying power.
Advantage: Higher Rent Yield and Potential Profits
As you can imagine with more expensive real estate investments, commercial properties typically come with higher rental rates. While residential properties usually will turn over a couple hundred dollars each month on their lease agreements in cash flow, commercial properties have the potential to produce thousands of dollars in rental income.
For many commercial leases, the monthly rate a property is rented at is frequently triple the net cost of the building. This helps minimize the risk of financial concerns arising on the part of the property owner, as the monthly rent well exceeds the property’s mortgage, insurance, utilities and maintenance costs. This further contributes to a higher return on investment for the investor.
Finally, as these properties appreciate, their values increase dramatically. This often results in very large profit margins when it comes time to sell the property.
Risk: Increased Time Commitment
As most commercial tenants require consistent access to the property during standard working hours, whenever maintenance or inspections are required. The property owner typically finds themselves stuck coming in on nights and weekends to have the work completed. This can greatly impact the lifestyle of the investor by occupying their schedule.
Advantage: Diversify Your Portfolio
If you have already made other investments, whether it is residential real estate, stocks or other investment streams, commercial real estate can be an excellent way to diversify your investment portfolio.
Investing in a single type of property or investment stream creates a dramatic amount of risk. A single downturn can be all it takes to bankrupt investors who overly depend on narrow investment portfolios. However, by widening your portfolio you reduce the immediate risk you are facing as an investor by spreading it out across multiple avenues.
For example, if housing prices plummet and you strictly buy single-family homes, you will lose a great deal of your net worth to the downturn. However, if you also have invested in things such as grocery stores or parking complexes and they remain unaffected, your finances are capable of remaining much steadier than they otherwise would have been.
Discover How To Analyze a Properties Cash Flow With This Step By Step Guide
Risk: Greater Risk of Emergencies
Commercial properties are much more accessible to members of the public than residential homes and dwellings. This means that the level of anticipated risk is higher. For example, while a single-family home may only contain a small family of four running around and wearing down the flooring, a department store may see hundreds of visitors in a single day wearing down its flooring. This means that on average the need for the commercial property to be serviced and maintenance is higher.
Additionally, some features that come with commercial properties have increased risks of accidents and injury occurring such as a sports field or a parking lot.
Advantage: Longer Leases and Business Relationships
Many serious commercial clients such as factories or large-scale retailers will want to sign longer leases than residential tenants may. This is because while a family can often pack up and move quite easily without seeing too much of a disruption to their lives depending on where they go, commercial tenants have employees and business to consider. These tenants do not want to halt production or sales to pack up and move because that will greatly harm their business and potentially cost them valuable employees.
As well, some commercial tenants manage multiple businesses, creating new and improved networking opportunities for you as the investor. If you have already established a strong relationship with these tenants, they may be willing to locate their other businesses and locations inside other properties you own and manage.
In Conclusion
Commercial real estate is a high-risk high-reward market that can be incredibly valuable for savvy investors who are ready to manage the risk.
So, it you are ready to invest commercially, visit us at LendCity and come speak with our dedicated commercial department. Our team will gladly help answer any questions you may have and get you set up with the best financing available from one of the top commercial lenders. To contact us you can call 519-960-0370 or visit us online at LendCity.ca. Alternatively, you can click the link below to book a free strategy call with our team.