Is investing in commercial properties right for you?
If you are looking to generate income in real estate, commercial properties might be the right investment for you.
Commercial property investing is attractive to many because of its potential to earn a higher financial reward than investing in residential property. Many types of commercial properties can generate attractive returns. But before investing, you should consider the pros and cons. Here are a few considerations to help you determine if commercial property investing is right for you.
Not all commercial property should be considered equal.
The risk/reward profile is different depending on the property type. This consideration should impact the decision you make on the type of property you wish to invest in. For example, investing in office space or a small strip shopping center will require less management than investing in an apartment complex. Generally, business owners and retail tenants take pride in their business and will take care to maintain it. This type of commercial property will require less management time than an apartment complex where there may be frequent turnover and a higher cost of items to repair.
Another positive feature of owning properties with less management considerations is that most businesses close at night. With the exception of emergencies, you should be able to rest easy after regular work hours.
Commercial properties require a larger financial investment.
Commercial real estate generally requires more capital up front since you are investing in a larger piece of real estate then most residential properties. Also, keep in mind, that while commercial properties may generate a higher rate of income, you may also be hit with large unexpected expenditures. For instance, owning your commercial property may be going along just fine until you are hit with a large unexpected repair such as a major plumbing issue or new roof.
Owning commercial property requires a larger risk.
Most commercial properties are busy places with lots of people coming and going. People fall and get hurt, accidents happen in parking lots, and vandals cause damage. This fact increases your liability issues should someone get hurt or cause a lot of damage to the structure.
Many financial forecasters are predicting rising interest rates.
With slowly rising interest rates, commercial property investors must seriously consider locking in their interest rates for as long as possible. Keeping your interest rates low will provide you with a larger percentage of return.
Always keep in mind that with commercial real estate, income is achieved from the cash-flow of the property. Determining your rental prices, spending less interest on the mortgage, and buying properties with lower maintenance costs will bring in more income for you.
Look for more flexibility and less stringent regulation in your lease terms.
State lawmakers assume business people are more knowledgeable; therefore, less consumer protection laws are required for commercial property transactions.
An attractive point to owning commercial property is that most lease agreements are for several years verses residential lease agreements, which are generally for one year. This translates into less turnover maintenance and paperwork for you.
Consider most commercial property ownership as a long-term investment.
Uncertain markets and higher risk in owning commercial property can make this type of investment unpredictable. In the short-term you may lose money due to many of the unexpected factors discussed. However, when investing over the long-term, you should see your property generating profitable income that will make it a worth-while endeavor.
As you can see, investing in commercial property is not a one size fits all proposition and is not for everyone. Investors need to determine long-range goals and develop a strategy that is right for them. Overall, commercial properties provide long-term success to its business owners.
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