- March 23, 2018
- 0 Comments
There are many factors that make commercial investment property a better choice than residential investment property. Below I will give you the three main factors that I believe make commercial investment property a better choice for an investor.
More Variety of Property Types
While residential property has limited variety, commercial property has a wide variety types that an investor can choose from. Some of the main property types are office, industrial (office/warehouse) and retail. Each property type has distinct characteristics with different kinds of tenants. An investor has the flexibility to choose which characteristics fits them best and meets their investments needs. In addition to this, the variety of property types allows an investor to diversify and spread risk over multiple property types. As opposed to residential, where you do not have the ability to do this.
More Professional Tenants
Typically, in commercial investment property you are dealing with more professional, sophisticated tenants than in residential. In residential, the tenants are individuals, couples or families. In commercial, the tenants are businesses or business owners. This typically means they have a planned budget for each month and are therefore less likely to miss a rent payment. Unfortunately, this is not the case with a lot individuals or families today. Also, there is motivation on the business’ part to pay the rent as getting evicted could disrupt their business causing a loss income and clientele. One other benefit of have a business as tenant is that they are more likely to take care of the space. Businesses have customers or clients coming into their establishment and do not want the space looking bad or rundown. This will make it more likely that the business tenant will keep up the leased premises, resulting in less deferred maintenance that the investor has to pay for in the future.
More Attractive Lease Terms for Investor
The lease terms on commercial properties are typically more advantageous to the landlord than residential lease terms. While residential lease terms are typically 6 to 12 month, commercial lease terms are typically 3 to 5 years, with some even being as long as 7 to 10 years. This provides a more reliable steady cash flow for the investor and a lower vacancy risk on the property. Also, in commercial leases the tenant is responsible for more maintenance and repairs on the leased premises than you will find in residential leases. Some commercial leases, called triple net (NNN) leases, the tenant is responsible for all annual operating expenses on the property. This includes real estate taxes, property insurance and maintenance costs. With more tenant responsibility, this obviously provides the investor with less annual expenses, which means an increase in income and a steadier cash flow.
As you can see, these factors make commercial investment property more diversified, less risky, more stable, more profitable and easier to manage than residential. This should make it an easy choice for an investor when trying to decide between investing in commercial or residential property…… choose commercial!