- December 18, 2017
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Any type of real estate investment comes with its own set of pros and cons, and commercial real estate is no different. Commercial real estate refers to a number of different types of properties including retail buildings, office buildings, warehouses, industrial buildings, apartment buildings, and “mixed-use” spaces which may include a combination of any of these. In order to decide whether or not commercial real estate is the proper investment for you, it is important to know what you can expect to encounter, good or bad.
Steadier Income/Return on Investment:
The number one benefit of commercial real estate investment is the potential for income. Most commercial properties will average between 6-12% return annually on the purchase price, as opposed to the 1-4% range expected from residential properties.
The list of deductions available to owners of commercial real estate goes on and on, though many investors fail to take advantage of them all. Among the most prominent are the ability to write off property mortgage interest, property depreciation, property repairs and maintenance, travel to and from the property, and any educational training or seminars you may attend to help you become a better investor. This small list barely scrapes the surface.
Tenants looking for commercial real estate have as much, if not more, interest in the care and maintenance of the property as the owners. A person leasing a commercial property will be dependent on the space attracting quality staff and clientele. Because of this, they will be far more likely to maintain the space as it has been leased to them, and may even invest in further improving the space for their own business needs. In short, your tenant’s interests are far more aligned with your own than that of a residential renter.
Flexibility in Lease Terms:
With far fewer consumer protection laws in place in commercial real estate (as opposed to residential real estate), it is far easier to negotiate leases with your tenants. The down payment you require, rules of termination should the relationship not work out, and what costs are covered by you, the landlord, are among just a few of the negotiable terms of a lease.
Limited Hours of Operation:
When you are dealing with residential real estate, you never know when your phone may ring in the middle of the night. A perk of commercial real estate is that the majority of businesses who will be leasing from you will likely stick to the same or similar business hours as you do. This means that, barring an emergency, you are more likely to have less bother.
Bigger Initial Investment
Purchasing commercial real estate typically requires a much larger initial investment than residential property. There may also be costly changes and repairs that need to be made in order to make the space equipped for a business to operate efficiently, and many of those costs may lie with you.
Professional Help Required:
With the number of tenants and square footage both typically greater in a commercial real estate property, there is a whole lot more to manage. From repairs and maintenance, to collecting rents, inspecting property regularly, and negotiating successful leases, you may be biting off more than you can chew unless you are willing to delegate some of these tasks. This can add to the cost of the property, and require extra time to find the right companies to sub the work out to.
Most commercial real estate properties will have an influx of customers, clients, and/or vendors in and out of the property, which means greater liability to you should there be an accident. Although there is obviously insurance that can help protect you from incurring the cost of any damages it is important to consider the greater risk factor here.
It Takes Longer to Find Tenants:
On the one side, commercial real estate lease terms are typically longer than residential, which implies that a property will have a tenant for a greater length of time once a lease is signed. That being said, once a property is vacant, it may remain that way longer. A tenant is looking for a property that most closely matches its business needs as far as property type, location, space, etc., and finding a tenant whose needs match the exact specifications of your space can be challenging.
Searching for Commercial Real Estate in the Baton Rouge Area?
To further determine whether or not an investment in commercial real estate is a great next step for you, contact a qualified broker who has your best interest at heart! At SVN|Graham, Langlois, & Legendre, we have over 99 years of combined experience helping our clients create successful commercial real estate transactions, from start to finish. We pride ourselves on excellence and look forward to giving you a superior experience. Take a look at our properties today and call us to get your search started!