If you have only considered residential investments in the past, opening the door to commercial property can be a great way to diversify your portfolio. Learn more about commercial real estate investing in our latest post!
Commercial property can be many things. It might be a retail center, office buildings, industrial warehouses or even apartment buildings. Some commercial buildings are mix use and can have retail, apartment, and office space, or any combination thereof. Each type will require slightly different management styles, but they can all be lucrative and wise investment options to compliment your portfolio.
Pros:
Tenants Take Pride In The Property
A business owner is not going to want to have a run-down storefront or messy office. They will take pride in the property, keeping things clean and well maintained. They are trying to make a good impression to their customers and clients, and having their space be aesthetically pleasing is a big part of that. You won’t have to worry about the place getting trashed as you might with a residential rental property.
Longer Terms
Residential leases are typically held for about one year. Commercial leases are often much longer, sometimes even up to 5 years. Having this guaranteed tenancy and income will help you to plan financially and pay off the loan on the property faster. You won’t have to worry about a vacancy or loss of income.
Professional Interactions
With commercial property, you will be dealing with people as business owners, not as residential tenants. As such, there is an air of formality and respect. You can count on things being done professionally as opposed to the communication you might have with residential tenants. Calls will be returned, deposits and rent paid on time, and damages immediately reported.
No After Hours Calls
Most commercial buildings close at night, aside from apartments of course. This means you won’t be getting calls at 2 in the morning about a noisy neighbor or someone being locked out. You can bank on your tenants reaching out to you during the day if something goes wrong, but not at all hours of the night.
Cons:
A Larger Investment
A commercial building will likely cost you more upfront. The price of the building will be higher as will the down payment. If improvements are needed, things can end up getting pricey. Set your budget accordingly or consider working with a partner on your first commercial investment. Even with all of these costs up front, a commercial property is likely to bring in more cash for the long term.
More Liability
Having more people on the property makes it more likely that someone will get hurt. You might find yourself dealing with slip and fall claims or minor accidents that occur in the parking lot. Your liability will increase as will your insurance costs. Be mindful of this and make sure you have a solid insurance policy in place.
The Management
Depending on the building, the management can become a full-time job. Repairs and maintenance need to be done by licensed professionals, no DIY projects here. You might also consider a property management company to help you out. These costs should be noted when purchasing the property and factored into your ROI.
Zoning Rules
Commercial zoning can be pretty strict and difficult to change. If you own a building zoned for manufacturing but a retail tenant wants to move-in you may have to turn them away. This limits the types of tenants you can have in your building, making it more difficult to have the entire property rented out at once.
