Reasons to Invest in Commercial Real Estate
Everything you need to know about investing in commercial property
It is often said that the best way to invest in the future is to invest in the present. This applies to many facets of life, including deciding to invest in property specifically commercial property. Commercial property refers to land or buildings intended to generate a profit, either from rental income or capital gain. Common examples of commercial property include apartment and office buildings, shopping centres, hotels, farmland, and warehouses.
Before we dive into some of the reasons to consider investing in commercial property, it is important to understand the fundamental differences between commercial and residential real estate. Residential property refers to single family-type homes, while commercial property usually encompasses several units of properties that have been assembled to create a larger unit. Both property types attract different kinds of tenants and bring with them different sets of opportunities. Residential properties are normally leased to families, while commercial properties are typically leased to businesses.
A common question asked by many potential investors is whether to go the commercial or residential route when it comes to investments. Although there is no single correct answer to this question, as it is completely dependent on the investor’s goals, we will be looking at the reasons to invest in commercial property. Here we break down the basics of investing in commercial property and why it could be one of the best decisions you will make.
A HIGHER AND MORE STABLE RENTAL INCOME
An optimum yield together with low risk should be at the heart of all investment ventures, which is why commercial real estate is one of the better options on the market. One of the primary reasons people opt for investing in commercial property over residential property is the income potential. Compared to residential properties, commercial property cash flow and returns are far more attractive to potential investors, due to the various property sizes and the number of tenants a commercial development can potentially hold. In addition to yielding a higher income than residential properties, investing in commercial property usually allows for a more steady and consistent flow of income. Residential properties are often clad with an amount of uncertainty with regards to the longevity of the lease or rental duration. However, in the case of commercial property, there is usually a longer lease duration. This means that commercial real estate owners have to deal with far less tenant turnover and are subsequently provided with much more stability.
QUALIFIED TENANTS AND PROFESSIONAL RELATIONSHIPS
When comparing the nature of the lease agreements between commercial and residential properties, commercial property leases allow for a far more straightforward and professional relationship. Finding tenants who will treat the property with respect and obey all rules in the lease agreement is a common struggle of investors looking to rent out their residential properties. Commercial tenants, on the other hand, tend to be businesses or corporations, and because they are backed by a larger company, they are more likely to respect the property and its rules. While there are certainly exceptions, qualified tenants will generally make any property owner’s life easier. Additionally, when leasing out a commercial property, there is generally no risk of having to run around to get the rent.
TRIPLE NET LEASES
A triple net lease is a lease agreement whereby the tenant agrees to pay all the expenses of the property, including real estate taxes, maintenance, and building insurance. With a triple net lease, the property owner is not responsible for any of these expenses, which naturally makes things a lot easier for them from a logistical point of view. While triple net leases do vary from case to case, they are generally extremely valuable for commercial real estate investors and are viewed as one of the biggest advantages of investing in commercial property as opposed to residential property.
Commercial real estate remains an appealing investment because of its consistent returns, growth potential, and passive income. These investments can provide stable cash flows in the form of rental income and, because commercial real estate is a hard asset, it always has intrinsic value and usually appreciates in value over time. Although this may all seem a little daunting for those who are not familiar with the ins-and-outs of property investment, investing in commercial property, while certainly not without its challenges, can be highly lucrative if done correctly.