When times are tough, the commercial property market is likely to suffer. In an economic downturn, real estate suffers heavily. Un-finished developments surrounded by cranes and barbed wire are not an un-common sight. Keeping this in mind, a large number of investors and businesses shy away from investing in commercial properties. However, keen investors can close lucrative deals after weighing all the pros and cons of a commercial property.
Commercial property covers office blocks, retail and industrial estates. A commercial property investment can be as big as acquiring a prestigious hotel in Piccadilly to a modest acquisition of a local pizza franchise. While a large percentage of businesses are unlikely to invest in huge commercial properties, such as hotels,let alone buying it,they are interested in probing potential properties that offer substantial benefits.
Types of Commercial properties:
- Industrial buildings
- Warehouses
- Office buildings
- Retail buildings
- Apartment buildings
Buildings, which serve all purposes (retail, office and apartments), are often referred to as ‘mixed buildings.’Managing each of these properties can be quite challenging. Before investing in a commercial property, all businesses and investors must look at the pros and cons. Here are some pros and cons of buying commercial real estate over residential property.
Pros
Increased Income
Businesses invest in commercial properties as they guarantee more earning potential than residential properties. The annual return on purchasing a commercial property is between 6% and 12% of the purchase price.
Limited Operational Hours
A commercial property is operational mostly during the daytime. This means you are less likely to receive midnight break-ins or fire alarm calls.
Triple Net Leases
There can be different variations of triple net leases. However, generally, the property owner does not have to pay any expenses (apart from the mortgage) on the property. All property expenses and handled directly by the lessee, including real estate taxes.
Accurate and Convenient Price Evaluations
Commercial properties are often easier to evaluate since you can request the present owner’s income statement to evaluate how much the price should be.
Public Eye
Retail tenants are more likely to maintain your property as it has a huge impact on their business.
Cons
Time Commitment
You cannot act as an absentee landlord and get maximum returns on your investment. A commercial property owner has more to manage, as there are multiple tenants.
Professional Assistance Needed
Buying a commercial property is not a DIY task. If you want to handle all the steps involved, it is better that you are licensed.
Huge Initial Investment
Investing in a commercial property almost always requires more capital upfront. This is more than a residential property in the same area.
Risky
Properties designed for commercial use receive a larger number of public visitors. This means your commercial real estate property is vulnerable to more damage than a residential property.
Final Thoughts
The buying process for both residential and commercial property is pretty much the same. However, you should do sufficient market research and weigh all the pros and cons of a commercial property investment before signing a contract.
About the Author:
Elena is an avid traveler and has a passion for investing in corporate bonds. She is the content manager at Sotheby’s Property. When she’s away from her office, Elena spends most of her time travelling and practicing squash with her office buddies.