Some of the Advantages and Disadvantages of Investing in Commercial Real Estate
There are some key unique differences between commercial and residential real estate investments. Commercial property investments offer a higher potential financial reward, but this also comes with a higher level of risk. Understanding these risks and rewards is essential if you are looking to invest in commercial real estate.
It’s always a good idea to meet with an experienced South Florida real estate lawyer to discuss the potential benefits and downsides of any residential or commercial real estate investment that you are seriously considering. Your attorney can give you guidance and review your contract to let you know about any potential risks that you may have overlooked. All of these due diligence steps can help ensure that you are making a sound investment.
Commercial real estate investment can be complex
Some examples of commercial properties include warehouses, apartment buildings, office buildings, shopping malls, and industrial buildings. Every type of property has several details and nuances that must be learned by the investor, which makes commercial real estate investment a lot more complicated and gives it higher learning curve.
Below are some of the advantages of investing in commercial real estate instead of residential:
- Higher potential income – the average rental return for commercial real estate investments is higher on than residential, with commercial properties yielding anywhere from 6 to 12%. Typical residential property rental returns are between 1 and 4% usually.
- Longer tenancy – tenants tend to stay longer in commercial leases and will often remain in one location anywhere from 3 to 10 years. Residential tenants will usually move within one year or sooner.
- Easier price evaluations – it can be easier to evaluate the potential income of a commercial property with a detailed income statement and other supporting documents.
Some of the disadvantages of commercial real estate investment compared to residential are as follows:
- A higher upfront capital requirement – many commercial properties will require a higher amount of capital upfront to acquire them. Significant repairs may need to be made to a commercial property after it’s acquired in order to get it into a rentable condition.
- Higher investment risk – commercial properties are used for business, and many businesses expose workers or the public to risks. Parking lot accidents can occur, people can fall, and the property can be damaged by vandalism. These risks are a part of owning any commercial property, and you will need the appropriate insurance and preventative maintenance to mitigate them.
- Maintenance – you are going to need to pay someone to handle maintenance at your commercial property or do it yourself and add it to your list of expenses. You can manage the property and maintain it yourself or outsource it to a property management company, but either way it’s an unavoidable requirement for your investment.
If you’re in the process of closing a commercial real estate deal and you have any questions about the pros and cons of your investment, call (954)-779-7009 to schedule a consultation with Mark Schecter, an expert South Florida real estate lawyer.