Investing in real estate is probably one of the best ways to build wealth known to mankind. If you look at and closely examine the list of some of the wealthiest people in the world, you will see that the majority of them are successful real estate investors. Real estate investing is a game that when played right can reap huge benefits for the investors.
Commercial real estate investing, in particular, is known to providing some of the best income streams. Whether you are an absolute beginner to commercial property investing or have invested in residential properties before and want to up your game by investing in commercial properties, this guide has all that you need to know to understand if commercial property investing is right for you.
What is “Commercial Property Investing”?
Before we break down into the advantages of investing in commercial real estate properties and the many types of commercial property investing one can consider, let us first understand what is the meaning of “Commercial Property Investing.”
Commercial real estate investing is investing in properties that are typically leased out for business or retail purposes. Investing in commercial real estate property involves the purchase and the development of properties that are intended to be leased or rented out to business tenants who run their businesses in the properties or use the property for any other business purpose like storage and warehousing, invoicing, accounting and so on.
Residential property investing, on the other hand, involves purchase and development of properties that are intended to be leased out to residential tenants who would live in the properties. Raw land purchased with the intent of constructing a commercial property building is also considered commercial property investing.
Read on the advantages of investing in commercial real estate properties which paint a fair picture of whether commercial property investing is for you or not.
What are the advantages of commercial real estate investing?
Investing in commercial real estate property can be very rewarding, both financially and personally. Commercial property investing surely builds a huge sense of financial security that many people wish to have before they retire.
While most people’s basic objective of investing in commercial real estate properties would be to build up future wealth and security, for others it can also be investment portfolio diversification and the numerous tax benefits that come with commercial real estate investing.
Here are the many benefits of investing in commercial real estate:
#1 – Higher income
One of the most significant benefits of investing in commercial real estate is the higher income possibility. Commercial real estate properties fetch much higher returns as compared to their residential investment property counterparts.
Typically, commercial real estate properties fetch a good 10 to 12% of return on investment whereas residential properties fetch a return ranging from 1 to 5%, depending on the nature, size, and location of the property. Higher-income is also associated with the fact that the vacancy risks associated with commercial real estate properties are much lesser as compared to residential property investing.
The reason that vacancy risks are lower in commercial property investing is that a commercial building will generally have many units available and when one or two business tenants do vacate, there are still many other units that are there who would be paying off their rents.
However, with residential properties, owners generally have to face high vacancy risks as they’re counting on a single-family or a couple of families in case of a multi-family property.
Additionally, the lease periods for commercial real estate properties are much longer than the residential properties, meaning that commercial property investors have to deal with much lesser tenant turnover than the residential property investors.
#2 – Less competition
As compared to residential property investing, it is safe to say that commercial property investing has much lesser competition.
One major contributing factor to this is the perception amongst people that commercial real estate investing is a hard game to play and the supposedly deemed complexities of investing in commercial real property keep most investors away from commercial property investing.
Thus, the commercial real estate investing industry is not saturated with too many competitors. And with various types of commercial real estate loans that are available today, entering the commercial real estate property investing isn’t that big of a deal.
At the end of the day, we believe that one can win any game if they learn and understand the rules of the game and everybody’s got a learning curve. With the right approach and guidance, commercial real estate investing can be an extremely lucrative venture and can make people a fortune when played right! The trick lies in getting the game right.
#3 – Consistent cash flows
Another major advantage of investing in commercial real estate is the consistent cash flows that can be generated from commercial real estate properties. Since the lease periods are generally longer than 5 years, owners can lay back and enjoy consistent cash inflows every month from their commercial property business tenants.
Besides, since commercial real estate properties are built for multiple units, it means that the property owner can hugely leverage on the economies of scale at play and earn the larger buck every month for a good long period of the lease.
Besides, the triple net lease type of commercial property leasing that is the most popular and the most common, the owners do not have to bother about paying up the insurance costs or the interest costs that come with loans, the commercial tenants would take care of them.
This means that a commercial property owner can lay back in peace and focus on other ventures or hobbies while their commercial real estate property will earn their large buck every month.
#4 – Commercial Property Investing managements are very less of a hassle
The most haunting part of being a property owner is to be called up in the middle of the day by a tenant who is complaining about a broken tap or a broken shower at the property. If you’ve owned a couple of residential properties before, you might have experienced this time and again.
However, with commercial real estate property investing, you’d not have to worry about the tiny repairs and renovation expenses of the property. In most types of commercial property leasing, such costs are covered up by the business tenants themselves.
Besides, if you hate the idea of being a landlord who has to run checks on the arrears of rent left by your tenants and keep following up with them for the rents, commercial real estate investing might be tailor-made for you.
With commercial real estate investing, you are dealing with business class tenants and in a majority of the cases, they would not default on their rent payments.
Even when they do, they would talk to you about it with the motive of resolving it for you and make the job easier for you. In a nutshell, being an owner of a commercial real estate property will let you enjoy the benefits of consistent cashflows without you having to crack your head over every tiny detail happening back at your property.
#5 – Longer leases
One another major perk of investing in commercial real estate properties is the longer lease periods. The lease periods are at least a good 3 to 20 years long term contracts and thus you don’t have to worry about finding new business clients every time there’s a vacancy.
This does not mean that there won’t be any kind of vacancies at commercial real estate properties but the vacancy rates are very minimal, keeping you at the safe side. Thus, commercial real estate investors can rest assured that they don’t have to routinely stay on a lookout for new tenants.
Now that you are familiar with the various advantages of investing in commercial real estate properties, here are the various types of commercial properties you can choose from:
#1 – Office Space
The most common type of commercial real estate property investing is investing in office spaces. From stand-alone single room business office space to large skyscrapers with hundreds of multiple office spaces, the potential office spaces have is an incredible one.
#2 – Industrial spaces
From industrial warehouses to large manufacturing sites and distribution centers, industrial spaces are the next big type of commercial real estate property investing which generally requires large space that suits the massive space requirements of an industrial tenant.
#3 – Retail spaces
From strip malls to small retail spaces like restaurants and banks, retail spaces are commercial properties that are generally spread wide across on the urban areas. Retail spaces usually have multiple units and are a good way of leveraging on the economies of scale at play.
#4 – Multi-family properties
Although multi-family properties are intended to be used for residential purposes, they come under the purview of commercial real estate investing as they are managed as multiple units by the property owners. Many residential property owners make their switch to commercial property investing by beginning with their investing in multi-family properties as it’s an easy transition and also a lucrative one.