Switching from Residential to Commercial Real Estate

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One of the most rewarding investment returns today comes from real estate investment. When done right, smart real estate investors know how to take the calculated approach and yield higher benefits. Today, with the changing market dynamics, the focus in the real estate industry is switching from residential to commercial real estate.

If you have been around in the market for some time now, then you understand residential properties, and already would have tried your hand at it. Commercial properties have gained importance because residential properties come with fierce competition, are often overpriced, and managing them is a time-consuming task. Several real estate investors have moved their focus towards commercial real estate. So, why do people consider commercial real estate?

Work

Yes, there is much less work with this property. The management and upkeep of every residential property are tedious and taxing. Between fixing the routine tasks and taking care of emergency maintenance, it is also about sorting through complaints, filling empty units, tracking rent, and more. Therefore, the time you end up spending with residential properties is more than you bargained for. And the moment you decide to divide the time spent with the profits earned, you will realize that it wasn’t worth it.

When it comes to commercial real estate properties, these will often be managed by property managers. The property manager will be responsible for handling every single aspect of the property, giving you enough time to focus on other things. Given that the profits attached to commercial properties are higher, it becomes convenient to hire a property manager.

Returns

The returns on commercial real estate are as good as returns received on bonds, commodities, or stocks. For instance, the average return for any triple net property is around 5%, much higher if we consider the return received on a traditional stock. If we believe the experts, then the stock returns should be around 5-7%. However, the investor will always receive a standard return of around 3.5%, irrespective of the investment option chosen.

Money flow

Any investor who chooses to invest in commercial real estate has to ensure that the investment is paying for itself. In simpler words, any cash flow that is being generated through the tenants has to be higher so that it covers the property maintenance and ownership costs.

Whenever you invest in a commercial property always look at the numbers and if it will bring you profit in the future, enough to meet your investment goal. These properties rarely come with emotions attached, unlike the residential property. If the property is a huge hit, then the investor can think of other properties as well. If not, then you can always opt for a better property.

Also, there are a few properties in the market that are the least expensive to own. When it comes to triple net properties on a lease, they will always consider the tenant responsible for every expense involved. Since their income depends on the face value of the property, the property is always well maintained by the commercial tenants.

If investors opt for loaning money to some other investors then this as well guarantees steady income flow, because the dividends will often be paid out on annual, quarterly, or monthly basis.

Depreciation

According to the government, every real estate investor is eligible for deducting the costs of depreciation from their tax returns. Subtracting the depreciation, which in originality the money lost with the decreasing property value, often brings increased after-tax returns.

Paydown

In the paydown of the property, the rent received allows the owner to reduce the main loan amount. The rent received every month is used for reducing the debt on a mortgage and paying the mortgage itself. This helps in reducing the monthly payment by the investors and makes the cash flow better and also helps in reducing the principal amount. These returns make the commercial real estate property a better option for reducing the money risk involved.

Rental

The rental amount in a commercial real estate property is much higher as compared to the residential property. This is primarily because the cost of commercial property is completely related to the tenants. If there are good tenants, this leads to increased consumers, making the property a high-performing property. For instance, in the retail industry, more profits mean a fixed percentile of the retail owner’s profit to you.

Property valuation

Another benefit of investing in commercial property is the appreciating value of the property. This comes in handy especially when you have to resell the property in the future. Unlike residential properties, where the property value is based on the nearing properties, the commercial property valuation is never performed basis surrounding properties. The commercial property value is the defined basis of the revenue that is being generated by that property.

Given that, you can also choose to increase the revenue of the property by introducing more revenue streams, because of the better the revenue, the better the value. The increased revenue is also an advantage when you are trying to sell the property and enjoy the revenue benefits at the same time.

Triple net

The triple net option means that the renter will have to bear the costs of property tax, maintenance, insurance, and any other costs involved with repair, apart from paying for the utilities and rent. Bigger organizations are always on the lookout for such options because it gives them the benefit of maintaining the property according to their liking and not having to compromise with their brand image.

Things to consider

Yes, commercial properties come with a lot of benefits. However, there are a few other things that you need to consider.

Interest rate

The economy is growing phenomenally, but there will be a time when it will reach a slow period. Even in such a scenario, commercial properties are expected to do well because businesses need their space to settle and grow. But, if interest rates ever increase, commercial properties will take the first hit.

Cost for startup

Investing in commercial properties is less risky as compared to residential property. The hidden truth, investing in commercial properties requires a lot more money to start as an investor, creating a barrier for many average investors to invest.

Typically, in such scenarios, investors are willing to pool with other investors to acquire the property. But this can be challenging due to fraudulent activities. Therefore, it is essential to know about the other investors, their background, and their history with commercial properties. You will also find many like-minded investors, which can be a good option and an entry point in the commercial real estate industry.

In commercial real estate investing, you will often need to work with someone extremely experienced in this industry to show you the ropes around. A well-informed and experienced mentor will help you sort through the properties, teach you how to make a deal, and honestly highlight the risks involved with the property (if any). Your mentor can also introduce you to a known real estate agent to help mitigate the tasks. Always remember that the stakes in commercial properties are much higher, and the mistakes inevitably are costly too.

A mentor will also help you understand the local laws, state or country requirement. Because the moment you become a happy owner, you will be showered by local body laws and compliances.

Where to begin?

Before you start hunting for the ideal commercial property, you need to decide for yourself, your investment goals with that property. If you are looking for a property to diversify your portfolio? Are you looking for only money investment options, because you plan to retire soon? Or if you want to invest in only riskier projects?

Once you answer all these questions, it will become easier for you to narrow down your search. 

Want to learn more? Get in touch with us today.

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