Pros and Cons of Commercial Real Estate Investmentsupport
Considering stepping into commercial real estate investment? Private Mortgage lenders ‘Pacific 8’ explain how it all works and what the pros and cons are for investing in commercial properties.
What Is Commercial Real Estate Investment?
Commercial real estate is property that is used for the purpose of conducting business, that is, not for residential uses. Such properties may include offices, warehouses, industrial sites, or retail property. Therefore, the definition of commercial real estate investment involves the purchase or lease of commercial property with profit-making purposes, either from rental income or capital gains. Before starting in commercial investment, one requires an understanding of the factors influencing the dynamic property market, financing prerequisites, leasing terms, and quite evidently that there are pros and cons involved.
Considerations Before Getting into the Commercial Property Market
- Location of Property – The ease of access to a business is crucial to consider as this relates directly to its prospective exposure, particularly valuable for retail enterprises.
- The Physical Building – Investing in property that has been maintained is ideal, helping keep refurbishing costs to a minimum. However, if required there are ways to add value to commercial property such as improving the building appearance or expanding the block.
- Features and Amenities – One of the most sought after features for many commercial properties is the availability of car parking spaces, not only for the employees but for customers.
- Vacancy – Take note of the number of vacant offices or shops that are in the nearby area you are considering investing in. If most neighbouring spaces are occupied, this may be an indication that business is well.
Pros of Commercial Real Estate Investment
All in all, when compared to residential real estate investment, commercial properties offer a higher return on investment. The average return may vary from six to ten percent total rental income, as posed to the three percent average rental return for residential estates.
Less Maintenance and Rates
With commercial estate investment, the tenants are responsible for typical expenses such as council rates, utility costs, body corporate fees and insurance.
On average, a commercial estate lease can fall anywhere between three to ten years, compared to the much shorter six to twelve month turn over for most residential tenancies.
Commercial properties attract higher quality tenants consequently assisting in the lowering of the risk of defaulting. This is particularly evident where the tenant is a government agency or a renowned organisation.
Cons of Commercial Real Estate Investment
Sensitivity to the Economy
During an economic boom, the majority of businesses thrive, and in turn, there may be spike in the demand for commercial properties. On the other side of this, the demand eases for commercial estates in weaker economic conditions or recessions. The economic conditions may also influence a potential tenants’ ability to make rent payments, and additionally make it more challenging to find quality tenants.
Due to the longer nature of commercial lease arrangements, it may be more difficult to find a tenant specifically if the property becomes unoccupied. However, lengthy periods of vacancy are commonplace, and the investor should be aware that this entails the loss of rental income and may accrue upkeeping expenses.
Banks generally require a larger down payment to purchase commercial real estate, posing as one of the greatest hurdles for entry into the commercial property market. This is partially due to the higher risk involved in running a business.
Getting Started with Commercial Real Estate Investment
Many individuals steer away from investing into commercial properties caused by the perceived higher risk compared with residential investment. Nevertheless, commercial estate investment can be extremely rewarding and profitable, and Private 8 are here to help you begin your journey into commercial real estate investment through a consultation request.