Without a doubt, real estate investing can be a lucrative prospect. With that said, whether you decide residential real estate or commercial real estate investing is the avenue for you, you must understand the risks involved. As with any investment opportunity, there are profits to be made and risks to be aware of.
Pros and Cons of Owning Commercial Real Estate
In the following article, we’ll explore the pros and cons of investing in the commercial side of real estate so you can make an informed decision as to whether it’s the right investment opportunity for you.
Pros of Owning Commercial Real Estate
We’ll start with three reasons you should consider investing in commercial real estate and then follow up with three reasons to pause before jumping in.
Income potential
One of the biggest reasons to own commercial real estate is its income potential, which is anywhere from 6-12 percent of the purchase price annually. Residential real estate only sees about 1-4 percent annually. The numbers tell you everything you need to know.
Daytime Operations
Most commercial properties close at night, which means there is less for you to do as a landlord when you should be sleeping. Barring any break-ins or fire alarms, you’ll be able to rest easy at night. If you were to own residential property, you could receive calls from demanding tenants day and night for repairs or lost keys. As a residential landlord, you’re always on call, but when you own commercial property, you only work when they work.
More flexible lease terms
Commercial real estate isn’t governed by such strict consumer protection laws as residential real estate. This allows commercial property owners more flexibility in setting security deposit and termination rules. In addition, most commercial rental leases are long-term – some as long as 10 years – so rental income is stable, unlike residential real estate where leases are only 6-12 months on average.
Cons of Owning Commercial Real Estate
Despite the pros of owning commercial real estate, there are a few reasons it may not be for you.
Higher risk
The nature of commercial property means multitudes of people will visit your property day in and day out. This means more opportunities for people to get hurt and for things to get damaged or stolen. While these things can happen on residential properties too, the likelihood increases when you own commercial real estate.
Bigger investment
When you purchase a commercial property, you can expect to shell out a lot more capital upfront than with a residential property. You’ll also incur larger expenses to maintain and make repairs to your commercial property. With any luck, the income your commercial property generates will outweigh any expenses you incur, so it may still be worth the time and monetary investment to own a commercial property.
Time commitment
As a commercial property landlord, you can’t afford to be absent. You may have several tenants to deal with, as well as public safety concerns, and how your property is viewed in the public eye. There’s a lot more to manage as a commercial real estate owner, so if time isn’t something you have a lot of, you may want to consider another investment opportunity.
Investing in commercial real estate is a great way to earn money as the income potential is much higher than that of owning residential real estate. With that said, commercial real estate carries a higher risk than its residential counterpart. If you’re considering investing in a commercial property, you must understand the pros and cons so you can decide if it’s the right investment opportunity for you.
