When you’re investing in real estate, understanding the various different markets you can get into is vital for success. If you’ve primarily been investing in residential real estate, such as flipping and selling houses or renting to tenants, then commercial real estate is an entirely different beast. That doesn’t mean that it can’t be tamed, however. There are significant differences, but there’s also significant profit to be made, so let’s explore what you should know about commercial real estate and how to improve your chances of succeeding at it.
What Makes It Different From Other Real Estate?
As the name implies, commercial real estate is about properties used for business purposes as opposed to residential living. You’re not renting or selling to individuals or families but rather leasing them to companies and organizations. As such, how the properties work, from their leases to your responsibilities, can be massively different. For one, commercial real estate leases tend to be a lot longer. That can mean more predictable income and fewer turnover costs, which does have its benefits in an uncertain market. However, commercial tenants tend to negotiate more heavily, and vacancies can last longer, which adds a layer of complexity. The income that the property produces also tends to play a much higher value in the property’s value rather than just local market comparisons, too.
The Different Types Of Properties
There are many different kinds of investments you might be handling if you get into commercial real estate. Having some idea of what they care about could help you decide which you would prefer to work with. Retail properties, for instance, including things like strip malls and standalone stalls to large shopping centers, benefit best from foot traffic, great locations, and areas with good consumer spending trends. Industrial properties are more often used for warehousing, logistics, and manufacturing and can be highly lucrative in commercialized areas, typically offering stable, long-term tenants with fewer management demands. Office spaces are versatile and are able to go anywhere from suburban areas ot to city centers, which can make it easier to spot opportunities, but recent shifts in remote work trends have made this segment more nuanced.
Managing Commercial Real Estate
The management responsibilities that come with commercial real estate tend to be much different from residential properties. The expectations of business tenants tend to be higher, and you have to ensure a certain degree of facility conditions, functionality, and compliance with business regulations. While the tenant is often responsible for certain maintenance responsibilities, the property owner is still responsible for the structural integrity of the building, as well as any shared spaces. To deal with the inevitable repairs, renovations, and upgrades the space needs, it’s important to have a partnership with a qualified general contractor. They help ensure that projects stay on schedule, comply with regulations, and are completed to a professional standard. They also bring in trusted subcontractors and manage the logistics that would otherwise be overwhelming for a solo investor.
Where Your Returns Come From
In order to decide whether or not commercial real estate is for you, you need to think about where your end comes from. Usually, it’s from rental income and property appreciation. The former tends to be more stable and substantial in the commercial market thanks to long-term leases. Commercial tenants often pay not just rent but also some or all of the operating expenses like taxes, insurance, and maintenance, depending on how the lease is structured. This can reduce the landlord’s out-of-pocket costs and improve net returns. Appreciation, meanwhile, happens as a result of the property gaining value over time. The more income the property generates for the businesses operating in it, the more it’s likely to appreciate.
Is Commercial Real Estate Right For You?
Although your obligations might be greater with a commercial property, and you have to work to the higher standards of business clients, there are plenty of benefits to investing in the field. The potential for higher income is the obvious place to start, given that commercial companies tend to generate a lot more cash flow. Professional clients tend to mean fewer late payments and fewer headaches. They can also work to diversify your investment portfolio, as you’re investing in a market that’s resistant to the shocks that might hit the housing market.
Commercial real estate is a different, often more costly, and more complex means of putting your money into property. However, given the high-value clientele it brings, it can be more than worth it, so consider making it a part of your investment strategy.
