What To Consider Before Investing In Commercial Real Estate

As of recently, the number of people investing in commercial real estate has been on the rise. According to Bigger Pockets Blog, there are a number of pros and cons to investing in this kind of real estate. So, before you jump head first into the industry, it is very important to research exactly what you are getting into to avoid any surprises in the end.

Don’t be fooled; although commercial real estate is a complicated business to involve yourself in, it can also be extremely lucrative, so here are some of the benefits from professionals who have been through it before:

1. Flexible Financing- Rather than spending money out of pocket, banks are often willing to provide substantial loans to help commercial real estate investors succeed. There is also an option to utilize auxiliary financing, which means there is up to 100% coverage with first or second mortgages; whereas residential financing often opposes the 100% financing option. This essentially means that if you are looking to purchase an apartment complex with 40 units, you will only be paying one mortgage on the property as opposed to 40 mortgages on 40 properties.

2. Economies of Scale- When owning multiple units on one plot of land (i.e. an apartment complex) contractors are usually willing to negotiate lower costs for maintenance and repairs on the property. However, the more units in the complex the better, because then you can afford to hire your own team which will cost even less than bringing in outside contractors.

3. Passive Environment- If the commercial property you own is an office building, you will receive little to no maintenance requests after hours, or on weekends and holidays; As opposed to owning residential properties where the tenant occupies the space 24/7. Also, with a triple net lease (common for most commercial leases) the tenant is the one responsible to pay any taxes, insurance costs, and maintenance costs, including rent, and utilities.

While these benefits sound enticing, there are unfortunately a list of cons pertaining to owning a commercial real estate property as well:

1. More Competition- In the commercial industry most buyers are looking to improve the space. Usually they want to increase the value of the property so they can refinance with cheaper options. However, as the investor this may be challenging because properties in a reasonable price range with room for improvement are in high demand.

2. Risk of Poor Management- After finding your dream commercial property, it’s just as important to have a strong property management team which is often hard to come by. Tenants will be paying higher rent in order to afford the team, so it’s important to hire a solid crew. When looking for property managers you must ask them their efficiency rate, how much experience they have, and if they’re compliant in order to avoid problems in the future.

In conclusion, investing in commercial real estate can be extremely lucrative, but there are many factors to consider before purchasing the property, as you can see above. When you are confident that you can handle taking on the responsibility of owning a commercial property, the most important thing to remember is to stay up to date with the trends, and most of all have fun with it!

Author: Tara Doherty