Commercial Property – Worth the Investment?
“The term Commercial Property refers to real estate property that is used for business purposes. It can also refer to land that is intended to generate a profit, as well as a larger residential rental property. The designation of a property as commercial has implications on the financing of the building, the tax treatment, and the laws that apply to it.”
First Things First
Is Commercial Property Better Than Residential Property?
As far as investment goes, commercial property has always carried less risk. Although the initial costs for tenants are much higher than with residential property, customisation and building adjustments are what ensure higher returns on investments. Apart from the above, there are many benefits that come with investing in commercial – rather than residential – property. Let’s take a look at some of them:
Higher Income Potential
If you think about it, the bigger the property, the greater the potential. Because of the property size and the number of tenants a commercial property can hold, the annual return is much higher than on other investments. However, certain factors still play a part in ROI. For example, multi-family properties or apartments tend to be on the lower end, while suburban offices are higher.
More Tenants = Less Financial Risk
The problem with residential investment is that you’re often limited to the number of tenants you are allowed to accommodate. This causes a bit of uncertainty when it comes to maintaining a consistent flow of income/returns.
In a multiple-occupancy building, there is less risk of income loss when it comes to vacancies, as other tenants are constantly contributing to covering operational costs. Another benefit of commercial properties is that tenants are also responsible for the main expenses on the property, in addition to their base rents. These include net taxes, building expenses, and common area maintenance fees.
Leveraging Increases Cash Flow for Higher Equity Potential
Much of the equity built in commercial real estate is increased through leveraging borrowed capital to make an investment, with the expectation that the profits will be greater than the payable interest. This allows you to enjoy a much higher return on investment than buying outright. Commercial property leases are also typically more favourable, as banks provide higher approval rates because of the high, stable income flow – as long as you’re not over-leveraging your assets.
Are There Any Negatives to Commercial Property Investments?
Like everything in life, there are always two sides to an argument, and commercial versus residential property is no different. Before deciding to invest a large amount of money into something, it’s always important to look at the pros as well as the cons.
Important factors to consider would be that commercial property investment is extremely time-consuming. You’re not only taking care of one tenant but could possibly be managing multiple occupants.
Another con would be that professional help would be a requirement, as maintenance is a huge part of keeping your occupants happy.
Finally, another important thing to take into account is the expense. Commercial property requires much more capital upfront than acquiring a residential rental in the same area.
Taking all things into consideration, commercial property investment appears to have a much larger ROI, but can be time and money consuming. At the end of the day, a property investor should evaluate not only what he/she can afford, but also what is realistic in terms of resource availability.
If you are interested in learning more about how YOU can invest in commercial property, you may want to attend our FREE seminar, where our property experts can teach you all there is to know about Thinking and Growing Rich in Property.