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True or False:
All real estate is created equal.
FALSE.
Commercial real estate and residential real estate are two completely different things, with different benefits and detriments on either side.
Today we are going to take an in-depth look at the pros and cons of commercial real estate investing.
If you are curious about residential real estate, you can read up on my other articles about real estate right here (link to blog).
Before we go further, let’s look at how commercial real estate differs from residential real estate.
Residential real estate are units or buildings that are designed for people to live in.
Examples of residential real estate are:
- Single-family homes
- Townhomes
- Apartments
- Condos
Alternatively, commercial real estate or commercial properties are spaces used for businesses, such as:
- Retail buildings
- Warehouses
- Office spaces
- Apartment buildings (different than investing in units)
With these different types of real estate come different pros and cons.
As promised, let’s look at the pros and cons of investing in commercial real estate.
Pros of Investing in Commercial Real Estate
Income Potential
With a bigger space comes the potential for bigger income. If you are renting out individual office spaces, you are getting more bang for your buck.
Commercial properties typically have either more individual renters or the space is big enough that the rent you require is enough to make your income.
Professional Tenants (Not Individuals)
Commercial real estate comes with a whole new set of tenants. Your tenets are no longer individuals but are typically businesses.
In theory, these business tenants are more professional and (maybe) a bit easier to handle.
Emergencies Are Less Likely
How many times have you gotten an after-hours call about a burst pipe or other emergencies happening in a residence?
This is far less likely to occur in commercial real estate, as your clients are pretty much only in your units during work hours.
Diversifying Your Portfolio (if you are already invested in residential real estate)
One of the goals in investing in real estate is to have a diversified portfolio.
If you are already invested in residential real estate, use commercial real estate to diversify your portfolio.
Dispersion of Vacancy Risk (the more renters you have, the less you are impacted by someone leaving)
We all know how satisfying it is to have no vacancies in our rental properties.
One of the pros of having commercial real estate is that, unlike residential real estate, you have more renters involved.
With more renters comes a dispersion of vacancy risk.
If one of your 20 units breaks a lease, you won’t sweat nearly as much as if one of 5 units breaks a lease.
As with any facet of your business, there are benefits to commercial investing, but there are also some real drawbacks. Here are a few of the cons to commercial investing.
Cons Of Investing In Commercial Real Estate
Large Initial Investment
We know that commercial real estate includes warehouses, office spaces, and retail buildings. These are all much larger than the occasional unit or even townhome.
Therefore, the initial investment you have to make will be much larger when investing in commercial real estate.
With this in mind, you’ll need to ensure that you have a solid amount of cash set aside before making this investment.
Market Risks
Let’s talk about market risks.
We all know that the more money you invest, the more money you risk losing if things go wrong.
Just think about how the pandemic changed the workplace. I’m sure there were many investors out of money when multiple small businesses went from working in office buildings to working from home.
While we never anticipate something as major as this, there are market risks to be aware of when considering investing in commercial real estate.
Other risks are interest rates, property taxes, and absorption of space.
Market risks can occur without much warning, so be on the lookout.
Public Safety
A piece of commercial real estate is a place where the public gathers, whether for work or pleasure.
Along with the public gathering comes the inherent risk of the public getting injured while on your property.
If you are considering investing in commercial real estate like a shopping center, be sure to consider the liabilities involved.
Harder To Sell
Let’s say that you need to take a step back from your investments.
It happens, right?
It is way more difficult to find someone to take over a warehouse space or a retail space than finding someone to take a single-family home.
If you decide to invest in commercial real estate, understand that the game is long and is a bit tricky to get out of once you start.
We’re not saying that it is impossible, after all, real estate investing is not the mafia!
Just be prepared for things to take a bit of time if/when you decide to end your time in the commercial real estate world.
Professional Help May Be Needed
Are you a DIYer?
While the do-it-yourself method may be all you need to fix up any issues at your residential properties, you will likely need to hire professionals to fix any issues that may arise at your commercial properties.
While not a deal-breaker, this additional expense should be taken into consideration when looking into commercial real estate.
So there you have it, the pros and cons of investing in commercial real estate.
When done well, commercial real estate can be an incredibly lucrative asset to have in your portfolio. You just have to consider all the factors before leaping in.
Do you have any questions about residential or commercial real estate? Please let me know! I’d love to connect!