Are you a residential real estate investor looking to broaden your horizons? By diversifying your portfolio with commercial property investments, you can create additional opportunities for income generation and other advantages that can draw you closer to achieving your financial goals.
Here are a few of the most common benefits of investing in commercial real estate. As you read, keep in mind that no two investors are guaranteed to have the same experience and that any past success in a particular market is no indicator of future performance.
Commercial Real Estate Explained
A commercial property is generally defined as real estate that is used for business activities. However, apartment buildings can also be described as commercial, since the property is used to generate rental income from residential tenants. In many states, residential property containing more than a certain number of units qualifies as commercial property for tax purposes.
Common commercial property types include multifamily, retail, office, industrial, and mixed-use spaces.
Income Generation Potential
While the return on an investment is never guaranteed, those who invest in commercial real estate can put themselves in a position to generate more income than they could reasonably expect from a single family home.
This is mostly due to the fact that commercial properties often house a number of tenants. While many multi-tenant properties, especially those larger in scale, require the assistance of a property management firm, the steady flow in income from multiple lessees is a significant draw for real estate investors.
Commercial property owners may also generate income through other means, such as parking fees or rental fees for appliances or storage space.
Investors looking to finance the purchase of a commercial property have a number of different lending options to choose from in today’s market. Some of these lenders, like Commercial Direct, a division of Silver Hill Funding, LLC, offer loan-to-value (LTV) ratios of up to 80%.
This means that qualifying borrowers could purchase an office or retail property with just a 20% down payment.
A borrower could then build equity in the property with each ensuing monthly mortgage payment. By eventually executing a cash-out refinance, the borrower could access that equity and use it to make building improvements or purchase another property.
This is a popular strategy for several types of real estate investors, from those who need cash to take advantage of a new investment opportunity to those who simply need funds to help pay for new appliances or flooring for their commercial property.
Potentially Lower Risk
Occupancy is a constant concern for those who invest in single family homes. If the unit becomes vacant, the investor must quickly work to secure a new lessee to avoid a prolonged lapse in revenue from rent payments.
Investors of multi-tenanted commercial real estate have a bit more protection in this area. If other tenants continue to pay rent each month, the property owner may not feel as much financial pressure to replace a single vacancy.
Be sure to take the time to get more familiar with the potential benefits, and drawbacks, of commercial real estate investing before you decide to make your first purchase. If you’d like to get in touch with one of our mortgage experts, connect with us online here.