Investing in commercial real estate might be a great way to diversify your investment portfolio and plan for the future. However, people who are new to real estate investing often wonder what the pros and cons of commercial real estate are and whether it's better to invest in commercial or residential properties. The truth is that commercial real estate investing has both advantages and disadvantages — here a few of both to help you as you consider your investment goals.
Pro: There Are Plenty of Property Types to Choose From
Commercial real estate offers plenty of opportunities because many different property types fall into this category, including multifamily dwellings, office spaces, retail buildings, industrial units, warehouses, and mixed-use properties that have both commercial and residential space.
Con: The Job Is More Complex, and You'll Probably Need Help
Commercial properties tend to have multiple tenants, and this means multiple leases and terms, increased maintenance costs, and more. Similarly, there can be more risks involved with commercial properties. Because of the increased risk and complexity, many commercial property owners hire professional management companies to offset the additional time and work required to maintain the property.
Pro: A Greater Income Potential
One of the major draws of commercial real estate is that there's a more significant opportunity for rental income, not only because you'll have multiple tenants, but also because you can expect to charge higher rents for the space.
Con: It’s a More Expensive Investment
Commercial properties cost more to purchase and maintain. You'll also have to set aside money for capital expenditures for things like renovations, repairs, and upgrades, which will cost more than with a residential unit. Furthermore, commercial real estate financing can be more difficult to secure than residential financing.
Pro: Your Property Will Be Cared For
When tenants rent a home, they usually don’t care for it the same way that you would as the owner living in your own home. But with commercial properties, the tenants have a vested interest in maintaining the property because their business relies on the space (especially if the public is welcome at the location).
Con: Finding Tenants Can Be Tough
There are two sides to this issue because although commercial tenants typically have longer leases than residential ones, filling commercial vacancies can be more difficult, especially during tough economic times. As such, it's a good idea to be proactive about finding tenants if you have planned vacancies coming up — it can also be beneficial to have the cash reserves to cover extended vacancies.
Pro: You Know What You're Getting into (if You Know Where to Look)
There's a lot of information made available to prospective buyers when a commercial property is involved, including things like rent rolls and income statements, and this can give you a good idea of how sound the investment is.
As you can see, there are both pros and cons to commercial real estate investing, and it’s important to know what you're getting into before committing to a purchase. When you are ready, contact Investment Property Loans and get your application started for a commercial mortgage.