If you are in real estate, even just starting out, there is, at least, a slight chance the concept of purchasing commercial real estate has crossed your mind. If you ARE just starting out, you are likely dealing with the likes of homes and apartments, but there comes a time in most real estate agents lives where they sit back and wonder just how much better life would be if they were to somehow get their hands on a juicy bit of commercial real estate. If you have ever wondered if this is right for you, just sit back and see what we have to say about the pros and cons of commercial property.
WHAT MAKES A COMMERCIAL PROPERTY?
There are a few things that can constitute as commercial property. When you consider commercial real estate, you are likely considering, at least, a somewhat established business. Some of these businesses can include everything from warehouses, office buildings, industrial buildings, your average retailer, or even the occasional entire apartment complex can sometimes be up for grabs if you know just where to look. While each and every various type of company may have it's individual pros and cons within themselves, it is much easier to take a broader view and approach all aspects at once rather than attempting to pinpoint each and every detail of each business.
Starting with the downside, let's take a look at a few potentially unfortunate circumstances that could occur with the purchase of even a well established commercial property.
First, let's cut right to the chase and talk about the risk. If you are looking for a good risk to reward ratio, depending on the business you invest in, commercial property may not be for you. Take your average retail store, for example. How many people do you think would be in and out of the building on an average day? Are we looking at people in the dozens or hundreds? And, out of those people, how many of them are going to get injured, cause property damage, or just overall in some way give your entire establishment a bad name? Now ask yourself how much of that is going to cost you directly. Accidents tend to happen every day and sometimes it's not about "if" but "when".
This can lead to a large devotion of time on your part. Unlike a personal home where yourself and/or virtually any trusted individual can say, fix a plumbing issue, in cases of commercial real estate, you may find that old red tape to be just a bit thicker when it comes to professional property management. You are going to need a licensed expert and you are likely going to need one for each thing that could potentially go wrong. If you're lucky and have a decent building, it may not be AS big of an issue, but it is definitely going to cause you to put a bit more effort than just reading a book and doing the repairs in your own spare time. With commercial real estate, you are going to have many more eyes on you than the average college roommates looking to get a house for a semester. So you are going to have to be on top of your real estate managing game.
And that's not to mention your own initial investment as well. Chances are you can locate and purchase a very nice house in a very nice area for just a few thousand, but finding an affordable commercial property without an extremely large loan is going to be next to impossible. It's not to say that the odd little mom and pop organization won't come looking to work with you on purchasing a building, but, if you really want to go where the green is, you are looking at warehouse and industry space and those are anything but cheap.
But it's not all bad news. The reality is, as much as you may have to spend on that initial investment and possible repairs, statistically you are going to get that money back tenfold. On average, you are looking at a minimum 6% to 14% cash return just on your first building alone. Typically with residential, you are lucky to get back 3%, but by taking that little extra risk, you have established yourself a very nice little nest egg. And people are going to notice. Once you have established yourself in the commercial real estate community, your name is going to get around to a lot of potential clients. You are going to find that the more businesses you rent out to, the more are going to be looking to you for their next building.
The amazing thing is, that is just what people see up front! Even behind that scenes you are going to find your life getting easier by the day. If you are leasing an average retail shop, your clients and theirs are likely going to be heading home near nightfall. This means no calls at all hours like you would potentially have in a residential situation. It is also much easier to evaluate the cost of your rent by judging how the business has done in the past. This means fewer calculations and guesswork, and more solid numbers and knowledge before you even go into the deal. You also have the option of a triple net leasing, which although it may vary from contract to contract, basically states that you will not have to pay any extra expenses on the property. Again, they vary, but if done correctly could save you hundreds if not thousands of repair bills alone!
SUMMING IT ALL UP
As you can see, there are just about as many pros as there are cons to commercial real estate. At the end of the day, just do your research, make decisions that are right for you, and always trust yourself. You may just find commercial real estate to be exactly what you've been looking for all along.
Thank You For Reading!