Investing in the commercial property market is well worth the disadvantages when you weigh these against the potential income to be made. Compared to residential property, there are plenty of advantages to sweeten the deal. Here are the pros and cons of entering the commercial real estate field as well as a few tips for getting started.
Commercial properties are a good investment with a return of between six to twelve percent. This makes them a better choice than the residential market where each property generates one to four percent. Residential clients will keep you busy with maintenance issues around the clock, while commercial tenants usually only operate during standard business hours. Some of the bigger companies will take responsibility for maintenance as part of their contract.
As well as this, it is easier to get up to 100% financing after you have purchased the first property. Overall, it is a more profitable field. Also, working relationships with tenants are more professional. You can work through a commercial property broker. The evaluation of property can be calculated from the seller’s income statement. With residential properties, there is no fixed formula to establish pricing.
Disadvantages of Getting Into Commercial Real Estate
Commercial real estate has more complexities to deal with. You will need the practical and technical know-how to fix up properties or subdivide them. The initial costs of converting a commercial property could be extensive, over and above the purchase price. The latter could be prohibitive for getting into the market. There is also a lot of competition for prime locations.
There may be long delays before you start seeing an income on your investment. Factors such as permits, zoning, escrow, and construction may go on for years. You may also have to do an environmental impact study.
Commercial property will require a licensed property management company that will take between five and ten percent of the income you make. Maintenance tasks cannot be done without the right paperwork. If this management team is not conscientious and does not exercise time management or is rude to tenants, this will come down on you. Their actions could result in legal woes for you.
Tips for Getting into the Commercial Property Market
You should consider becoming a commercial real estate broker first. You will be getting an income from sales and leases. This will enable you to gain experience dealing with legal issues, tenants, and maintenance issues. Although it takes longer to process than a residential deal, the income is far higher.
An important skill you will need is the ability to look at a property and work out what it will take to transform it into suitable offices or tenant spaces, what you can charge, and what your return will be.
When looking for properties to invest in, the location remains the priority. Determine what type of commercial properties will work there. Don’t forget to get quotes from a commercial insurance company to protect your business.
The decision to invest in commercial real estate is a big one, and it comes with risks. However, once you get your foot in the door, you won’t look back.