Why You Should Consider Commercial Real Estate Investing
Commercial real estate investing isn’t just for the super wealthy. Savvy individual real estate investors understand the value of commercial real estate over residential real estate and are moving in on this lucrative sector. If you’re new to investing in real estate or are simply looking for other types of investments, here are some reasons why you should consider commercial real estate.
Companies typically pay more per square foot for commercial space compared to residential real estate. One reason for this is because commercial space is frequently outfitted with infrastructure conducive to business operations, like lobby area to greet visitors, private reception rooms outside office spaces, commissary areas, kitchen equipment, hi-speed internet wiring, cubicles, electrical capacity for private servers, multiple outlets for individual workstations, and more. Another reason commercial rents are higher than residential rents is parking availability. Commercial buildings often come with either designated company parking spots or an entire parking lot available for employees and customers/visitors.
Extra Revenue Streams
Commercial real estate offers more revenue streams than residential real estate, too. Part of that extra revenue comes from common area maintenance (CAM) fees. CAM fees cover maintenance for things like elevator service and maintenance, groundskeeping, trash collection and disposal, ice and snow removal, lobby cleaning and maintenance, climate control maintenance, indoor plant maintenance, water features maintenance and more. While CAM fees are intended to cover these costs for commercial landlords, there is also room for profit. Signage is another source of revenue. Commercial landlords can opt to lease sign space to individual companies in a multi-company commercial building.
For a landlord, longer leases equate to fewer vacancies. This is where commercial real estate investing truly excels. Commercial lease terms usually go from two years onward. It’s not uncommon to see a commercial lease for five years. Commercial tenants are eager to lock in rates and secure tenancy for the long-term because they recognize the value of staying in one location. It costs companies a lot of money to advertise location moves, market the new location and get customers to follow them to a new location. For that reason, once a company finds a commercial space, they’re likely to stay for decades. Even when rents increase at lease renewal, a commercial tenant often has little choice but to renew at a higher rate.
There are more types of commercial real estate than residential real estate, which means more opportunities for the commercial real estate investor. There isn’t just one kind of commercial building you can invest in. You can choose among restaurants, retail operations, warehouses, personal storage facilities, car washes, parking lots, laundromats, factories, industrial and/or manufacturing facilities, office buildings and much more. This is a great way to invest in something that holds personal interest for you if that excites you as a commercial investor. More importantly, the diversity of commercial real estate types broadens the horizon for opportunities in the real estate investment landscape.
More Responsible Tenants
As a general rule, commercial tenants tend to take better care of property than residential tenants. That’s not to say that every residential tenant ends up destroying your property. It’s just that commercial tenants are conducting serious business activities on premises. They don’t have kids running around (unless you’re leasing to a daycare), they don’t throw parties on the weekends or spill wine on the carpets. Naturally, there’s going to be wear and tear in commercial properties, but not on a level with residential tenants.
Partial Immunity From Economic Turmoil
Commercial investing is different than residential investing in that different factors affect each sector. Residential real estate investors are affected by layoffs, rising interest rates, and other economic downturns. They may not be able to sell a house to turn a profit, or they may have to drastically cut rents in order to achieve higher tenancy rates in an area with few jobs. Commercial real estate investors are somewhat affected by these factors, but not as much. Companies still have to pay their rent if they want to stay in business. It’s not as simple for a company to renege on a lease as it is for an individual. If you invest in commercial real estate in an area where there are lots of highly successful company headquarters and that has commercial diversity, you’ll be even more protected from economic turmoil.
Challenges of Investing in Commercial Real Estate
As with most things worth having, it can be a challenge to procure commercial real estate. For one thing, it’s more costly per square foot than residential real estate. The cost is offset by the potential ROI, but an investor is still faced with coming up with the resources to acquire the loan to buy in the first place. A second challenge is finding the right commercial property to purchase. An investor has the option to buy locally, where they’re more familiar with the market; or to invest out of state, where there are more opportunity and better deals. Investing out of state poses its own challenges. You’d need boots on the ground to find, finance and manage the property. In short, all this work could easily take six months to a year just to find and finance a commercial property.
The Fastest Way to Start Commercial Real Estate Investing
One of the fastest—and easiest—ways to get started in commercial real estate investing is with debt syndication. Debt syndication is a form of private money lending where you act as the bank on a commercial real estate project. Your contribution of about $50,000 is pooled with other investors’ contributions to fund the project. You earn with monthly repayments at a fixed rate of return. With this form of real estate investing, you don’t have to find the property, you don’t have to find tenants and you don’t have to manage anything. Your money works for you by providing you with a passive income stream you can rely on each and every month. Arguably, it’s commercial real estate investing at its best. You get nearly all the benefits of commercial real estate with none of the headache.
Commercial real estate investing is well worth considering. Whether you opt for private money lending or whether you prefer the adventure of seeking out your own commercial real estate project, there’s a lot to like about this investment sector. If you’re interested in learning more about private money lending in a market with rapid growth and economic diversity, contact American Real Estate Investments today.