Why It’s Time to Add Commercial Real Estate to Your Investment Portfolio
Investing in commercial real estate can help you diversify your investment portfolio and enter into an area that can help you achieve your financial goals of long term growth, stable monthly cash flow, and security. Commercial real estate investors can move into the commercial real estate market by acquiring one property and renting it out long-term, or alternatively, they may wish to purchase a property, renovate it and flip it for a profit. Some compelling reasons to consider commercial properties for your investment portfolio include:
Higher Return on Investment
Commercial real estate often provides a higher return on investment than their residential counterparts. Many commercial properties are of a larger scale than one-off residential properties. Additionally, commercial properties often provide a more predictable source of revenue than residential properties, which may be subject to higher vacancies and turnover as people move in and out. Commercial properties may be perceived by mortgage holders as more stable and credit worth and have a lower cost of borrowing than residential properties. All of these factors allow commercial properties to yield a higher return on investment.
Many commercial leases are for longer terms than residential lasting for five or ten years. This provides greater stability throughout the term of the investment. Time in between leases is condensed, so there are fewer vacancy losses. Additionally, commercial leases often contain provisions that automatically increase the rental rate, after a certain periods of time. These factors provide for more predictable cash flow.
Residential property investments may require an investor to act as a landlord, solving tenant problems and making frequent repairs. Commercial real estate investments may be able to be managed by a professional property management firm, but many properties are self-managed by the Tenant. Many large tenants such as Dollar General, Verizon, Pizza Hut, etc. have their own property management departments. Even if you choose to be a commercial landlord, you can likely avoid many of the common problems associated with residential tenants, such as not having unauthorized guests, parking,pets, neighbor disputes or non-payment of rent. Commercial tenants are often have higher credit worthy and take pride and maintain the property because their own financial interests are at stake.
Many commercial properties are structured so that the tenant has more responsibility than a typical residential tenant. While the investor may be responsible for roof and structure, the commercial tenant may be responsible for maintenance of the operational systems, insurance and taxes, landscaping and snow removal.
Appreciation is measured differently for commercial properties than it is for residential properties. Residential properties’ appreciation is typically measured by market demand or sales comparisons to other properties in the neighborhood. Commercial properties are valued as a multiple of their net operating income. This can be increased by a number of factors, such as:
• Upgrading the building or other structures
• Making tenant improvements
• Adding amenities
• Adding square footage to the property that can be leased
• Increasing rent of the property
• Reducing operating expenses
You can establish your own appreciation through some of these mechanisms and improve your overall investment potential.
Commercial real estate is a viable investment option that can diversify your portfolio. It can provide a safe way to increase your cash flow, reduce your risk of ownership and reduce taxes all without creating impositions in your life that may occur through other types of investments.