Many people who are getting started in real estate investment stick to residential homes, since they’re generally more familiar with the buying process (and the rules that govern renting residential properties). But buying commercial real estate can be an equally profitable or more profitable route, provided you take the time to do your research. Here are some pros and cons of buying commercial real estate to consider before you dive in:
Pros
- Higher Income Potential
Commercial real estate yields, on average, a much higher annual percentage of the purchase price than residential real estate does. You might be getting 6% to 12%, rather than 1% to 4%.
- A Diversified Portfolio
It’s a widely believed myth that commercial properties don’t go into foreclosure. They can, and commercial real estate values fell sharply with the 2008 consumer credit crisis, for example. But just as in all investments, a diversified portfolio including several types of properties is an advantage in commercial real estate investing.
- Professional Interactions
When you rent a house to individuals, you’re on call 24/7 in case of emergencies. But since most business operate during daytime hours, it’s far more likely you’ll be able to keep regular business hours yourself (barring a late-night alarm or fire). And since you’ll be working on a business-to-business basis, your interactions with tenants are more likely to be courteous and professional.
Cons
- Higher Down Payments
When you’re buying commercial real estate, you should expect to put down a much larger down payment than you would on a residential property. The standard is 30% or even more.
- Less DIY Opportunity
In a commercial space, you’ll need to be licensed as a professional contractor if you want to make improvements. It’s more likely that you’ll want to budget out a portion of your higher earnings for hiring other professionals.
- Greater Liability
Since there will be many people coming and going on your property, your liability is increased. This is just one of the reasons it’s important to make sure renovations are done to code and all repairs are promptly addressed. The better maintained your property is, the less risk you’re taking on.
Do you have any questions or tips on how to buy commercial real estate? Join the discussion in the comments.