Investing In Commercial Real Estate Vs. Residential Real Estate

James C Dragon

December 8, 2022

Commercial Real Estate Vs. Residential Real Estate

Investing in Commercial Real Estate is a great way to generate investment returns, but you must choose wisely. There are a few key factors to consider. The most important is how much risk you are willing to take. Look at the costs involved in managing property. These include maintenance, property management, and tenant turnover. These factors can affect how quickly you can return on your investment.

Less risky

Investing in commercial real estate is an appealing option for various investors. Historically, it has been one of the most stable forms of investment. However, there are still risks involved. The most important thing to remember is that it isn’t always a risk-free investment.

A good place to start is by exploring less risky options. Some strategies to consider include opportunistic, core, and leverage.

The opportunistic strategy can involve developing a property on a raw piece of land or developing a niche property. It is the most work-intensive but can yield the highest returns. It can also result in the lowest cash flow.

The core strategy is a more modestly sized but more robust strategy. This involves investing in properties that are leased to high-credit tenants. This property is often in gateway cities and offers predictable cash flows. The downside is that these properties require a higher level of work and require more leverage.

Higher investment returns

Investing in commercial real estate offers investors some advantages. The most obvious is the ability to generate a high return on investment.

Commercial real estate is classified into five main sectors: office, retail, medical, multifamily, and special purpose. These categories differ in their vacancy rates and tenant mix.

The best way to maximize your ROI is to purchase property at the lowest possible price. Also, working with a commercial real estate broker can help you increase your ROI over time.

The NCREIF Property Index reported an average annual return of 8.8% over the past 15 years. The JOBS Act of 2012 changed the landscape of commercial real estate investing. Large institutional investors have begun competing for prominently located properties.

Longer leases

Choosing the best length for a commercial real estate lease is a decision that can affect your business in various ways. Generally speaking, longer leases are more stable and valuable, while shorter ones can be a hassle for both the tenant and landlord.

Among other things, a longer lease can help you avoid the rent hikes that plague many tenants. While some landlords habitually raise the rent on renewal, others are less demanding. On the other hand, a longer lease can allow you to recoup your investment before it’s too late. Similarly, a longer lease may be the best way to make your company’s mark in a new location.

Property management costs

Property management costs can range from two hundred dollars per month to a couple of thousand depending on the property type and market. The average fee is about six percent of the rental income.

For instance, you may have to pay an initial setup fee when you sign up with a third-party property manager. A one-time charge might include a visit to your property to inspect it, the costs of preparing and notifying your tenants, and a service fee for advertising.

A lease renewal fee is another common expense. This fee is typically about $200 or less and is charged by a property manager for handling tenant renewals. Negotiating this charge is a good idea since it can be an important part of your relationship with the manager.

Shorter leases can lead to higher tenant turnover

Typically, commercial leases last for three to five years. However, in some cases, shorter leases can be beneficial. They give landlords the flexibility to fill gaps and capitalize on rent increases. In other cases, they can be an expensive drain on a landlord’s profits.

In the last nine years, the Urban Land Institute has tracked the lease term trend in the U.S. During that period. The average lease term has decreased from five to four years.

While long-term leases are still in demand, more small tenants sign short extension-like leases. The trend is unique to the office sector.

While larger companies have enough capital to ride out market fluctuations, smaller tenants are more susceptible to real estate costs. This means higher turnover. This also means more frequent build-outs for new clients.