Is Commercial Real Estate a Good Investment Choice?
Investing in commercial real estate can be a profitable niche for real estate investors. However, buying commercial properties is often considerably more expensive than investing in residential properties. Additionally, investors must abide by zoning laws, hold adequate insurance, and adhere to provisions governed under the American with Disabilities Act.
Commercial real estate encompasses a variety of properties. Some of the more popular choices amongst investors include: retail outlets, apartment buildings, condominium complexes, office buildings, and raw land parcels.
When investors buy raw land the property must undergo inspection before buildings can be erected. Property owners must apply for building permits through the county zoning commission and submit architectural drawings to the board for approval. Prior to submitting a purchase offer, investors must conduct due diligence to ensure vacant land is zone for commercial use
Real estate investors often join forces with investment groups to purchase commercial real estate or land parcels. Commercial properties are often managed by a property management group that oversees the needs of tenants, collects rent, and handles maintenance problems. The type of property management group required depends on how the property is used.
Condominium complexes and apartment buildings generally have on-site property managers. When apartment complexes consist of less than 10 units, investors often use the services of a leasing agent to handle management duties. Office buildings, shopping malls, and retail outlets often utilize off-site property managers hired through an independent company.
Investors must calculate the true cost of acquiring commercial properties. When low occupancy rates exist, operating expenses can be more than generated income; yielding in financial loss. Calculating operating expenses is especially important when properties require multiple tenants. On average, commercial properties must have a minimum 50-percent occupancy rate to break even.
Investors must be knowledgeable of landlord / tenant laws, property management requirements, and legal statutes prior to investing in commercial real estate. Otherwise, they could be subjected to state and county fines, or tenant lawsuits. All real estate purchase agreements and leasing contracts should be drafted by a real estate attorney experienced in commercial property law and building codes.
The cost of buying commercial real estate is about three times higher than residential properties. However, investors can charge a higher rental rate and generally retain tenants for longer periods of time. Companies often lease space for 5 or more years, where residential tenants typically enter into 1 year lease agreements.
Leasing commercial real estate can yield a higher profit than residential properties, but can carry a higher level of risk. Investors must become educated about all aspects of commercial leases and develop a network of partners they can turn to for advice. Otherwise, they could place their property investment at risk for foreclosure, lawsuits, and tenants that default on leasing agreements.