2 March 2020/ sale_commercial_property_guide

Is Commercial Real Estate a Good Investment?

Commercial real estate is a huge market. It encompasses any property that is used for business purposes (or to generate a profit) rather than as a residential space, therefore includes everything from huge business parks to modest B&B’s.

Most types of property can be a great investment opportunity. Commercial real estate can offer bigger financial gains than residential properties but may come with higher risks.

Types of commercial real estate

  • Office buildings
  • Retail buildings
  • Industrial buildings
  • Leisure buildings
  • Medical buildings
  • ‘Mixed use’ buildings

We have a large selection of retail, office and industrial spaces to rent at Realla. With our powerful search engine, you can find your ideal commercial property in your location of choice.

Investing in commercial real estate

Income and appreciation are how you can earn money through commercial properties. Income is produced through operating the building and appreciation is when the property increases in value over time. While investing in commercial real estate often requires a lot of capital and expertise, the everyday investor can have a diversified portfolio of properties if done right. You can read more about this here.

Reasons why commercial property is a good investment

Below we consider the pros and cons of investing in commercial real estate rather than residential property. Naturally, these reasons will vary between commercial property types, but to get a general idea, we’ll use a single-story retail building as an example.

Pros of commercial property

Cons of commercial property

Can help to maintain professional relationships

Owners of commercial property tend to be LLCs instead of individuals. This means that the landlord and tenant can have a more business-to-business relationship, often leading to more professional interactions that aren’t characterised by emotion.

Usually require professional help

It’s likely that you’re going to need professional help to handle maintenance issues and emergencies. This additional cost isn’t ideal, but unless you want to get licensed and be responsible for such issues, you’ll need to add it to your list of expenses.

Therefore, when working out the price to pay for commercial real estate, remember to factor in property management expenses. Property management companies tend to charge 5-10% of rent revenues.

Fewer hours of operation

Unlike residential properties, businesses usually go home at night, so you don’t have to ‘work’ 24/7. Of course, there are exceptions like emergency calls, fire alarms or break-ins, but you’ll have an alarm monitoring service that will notify the authorities to assist.

So, for the most part, you should be able to relax at night without having a tenant ringing you for repair or a spare key.

It’s a juggling act

While there may be fewer hours of operation, there can often be more to manage with commercial real estate. If you own a building with three tenants, you’ll already have more to manage.

Usually, you’ll be managing multiple leases, public safety concerns and maintenance issues at the same time. While tenants need to consider how the public perceives their retail property, so do you.

Higher-income potential

Commercial properties have an annual return of purchase price between 6% and 12%, which is significantly higher than that of a single-family home at 1% to 4%.

Larger initial investment

To invest in commercial real estate, you’re going to need more upfront capital than with residential properties. This can make investing in commercial properties less achievable for many people.

As retail spaces will see more customers and have more facilities to maintain, there’s inevitably going to be more costs.

However, as we’ve discussed there is higher income potential. Many investors do find that the gains in revenue outweigh the costs.

Tenants should respect the property

Most tenants of retail spaces will want to keep their shop and shopfront in great condition because if they don’t, they risk losing business.

This should, in turn, improve the quality of the property and therefore the value of your investment.

 

Higher risk

Whether it’s an office block, a factory or a shopping centre, commercial real estate will see more people and public visitors each day.

Therefore, there is an increased likelihood of someone damaging the building or getting injured. While incidents like graffiti, people slipping on ice and car park accidents can occur anywhere, the probability of these events materialising is higher when investing in commercial real estate.

You don’t have to pay expenses

With triple net leases, you don’t have to pay expenses on the property, unlike with residential real estate. It’s the tenant’s responsibility to manage the expenses and the only expense you’ll need to pay is your mortgage.

 

Longer leases

In the UK there is a longer lease structure than the US and Europe. For a London office, the typical lease length is between 10 and 15 years, and across the rest of the UK, it’s eight.

This is, of course, much longer than what you’d expect with residential real estate, which tends to be between six months and a year.

Longer leases provide more security as an income is guaranteed for an extended period.

 

Commercial real estate has the potential to be a great investment

Investing in commercial real estate often generates stable cash flow from rent payments. It has intrinsic value and normally appreciates over time.

Whilst investing in residential real estate may be less risky in some respects, it doesn’t mean that it’s completely safe. Take the financial crisis in 2007 for example, where many property investors got their fingers burnt. No type of property investment is risk-free.

The growth of the UK economy will determine the value of commercial real estate. To read more about how you value commercial estate, click here.

At Realla we have thousands of commercial properties to rent or buy, from chic office spaces in Central London to spacious retail spaces in Manchester.