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The Dos and Don'ts of Investing in Commercial Real Estate - Part I

  


In the current economic environment, many investors are looking for ways to make wise investments, and many are considering commercial real estate as a possible strategy. Commercial real estate has always been a reliable method of building capital with its own unique advantages over stock market investment, but it also comes with its own specific roadblocks and challenges. To be successful in this space, you need to be aware of the possible pitfalls that you could encounter and have the patience to achieve the results you are looking for. 

 

Join us as we take a dive into the why and how of investing in commercial real estate properties today. 


Some of the Primary Reasons to Invest 

Investing in commercial properties comes with its own unique set of benefits, which many investors may find attractive when considering the prospect of investing. Some of the positive elements that make commercial real estate investment preferable to the traditional stock market or residential property investment include: 

 

Income Potential

Commercial properties generally have a higher income potential when compared to residential real estate. The typical annual return of a commercial property is usually somewhere between 6-12% of the initial purchase price. This number can vary depending on a variety of factors, such as the area the property is located in, current economic conditions, the credit strength of the tenant, and numerous other external factors. This can be compared to a typical rate of return of 1-4% for residential investments annually.

 

Professional Relationships

Some investors are drawn to commercial real estate by the allure of having an operating business as a tenant rather than a household or individual and the nature of the relationship and interactions that come with this type of renter. In these situations, the tenant relationship will typically be business to business, and property owners can expect the interaction with their tenants to be more professional than they may have experienced with residential renters.

 

Public Eye on the Property

With a commercial property, your tenant will be relying upon business from the public and as a result, will have a vested interest in maintaining the cleanliness of your property. The cleanliness and presentability of the property will be a core concern for them as well as for you, and you'll likely have better luck working with them to maintain the property. 

 

Limited Hours of Operation

Many investors are also drawn to commercial properties due to the more restrained windows of time during which businesses will typically be open. Many tenants will have operational hours that mimic your own daily schedule, making coordination with them more easily manageable than with residential properties. 

 

Objective Price Evaluations

Another element that investors find attractive is the fact that property values can be more easily determined based on the raw numbers surrounding income levels, property traffic, and recent sales of similar properties. Compared to the impact that emotions may have on pricing of a residential home, due to the personal connection homeowners can develop with their property, commercial properties present situations that are more suited to the business-minded investor. 

 

Flexibility in Lease Terms

The final factor that makes commercial properties attractive is the fact that there are fewer restrictions imposed upon commercial buildings than is common in residential real estate. This can be a strength for both parties, as it allows them space to have a discussion and reach a lease agreement that will be most beneficial to each of them. 

 

Potential Downsides and Pitfalls 

No investment is free of risk, and this is especially true of commercial real estate. As a potential investor, you will want to be aware of the possible challenges and issues you may face before making a commitment to a property. 

 

These are some of the unique difficulties and obstacles that you will want to give consideration to before investing in commercial real estate:

 

Time Commitment

In some instances and conditions, a commercial property can require more active management and dedication from the property owner. Depending on the type of lease agreement that you have with your tenant, property management could be a larger burden than it would be for a residential property, and these require more active participation on your end to address repairs, property taxes, or other issues as they arise. 

 

Professional Help Required

When maintenance issues occur with your property, they will, more often than not, require licensed professionals to address them. While with residential properties, you or your tenants can make the repairs necessary if you desire, with commercial properties, all work will need to be done by licensed professionals and up to local codes. Straying from this can result in serious damage to your property, and even serious costs in the future should you try to sell the property. 

 

Bigger Initial Investments

The most obvious barrier that you will face as an investor will be the high cost. Acquiring a commercial property requires considerably more capital than a residential property in the same area, and can carry hefty additional costs shortly after the initial investment. If you are seriously considering investing in commercial properties, you need to be financially prepared to bear these costs. 

 

More On-Site Risk

These properties have more regular traffic and visitors than would be seen in a residential property, which creates more opportunities for damage or other issues to arise on the property. More foot traffic means more wear and tear, as well as the rare instance of civilians being injured on the property, leading to possible litigation.  


Once all of this information has been properly evaluated, then you are truly ready to begin your investment journey. When this day comes, you will want to make sure that you have an experienced ally to help secure the property that will best serve your needs.


Byline_Brendan_Jost

 

Brendan Jost >

Acquisitions & Dispositions Manager

Brendan Jost serves as the Acquisitions & Dispositions Manager at SimonCRE. He plays a vital role in the day-to-day management of the company's disposition pipeline and investment sales team.

Commercial Real Estate Markets Investment Disposition Due Diligence Commercial Real Estate Investing