Are You Ready to Get Into Commercial Real Estate?
Residential and commercial real estate are two very different animals. For the average residential investor, getting involved on the commercial side of things may seem a little foreign, and even a bit intimidating. Before taking this step, it’s important that you understand the differences between these two types of property investment, as well as the pros and cons.
How is Commercial Investing Different From Residential?
There are several factors that set commercial investment apart from residential. One of the biggest is the property itself. Commercial real estate usually refers to land and non-residential buildings, like offices and warehouses. Apartment buildings also fall into this category, even though they are comprised of individual residences. Conversely, residential real estate generally refers to single-family homes, duplexes, or any other building that has less than 5 individual units.
The other differences between these two types of investing primarily have to do with the advantages and disadvantages, which are listed in the next sections.
Pros of Commercial Investment
There are lots of great things about commercial investing, which of course explains why so many decide to get into it. Here are some of them:
- Much higher profit potential
- Potential for triple-net leases, where the lessee pays for all property expenses
- Better quality tenants
- Longer term leases with lower turnover
- Better prices on property management/contractors
- May be a more passive investment
Cons of Commercial Investment
Commercial real estate isn’t all sunshine and roses, though. There are several disadvantages you may also encounter as a commercial investor.
- Higher start-up cost
- Lower inventory may mean more competition from other investors
- May be more susceptible to economic downturns
- Valuing commercial properties is more complicated
- Financing can be trickier
Should You Do It?
Great question! Unfortunately, I don’t have an answer for you. Whether or not you decide to get into commercial investing is completely dependent on your investment strategy and goals, as well as how much time and money you want to spend on a property. If you are new to investing, I would highly recommend starting with residential investment, and sticking with that until you’ve gained some experience and connections. There are lots of wonderful things about commercial investing, but if you know nothing of real estate or investment in general, a commercial property may be a bit overwhelming. There’s a lot to know, and you should definitely spend some time learning the ins and outs before you dive in.