The Pros and Cons of Investing in Commercial Real Estate
3 min read
As an outsider looking in, investing in the commercial real estate industry seems like an attractive way to get into the real estate market. Stability, consistency and reliability are just some of the many benefits of adding commercial real estate to your portfolio.
But like any industry, where there are advantages, there are disadvantages too. Below are the top pros and cons of investing in commercial real estate.
PROS
Higher ROI
Investing in commercial property fuels a better return on investment (ROI) whether you want to hold the property for the short or long term. Commercial properties tend to come with a higher price tag and rental income potential, resulting in higher potential returns.
Reliable Income Source
Commercial real estate almost always has leasing potential, no matter the stated use of the property. This allows investors to receive a steady income source over a long period of time. Lease terms are typically longer than residential leases, which allows the property owner or landlord to increase the lease rates over time.
Portfolio Diversification
When considering diversifying your investment portfolio, commercial real estate is the first place you should look. Why? It offers unique benefits such as passive income, low volatility and overall leverage. If done correctly, it can help you secure and increase your footprint on the market.
CONS
Higher Cost
Undoubtedly, investing in commercial real estate comes with a heftier price tag. This is typically the most significant deterrent for many looking to expand their portfolio and dip into the CRE market. An alternative can be an indirect investment into a real estate investment trust (REIT). Investing in a company that purchases, manages, and operates commercial properties is often less risky than making a direct investment.
Increased Risk
Just as the residential real estate market fluctuates, the commercial market does. As we’ve seen over the past few years, the economy and environmental factors play a considerable role in the success of the commercial real estate market. It is essential to keep an eye out for changing market trends before taking the leap.
Maintenance Responsibilities
Commercial properties tend to come with significantly more maintenance responsibilities. Unless you hire a property management company to manage all aspects of your investment, including ensuring your tenants uphold their obligations, you will spend a reasonable amount of time tending to your property to ensure the market value remains high.
Commercial real estate has the potential to become a significant income-generating asset to your portfolio. Ensure you advise an experienced commercial real estate potential to see whether investing in CRE is the right fit for you.
References
Chen, J. (2022, September 9). What is commercial real estate? Investopedia. Retrieved September 13, 2022, from https://www.investopedia.com/terms/c/commercialrealestate.asp
Goakes, S. (2021, June 22). The top 8 benefits of commercial property investment vs residential property investment. LinkedIn. Retrieved September 13, 2022, from https://www.linkedin.com/pulse/top-8-benefits-commercial-property-investment-vs-steven-goakes/
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