Any type of real estate has the potential to be a good investment opportunity.
Certain types of commercial investments are riskier than others, but commercial properties can offer greater financial rewards than investing in smaller residential properties.
Commercial real estate has several advantages over residential investing activities:
- There’s much less competition. There are many homebuyers competing for single-family homes. Most real estate investors are more comfortable with smaller residential properties. If you can get over your discomfort, you’ll find there’s less competition for commercial properties.
- Significantly higher income opportunity. Leasing commercial real estate is much higher in cost per square foot than found in residential real estate.
- Many single-family properties rent for less than 50 cents per square foot.
- An office in a high-rise building might cost over $100 per square foot.
- Single family properties typically return 1-4% on an annual basis.
- Commercial properties return an average of 6-12%.
- The risk of vacancies is lower. If you’re ever owned rental homes, a vacancy can be devastating. A few months without a tenant can be quite expensive. However, a vacancy in a 25-unit apartment building is only a loss of 4% of your rental income.
- Prices are easier to evaluate. Commercial real estate prices are normally based the income they provide. An office building, shopping center, or apartment building is priced as a business. Businesses are priced on income and profit. Residential real estate prices are based on several other factors, including how desirable the property is to any interested buyer.
- Sellers are more flexible and less emotional. A piece of commercial real estate is a business. By default, the owners are business people. Homeowners are more emotional when making decisions regarding the sale of their home. Commercial real estate owners view everything as a business decision.
- Commercial real estate owners can also be very flexible on price and terms. Everything is up for negotiation.
- More potential for capital gains. There are commercial properties available that cost over $100 million. A 10% appreciation on $100 million sure beats 10% of $100,000. Larger investments have the potential to provide larger returns.
Commercial investing can overcome many of the limitations of investing in single-family homes. Commercial properties are easier to appraise, the vacancy risk is lower, and the potential for large gains is greater. Consider these advantages before deciding on whether or not to pursue these investing opportunities.