The residential real estate market has long been a popular choice for savvy investors looking to make capital gains during volatile market cycles. In recent years, however, many investors have switched from residential property to commercial real estate.
Holding a commercial real estate portfolio offers a number of gains, which is why more than $435 billion flooded into the US real estate market in 2015. Investors from the US and overseas are snapping up retail units, apartment buildings, offices, industrial units, and mixed-use buildings. Smaller investors typically buy one or two individual units whereas larger and institutional investors may buy a community such as a strip mall, or a multi-unit office block.
Here are the five main reasons why commercial real estate trumps residential real estate every time.
Better Returns
Commercial real estate typically offers better returns compared to residential real estate. If you own a portfolio of separate apartments, you can expect a yield of around 1-5%. A commercial property portfolio typically yields returns of 6-12%. Over the lifetime of the investment, your earning potential is much higher.
Low Maintenance
Commercial real estate is low maintenance, as all property expenses, including taxes and insurance, are covered by the leaseholder. All you need to worry about is collecting the rent and paying your mortgage. Most commercial leaseholders want the freedom to personalize their unit and make changes as they deem fit. In the real estate business, this type of arrangement is referred to as a Triple Net Lease.
Lower Costs
In a residential property, you are responsible for all property expenses, including repairs and routine maintenance. These costs all add up over the lifetime of an investment. You don’t have to bear any of these costs with a commercial property portfolio, so profits are higher.
Reduced Working Hours
When managing a residential property, you are expected to be on-call 24/7. If the air-con breaks down at midnight or a pipe bursts, it’s your problem and tenants will have no problem calling your cell phone at 4 AM to let you know, even if you are on vacation.
Commercial tenants are responsible for their own maintenance and repairs, so you won’t have to deal with the hassle of everyday management issues. Most commercial tenants work regular hours so again, you won’t be bothered outside of normal working hours if a tenant has locked himself out. The only thing you might have to deal with is a break-in or alarm call-out, but most commercial landlords pay for an alarm monitoring service to deal with these types of issues.
Fewer Lease Restrictions
If commercial real estate investment appeals to you, consult a tax specialist. There are a number of key considerations, including 1031 property rules. The IRS has very strict rules relating to investment or business real estate and falling foul of them could cost you dearly.
Commercial real estate is a lucrative venture, but there are some disadvantages so do make sure you take professional advice before you invest.
