The Advantages of Commercial Real Estate Investing

It’s tempting to think that commercial real estate investing is exclusive to real estate moguls and existing millionaires, but it’s an area of investment that’s accessible to almost everyone; even if you don’t have the funds or the credit score to purchase a commercial property of your own, you can invest in shares of real estate investment trusts (REITs) or partner up to get exposure.

But why should you consider this investing strategy? What makes commercial real estate investing so great?

The Appeal of Real Estate Investing

Commercial real estate is but one set of strategies within the umbrella of real estate investing. Real estate investing is advantageous for several reasons:

Recurring Income

Many investors love real estate investing because of its propensity to generate recurring income. Owning a property and keeping that property occupied means you’ll have a steady stream of monthly rental income. While departures and vacancies do happen, this is generally predictable and consistent.

Long-term Value Increases

Real estate has historically increased in price quite consistently for the past several decades, across all areas, though of course, some areas perform better than others. Choose a commercial property in the right area, and the value of your investment should increase with each passing year.

Financial Leverage

This investment strategy is also unique for its potential to equip you with financial leverage. In other words, you’ll get to invest with other people’s money; taking out a loan to finance the purchase of a property instantly multiplies your purchasing power without much risk added to the equation.

Exposure to the Market

The real estate market functions separately from the stock market, and serves as an excellent complement to it. Investing in real estate is the most direct and best way to get exposure here – and diversify your portfolio in the process.

Property Management

All types of real estate investing can become (almost) fully passive if you’re willing to hire a property management company to manage your property portfolio on your behalf.

Distinctive Advantages of Commercial Real Estate Investing

Residential real estate is a good addition to your portfolio, but there are some distinctive advantages of commercial real estate investing that you should consider as well:

Higher Returns

Commercial properties tend to be bigger, more expensive, and overall more valuable than their residential counterparts. As a result, they tend to offer higher overall returns. You’ll be able to generate more monthly rental income and benefit from greater value increases over time in many cases. One of the downsides here is that this also increases the barrier to entry, as commercial real estate properties tend to be more expensive than their residential counterparts.

Professional Tenants

Some people are drawn to commercial real estate investing because the tenants tend to be more professional and mature. Instead of renting to an individual looking for a home, you’ll likely be renting to a business looking for a space to operate. Accordingly, turnover is lower, and rental income is much more stable.

Longer Leases

In line with this, the leases for commercial real estate tend to be associated with longer terms. Instead of being forced to renew the lease every year or dealing with tenants who are only renting on a month to month basis, you can deal with commercial tenants who keep their leases for many years at a time.

Triple Net Leases

Triple net (NNN) leases are a specific type of lease typically associated with commercial properties. In this arrangement, the tenant is responsible for paying expenses associated with property upkeep, including maintenance of common areas, property taxes, and even insurance. It’s a way of mitigating the costs of property ownership, and it’s also beneficial for tenants because it allows them to handle repairs and renovations as they see fit in most cases.

Limited Operational Hours

Though not always the case, many commercial leases benefit from limited operational hours. If a business is renting your property and it’s only open from 9:00 to 5:00 on weekdays, you typically won’t have to worry about late-night emergency calls.

Strategic Flexibility

There’s significant strategic flexibility in residential real estate investing, but there are even more options in the commercial real estate investing world. You can customize your strategy and portfolio to your liking, choosing specific geographic locations, specific types of clientele, and specific management approaches to maximize profitability.

Of course, there are some downsides to both real estate investing generally and commercial real estate investing specifically. The barrier to entry is somewhat high, there’s a risk of overleveraging yourself, and disruptions to the commercial real estate market, while rare, can be devastating. Still, you can iron out most of these disadvantages with due diligence and careful planning – and the advantages are simply too great to ignore.