Commercial or Residential? Part Two

Commercial Real Estate:

Investing in Commercial Real Estate has its pros and cons.  It is important to do your homework and best to use a trusted and reputable CRE professional to assist you.  Just like investing in Residential, Commercial can produce a steady flow of income.

Let's look at the advantages:

Assuming you own a professional office building you will notice that your tenants typically take extra care of the space they are leasing.  They are running their own reputable business where they desire an attractive place for their clients/customers.  This is the major difference in commercial real estate investing.   Your leases will typically be set up for a minimum of 3 years.  National tenants and government agencies often sign anywhere from 10 to 40 year leases.  Obtaining financing is not easy but it has a lot to do with the income production (or potential of income). Property value will primarily be based on the income your investment produces.  This is a big advantage compared to residential (single family) where values are based on comparable sales.

So what are the disadvantages?

Commercial properties will often be much more expensive.  Lending is not easy anymore and will most likely require 30% down or more with higher interest rates.  Tenant improvements can be costly!  Yes, you will typically recover these costs through the negotiated lease rate but they will need to be paid upfront.  Your tenant must comply with city/state/county/health/fire/police/environmental codes.  These codes can often be major hurdles to jump through depending on the business your client is running.  Start up businesses do fail - It happens, they can go bankrupt and you may lose out on rent and recovering any tenant improvement costs.

There will be pros and cons to any investment.  Take your time to do your due diligence and ask for advice from those who have walked the path before you.