Investment Real Estate: Total Gamble or Totally Worth It?
May 25, 2018
Looking to invest in commercial/industrial real estate? The experts at Valbridge Property Advisors share everything you need to know.
By: Jessi Minneci
When it comes to real estate investment, many people tend to start with investing in residential properties because, well, that’s what they’re used to: they’re more accustomed to buying and profiting off of homes. What they may not know is that they also have the opportunity to invest in already-established commercial and industrial properties (it can be a great way to balance out their investment portfolio!).
For your money, investing in established commercial and industrial properties tends to offer more financial reward than residential properties, but there also can be more risks associated with such ventures. Throughout this article, the experts at Valbridge Property Advisors will help you understand the full pros and cons of investing in such real estate so that you can make the investment decision that’s right for you.
What Commercial/Industrial Properties are Investible?
Sure, this depends on a case to case basis, but just to be sure that we are all on the same page, let’s review what types of properties are investible outside of the single-family residential sector. Investment real estate properties include, but are not limited to:
- Retail buildings
- Office buildings
- Recreation spaces
- Apartment complexes
- Industrial buildings
For a better perspective on commercial property types, check out the types of buildings and industries that Valbridge provides services for, here.
Of course, there are different criteria to managing each of these property types. But, for the sake of us not writing a novel, let’s use this blog to examine the pros and cons of investing in a single tenant commercial building.
Pros of Investment Real Estate
Investing in the public eye: It goes without saying that retail tenants generally maintain their real estate by virtue of the lease terms that require them to do so – after all, they ultimately want to see their business thrive and will usually do what it takes to accomplish and maintain that. Because of this, retail tenants (and other commercial/industrial property) interests are aligned, helping the owner maintain and improve the quality of the property. This is a big plus in assuring the return on value of your investment.
Objective price valuations: The appraisal process for a commercial property is often very smooth, especially when you team with a trusted property advisor like Valbridge!
If the seller is using a knowledgeable broker, the asking price should be set at a price where an investor can earn the area’s prevailing cap rate for the commercial property type they are looking at (dependent on a case-by-case basis). Residential properties are often subject to more "emotional" pricing.
Longer Lease Terms: Commercial leases typically have a much longer leasing term than residential leases which are generally 1 year and renew annually. A longer lease on commercial property helps maintain consistent cash flow without high turn-over rates and long-term vacancies.
Potential for income: There is huge earning potential when it comes to commercial real estate investment. Commercial properties generally have an annual return of the purchase price between six and 12 percent, depending on the location of the establishment and property type.
Lease flexibility: Fewer consumer protection laws govern commercial leases, unlike the dozens associated with residential real estate. Additionally, commercial leases are generally much longer than that of a residential. This definitely helps with a guarantee of stability of cash flow regarding your investment.
Cons of Investment Real Estate
As with any venture, it’s always important to look at both sides of the coin.
Risks: It goes without saying that properties intended for commercial/industrial use are usually occupied by tenants as opposed to exclusive use by the outright owner. Risks associated with investing in this type of real estate include the:
- Unplanned loss of a tenant
- Market forces that are out of your control (such as demographic and economic changes that alter the likelihood of business success)
- Functional utility of the property type (unanticipated property issues are not something to be overlooked when deciding on real estate investment)
Initial investment hikes: Acquiring a commercial property typically requires more capital up front than acquiring a residential one, even when in the same area. Therefore, it’s often more difficult to get your foot in the door.
Once you’ve acquired a commercial property, you should expect some large capital expenditures to follow.
A big commitment: With commercial real estate, you are likely going to be dealing with leases, annual CAM adjustments (Common Area Maintenance costs for tenants), more maintenance issues, and public safety concerns. You have more to manage and will need to set the proper amount of time aside to each endeavor.
What's Your End Game?
When it comes to commercial investment, it is important that you align your risk tolerance with the property type. Regardless, you will need to have an understanding of the dynamics of your property type investment and the associated concerns surrounding the marketplace your investment property competes in.
Additionally, how you plan on exiting your commercial real estate investments (whenever that time may come) is just as important as the way you enter them! Remember the risks – it’s always important to have confidence in your investment, but to weigh out the possible hiccups you could run into.
Whether you sell, rent, or exchange your property, it is essential to have a clear understanding of how you plan on exiting in order to minimize your risk. That’s where we can come in and assist.
The experts at Valbridge Property Advisors evaluate commercial property based on objective criteria, in-depth knowledge of local property markets and time-tested judgment. We identify and analyze the variables that affect value, often seeing what others don’t see based on our expertise and independence.
If you’re looking to enter, or to exit, a commercial real estate investment, get in touch with us! We will work with you to provide independent valuations and advise you on real estate investment decisions, including buy-sell-hold and lease-own alternatives.