Is Commercial Real Estate Right For You?
In the world of real estate, commercial real estate can offer an excellent return on investment (ROI). If you’re thinking of investing in real estate, then a commercial property may be the right choice. But it’s still necessary to conduct your due diligence, as it is with all investments. With commercial real estate specifically, there are some things you should know and some questions you should ask prior to investing.
What is Commercial Real Estate?
Commercial real estate is any property utilized for commercial purposes, including but not limited to office buildings, warehouses, factories, hotels, and multi-family residential housing units. Commercial real estate comprises some of the most important parts of any business: the physical plant, machinery, inventory, and warehouses; or buildings and storefronts used to conduct real estate activities such as leasing, renting, or selling property. Everything about commercial real estate is designed to make money for its owner and/or operator, but the complexity and high overhead of some businesses means that commercial real estate can sometimes be very demanding or time-consuming for the proprietor.
How does Commercial Real Estate differ from Residential Real Estate?
Because of that potential complexity, commercial real estate can be a whole different beast than residential real estate. The difference between commercial real estate and residential real estate isn’t simply about occupants, square footage, or payment terms. Rather, commercial real estate is a capital-intensive investment that depends on steady cash flow, which means any decline in sales is instantly felt by the seller (and potentially by the lender as well). Commercial real estate mortgages are also structured to protect the lender in the event sales revenue falls short. That said, both commercial and residential property investors will have to account for upkeep, quality of tenants, and changing market conditions.
What should you look for in good Commercial Real Estate?
Commercial real estate offers unparalleled investment opportunities, but you must manage your risk, invest where your returns are most favorable, and avoid purchasing substantially overvalued properties. To find good commercial investment properties, pay close attention to the local market and make sure you’re identifying a good location. Besides the age, structure, and design of a building, location is the critical factor for success in every business, from restaurants to retail. Good options include close proximity to residential areas or to bustling commercial hubs such as a shopping plaza or mall.
Commercial real estate can be a lucrative investment. But it’s vital you understand and manage the risks associated with commercial investment properties, some of which are not typical of residential investment properties. Continue to conduct your due diligence throughout the process, and you’ll be better positioned to maximize your ROI.