Which Asset Class is More Rewarding? Commercial Real Estate Investments
Any type of real estate, whether commercial or residential, can make a good investment opportunity. Each investment path offers its own set of benefits as well as its own set of challenges. Different real estate investors have different goals, capital, and levels of risk tolerance.
If you want to be a successful real estate investor, you need to orient your portfolio towards commercial investments.
First, What’s the Difference Between Commercial vs. Residential Real Estate?
Real estate, as per rule of thumb, is a great means of generating passive income, especially when held for an extended period of time. This holds true for both commercial and residential properties.
The major differences between commercial and residential real estate lie in the way they are rented/leased. Residential properties are leased to families and individuals. While commercial real estate investors generally deal with businesses. As such, lease agreements tend to be more complicated at the commercial level. These can vary from full-service leases to triple net leases and absolute net leases.
Residential real estate includes single-family homes and small multifamily properties. These investment properties have a strong demand and perform well in most economic scenarios. Commercial investments have a much higher barrier to entry as you’d need a much larger initial investment.
Investing in commercial properties offers a more lucrative, diversified, and scalable approach to investing. Let’s look at why you should be investing in commercial real estate as opposed to residential properties.
Benefits of Investing in Commercial Real estate
1. Businesses make better tenants
Tenants in commercial properties tend to be businesses with leases lasting ten years or more. Long leases mean more reliable cash flow. You won’t be dealing with vacancies as much as you would with a residential property. Also, there are fewer laws governing commercial leases, such as security deposit limitations.
Commercial tenants are also more inclined to respect and maintain a property because if they don’t, it will reflect negatively on their business. As a result, you’ll have a much easier time managing a property when you’re dealing with small business owners and corporations.
What’s more, commercial properties allow investors to distribute their vacancy over multiple units. Unlike in single-family properties, the choice of a tenant to run down the lease without renewing doesn’t leave a notable mark. As a result, you can take your time finding more qualified tenants.
2. Fewer Landlord Responsibilities
You incur fewer expenses as a landlord of a commercial property. It’s unusual for residential tenants to cover your property taxes, insurance, and building maintenance expenses. In the commercial arena, however, your tenants can cover these expenses depending on the type of property and lease structure.
In a triple net lease (NNN) scenario, for example, you’re not responsible for any expenses. These include tax, building insurance, and maintenance as the property owner. These expenses are in addition to the cost of rent and utilities. A single net lease spells out that tenants have to pay property taxes. A double net lease instructs them to cover property taxes and insurance. With an absolute net lease, a tenant will take 100% responsibility for maintaining the building structure. Talk about a win for the commercial real estate investor.
3. Forced Appreciation
Every property commands a particular value. This will appreciatesin relation to certain market factors. Forced appreciation is when you, the investor, control the increase in value of a property.
When investing in residential real estate, you have to rely on rent and market appreciation to increase the value of your property. Rent appreciation happens as a result of inflation. While market appreciation is influenced mainly by comparable properties.
In contrast, the value of commercial real estate depends on the property’s net operating income (NOI). The higher the cash flow, the higher the property’s value. By pursuing strategies that aim to increase revenue and reduce expenses, you can increase NOI. Thereby “forcing” the value of your property to rise.
4. Higher Income Potential
Cash flow and rate of return are often much higher in commercial real estate investing. Like stock distributions, commercial investments are structured to deliver regular dividends to investors. This has the added advantage of greater returns. Not only is the cash flow greater with commercial real estate, but you’ll enjoy more favorable tax benefits.
Businesses can also afford to pay much higher rents than individuals. This translates to less turnover and a steadier stream of income.
What’s more, the commercial real estate market offers the opportunity to work with property investment firms. Real estate investment trusts (REITs) have made it easier and more affordable for a retail investor to step into the commercial property market. The advantage of REITs is that they’re exempted from double taxation. This means you can keep more of your gains. Unlike direct investments in property, REITS are liquid, so you can access your investments quickly.
Interested in Learning More about Commercial Real Estate Investments? Call Anthony Maccaroni!
It’s imperative to conduct thorough research and consult a qualified real estate agent. Doing so enables you to circumvent the risks that come with commercial investments as you have a highly skilled specialist on your side.
By choosing a realtor with a strong background in commercial real estate, you’re also getting access to their extensive network and resources. This way, you can find a property, buyer, or tenant that best suits your needs.
Invest in the real estate that’s best for you with Anthony Maccaroni! Anthony has decades of experience helping clients just like you invest in commercial real estate in Pinellas, Clearwater, and Clearwater Beach.