Investing in commercial real estate can provide higher returns than its residential counterpart. There is also less volatility, as longer-term leases are the norm. The tax benefits are significant. Still, a considerable learning curve exists when it comes to commercial investing. Here’s some advice when getting started and basic tips.
Before starting commercial investing, understand exactly what constitutes a commercial property.
Commercial properties include:
- Industrial buildings
- Office buildings
- Retail buildings
- Shopping centers
- Strip malls
- Storage facilities
Apartment buildings are also considered commercial properties for investment purposes.
Commercial Investing Pros
Commercial investing provides various advantages. These include:
- Depreciation: Commercial properties are usually depreciated over 39 years. That means you can deduct 1/39 of the building as well as improvement costs over that period.
- Tax benefits: One of the great strengths of commercial investing involves tax breaks. Besides mortgage interest and property tax, property owners can deduct the costs of repairs, maintenance, some property management expenses, and certain operating expenses.
- Triple net lease: This is one of the most common leases in commercial real estate. A triple net lease puts the burden of paying rent, property taxes and insurance on the tenant. The tenant is also responsible for certain maintenance costs. In return, the base rent is generally lower.
In addition, commercial tenants tend to keep the premises in better condition than residential tenants. That’s because a lack of maintenance or cleanliness reflects on their business. The overall relationship between the tenant and the landlord is generally more professional. This is because both are operating businesses.
Commercial Investing Cons
There are also downsides to investing in commercial real estate. Commercial investing generally involves a large amount of capital. More so than in most residential real estate investing.
If you’re a small commercial landlord, expect to put a great deal of time into your investment. Commercial investing differs from residential investing in many ways. But overall management is more demanding.
In addition, there’s less of a DIY aspect in commercial investing as compared to investing in smaller residential properties. You’ll almost certainly have to hire a property manager to maintain the premises. And this can cost up to 10 percent of your rent revenue. If you are a licensed professional, you may prove able to handle commercial property repairs. But otherwise, you’ll need to hire licensed contractors and the like.
Many types of commercial properties are open to the public. And due to this, the liability risk …….