Pros and Cons of Investing in Commercial Real Estate

Commercial real estate is considered by investors as a prospective successful investment vehicle mainly due to its high potential yield. Investors see it as an excellent alternative investment that could possibly outperform stocks and bonds. Moreover, a commercial property compared to other real estate assets, see through a more stable growth over time, dodging the volatility of economic cycles.

Between a residential property and a commercial property, investing in commercial real estate, of course, tend to be a larger investment. It involves more tenants thus has a potential to yield larger profits. That said, commercial properties also tend to require more capital and demand a deeper real estate expertise in the beginning.

It would be wise for an investor who will pursue investing in commercial real estate to have a comprehensive knowledge of the market area, the property's history, the property's value and estimated revenue.



Types of Commercial Properties
Common types of commercial properties include:

• retail buildings
• office buildings
• industrial buildings
• apartment buildings
• warehouses
• mixed use buildings (wherein the commercial property may have a combination of uses, such as retail, office and apartments)

Of course each real estate commercial property type have unique nuances that entail different management challenges for its investor.

To mitigate the risks prior to investing, it is crucial for investors to understand first the pros and cons of investing in commercial real estate.


Pros of Investing in Commercial Property

Commercial properties present an opportunity to achieve financial success and establish a strong portfolio. Here are some of the benefits that come with a commercial real estate investment.


1. Income Potential

Among the top reasons to invest in a commercial property over a residential real estate property is the high earning potential. According to creuniversity.com, commercial real estate can pay upwards of 10% returns. In comparison, stocks only pay 3% annually. Annual return off the purchase price also depends on the commercial property's location, the current economic trends, and external factors like political or health crisis (such as a pandemic). That said, any annual return between 6% to 12% is still higher than a single family residential property at 1% to 4% at best.


2. Higher Rental Yields

A commercial property standing on prime location can offer higher rental income than any a residential property. The value of retail and offices also improves over time if properly maintained. Development of residential properties and updated modern infrastructure in the area can also increase the overall value of any commercial real estate property.


3. Professional Relationships with Tenants

Commercial property tenants are commonly business owners who can be trusted to protect and take pride in their livelihood. They can be expected to look out for the maintenance of the commercial property on which their store stands. As such, the landlord and tenant have more of a business-to-business customer relationship, which helps keep interactions professional.


4. Longer or Flexible Lease Terms

​An advantage of a commercial real estate property over a residential property is that commercial real estate attracts long term lease terms. Naturally if an investor secures a financially stable and reliable long term tenants like big corporations, organizations, government agencies, he or she can earn a steady income for years to come.


5. Diversify Your Investment Portfolio

Investors whether beginner or experienced can reap benefits off a diverse investment portfolio. An asset like a commercial real estate property can more often than not strengthen any investors financial standing. If you are already a residential property owner, investing in commercial real estate located in a prime location with good quality can take your portfolio up a notch. Getting advise from professional experts such as real estate brokers can point you to the right commercial property.

Cons of Investing in Commercial Property

As with other investments, there are a number of risks that commercial real estate investors should take time to review. Prior to committing to invest in a commercial property, an investor should see through a plan to address all risks.


1. High Cost

Compared to a residential property, a commercial real estate property requires a big capital up front which most of the time only experienced investors can afford. Because commercial real estate properties are expensive, there is a possibility for an investor to lose a significant amount of capital. The expense can also limit an investor's ability to diversify their portfolio.


2. Maintenance and Repairs

Due to their size, commercial real estate properties can be costly and demanding in maintenance in repairs compares to residential properties. Commercial premises are a place of business which are frequented by many people. Assuring the safety of the property is also the responsibility of tenants and the commercial property owner.


3. Market Risks

Market conditions can adversely impact the value of a commercial property. Market conditions can affect rental rates, property taxes, interest rates, etc. These changes are volatile and can happen out of nowhere which investors must anticipate and plan for.


4. Vacancy

Vacancy will naturally lead to lost income for a commercial property. This is particularly prevalent for a commercial property with a small group of tenants. Losing one can right away create an income shock for the property owner.

High profit and decreased property value over time are among the great benefits of investing in commercial real estate. With careful planning, investors of any experience level can find their financial success in investing in commercial real estate.