Are you considering investing in a commercial property? Before plunging into the deal take some time out to meet at least one commercial lender and one commercial-focused real estate agent to understand the market trends. Before you start looking for deals, it might be highly helpful to figure out where you would like to put your money and zero in on the individuals/organizations that specialize in these properties. Most importantly, the advantages and disadvantages of investing in a commercial property should be on the tips of your fingers.
To make things easier for you, here are some of the major pros and cons of commercial property investment:
PROS:
Flexible financing – When it comes to the commercial real estate, you get several flexible financing options. In fact, you can even buy huge commercial properties without actually using any of your own money. Auxillary financing (a financing option where you get up to 100% financing, with first or second mortgages) is an option that many investors utilize when it comes to commercial deals is used by new investors in the market. Also, the valuations of the commercial properties are based on the rent rates than the properties in the nearby area.
Proportionate saving in costs – Having several commercial units in one place allows you to develop positive agreements with your vendors and ultimately, save costs for further improvements and maintenance of the property. So if you are planning to invest, just look for multiple units at one location rather than scattered investing.
For investors planning to invest in a commercial real estate in Gurugram, New Delhi, Mumbai, and Bengaluru (which are also the hottest commercial property zones in India), a property consisting of more than 100 units is a viable option. Generally, these properties have an on-site team of technicians, contractors, security team, and helpers; who can help you with maintenance related work. Although you might still require some outside contractors to carry out the tasks, the need would be lessened.
Peace of mind – With an on-site maintenance, it gets peaceful for the owner as well. If it’s an office building, you only have a tenant during business hours, and there may be limited maintenance calls during off hours. Commercial properties often come with a lease agreement where the tenant is mostly responsible for the maintenance of all the assets, or any ongoing property expenses, including taxes, along with paying the rent and utilities.
CONS:
Some of the major disadvantages/challenges to consider while investing in a commercial property.
Increased competition – Unlike residential properties, the commercial property buyers look for further improvements. These buyers often look forward to increased valuation of a property so they can
When it comes to commercial properties, most buyers are looking for opportunity or room for improvement. They often want to see an increased valuation of the commercial property, as this could allow them to renew the finance with relatively lower and traditional form of financing and buy out their investors. This increased competition between the buyers and the investors often result in missed investment opportunities.
As a buyer, it may be challenging to find existing commercial properties where the numbers make sense, and you would likely have a lot of competition for this type of property. Maybe the seller is asking too much for the place or there’s too much hidden and unknown maintenance. Or maybe there’s not enough room to raise rents or to lower vacancies.
Poor management – Suppose you stumbled upon a great commercial property as an investor; but will your property management team be able to handle it? Even if the management is able to meet the tenants’ demands, do the tenants feel comfortable in paying higher rents? All this depends on the management of a commercial property.
(Avoid poor property management companies when it comes to investments.)
If your investment portfolio is handled by an underperforming property management company, you can easily see challenges on your way even before actual investment process has begun. You can select a property management company based on few criteria like – their efficiency, their experience, any negative complaints in the past, etc.
It’s important that you monitor your property management company to make sure they are managing the property well and that they have the bandwidth to manage all of your units. Property management companies often work better with responsive landlords, so if you’re on top of things, your management company may follow suit.
Considering some of this important pros and cons of commercial real estate investing, you can make a valuable and profitable investment. While experienced investors enjoy working with larger numbers, a newbie in the market should begin with few to acknowledge the steady incomes.
There are different ways that one could enter the commercial space. Like you can directly contact the landowner, or get in touch with a leasing company and third-party businesses, or any combination of the three.
So, will investing in commercial real estate be your next step, or is it something you look forward to doing later? Do share your experiences with us in the comments below.