Although there are certainly many advantages to investing in commercial properties, there are also aspects that you must consider when investing. Here are a few facts to keep in mind.
A large initial investment.
Commercial property can be more expensive than residential and might involve large loans that could require recourse or personal guarantees. Therefore, more capital up front is usually necessary.
Remember Everything Takes Longer
Compared to residential investing, everything takes longer. Due diligence is months instead of days. Finding new tenants takes longer. Build out or renovation is longer. But the leases are longer, as well. Patience is key. It just takes longer.
Understand The Market
Investors need to understand the market they are investing in. Having a good wherewithal of the fundamentals (legal implications, competition, vacancy, rents, etc.) will allow them to make savvy investments that could yield high returns. This will enable investors to fine tune their commercial real estate investments and diversify their portfolio.
As buildings age, they will eventually need updating. Some examples would be a new roof or HVAC system. These kinds of repairs can happen unexpectedly and may require a significant outlay of capital.
Commercial real estate tends to be more vulnerable than residential when there is an economic downturn. If a tenant defaults, replacing the vacancy becomes imperative and can be very expensive. In most cases, a new tenant will require several modifications to the existing space.
Commercial property is often strictly zoned for a particular use. For example, let’s say that a site is zoned for retail or office, but you want to rent to a tenant who does small-scale manufacturing. In this case, applying for a zoning variance can be costly, and there’s no guarantee that the zoning board will decide in your favor.