If you are looking to make money then investing in commercial real estate is a great option. Commercial real estate is more of a safer bet in a lot of ways than residential properties, because you can be confident that you will be able to find tenants, and you can do thorough checks on the financial history of the tenant before letting a property out to them. There are often caps on rent per area for residential properties, and you may be required to accept tenants that are on benefits or that come from less desirable backgrounds – there is the risk of tenants damaging your property, bringing in pets, causing issues for neighboring tenants or otherwise being a nuisance. With commercial property you are not immune to those risks, but they are lower, typically.
Commercial real estate holds its value well, and you can often get loans with quite beneficial Loan to Value (LTV) ratios and with low interest rates, because the lenders are confident that you will be able to get the investment back.
Classes of Commercial Property
There are many different types of commercial property – storage/warehouses and light industrial, larger industrial areas, leisure, retail and office spaces for example. Some are bigger risk factors than others. Succeeding in the pub or nightclub industry is hard, and this means that the turnover for tenants can be massive. It is important that landlords seek legal advice and get a lease that is reasonable, with a good buy-out clause and that protects them and their interests. Often, tenants will sell their lease and liability on to another interested party if their business is struggling, along with the fixtures and fittings/brand name, for that party to take it on and turn it around.
Industrial spaces are less expensive and are often more likely to allow for businesses that are newer to start up and enjoy some success. If you are looking for an affordable entry into commercial real estate, then light industrial units can be useful – they are inexpensive, low maintenance, and often attract businesses that are cheap to run. Turnover of tenants can be large, but it is easy to find replacement tenants because there are so many other start-ups that are looking to move in. Depending on where you are located, you may be able to work with a business incubator and get tenants who are enjoying business support or even government subsidies or grant funding. With these, you enjoy the security that comes from having a tenant that is in a sounder financial situation, and the tenant gets affordable business space.
Office spaces are perhaps the best investment in terms of stability and ease. Some property investors buy an entire office block and then rent it out in small chunks to multiple tenants, with a floor dedicated to co-working space which is available on an elastic basis. The co-working space is useful because it can be a huge generator of income – if you rent out 25 desk slots on a hotdesking basis, to 50 tenants, at $100 per month, you can be confident that fewer than 50% of the tenants will be in at any one time. You will be getting $5,000 per month from just that co-working space. Factor in the other tenants that you have in dedicated, full time office spaces, and you should be able to cover the cost of the building, cleaners and receptionist staff even if the building is only partially utilized. Office space is the multi-tenant property offering of the commercial real estate space.
Another benefit of office space is that it is relatively low maintenance, just like industrial space. The tenants are unlikely to do much damage to the property, and they should be fairly stable.
Philadelphia commercial real estate holds its value quite well. While there will be some fluctuations – and one cannot account, for changes in the regional economy which may increase or decrease the value of certain spaces, you can usually expect that if the time comes to get out you will be able to sell for a reasonable price. You can often predict changes in property pricing too – keep track of local planning applications and other potential changes to the area – if you know that an area is due for gentrification, hold on to your property because prices will rise as the area becomes more desirable.
Financial Requirements for Commercial Real Estate
Commercial real estate is expensive to invest in, but it is worth looking at adding some to your portfolio if you can, and with high LTV percentages being available it is something that many people are able to get into without a huge amount of starting capital. There are a number of lenders that specialize in commercial property, and some of the big banks such as Fanny Mae offer commercial property loans as well. The insurance requirements for these loans are strict, but for those without a lot of capital they are a good option.
Do remember, when building your business plan, that commercial property loans are shorter than loans for a standard mortgage. They are more likely to run over a period of just a few years – up to 10 in some cases. Do not plan around a mortgage-style loan, because you will be paying much greater amounts of interest, and over a shorter period of time.
Commercial real estate is ideal for a hands-off landlord though. You should find that payments come in more smoothly, and that once you have qualified the tenant and got the lease worked out the process takes less of your long-term time than working with residential tenants. There will always be some hiccups; no form of property investing is truly hands free – but those who have had to deal with tenants that are frequently late or delinquent will find that working with commercial property offers the potential for better returns, and for more financial stability.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.