An investment made in a property be it a commercial or residential is considered as a good investment. But before we dive deep let us first understand.
What is the difference between residential and commercial real estate?
Residential estates are meant for single family living and commercial real estate is meant for letting out space to run a business.
What are the different kinds of residential real estate investments?
- Apartment
- Duplex
- Villas
What are the different kinds of commercial real estate investments?
You can choose to invest in lands, retail units, office spaces, or industrial properties for example.
- Shops
- Hotels
- Warehouse
- Office building
While commercial real estate may look financially more rewarding, residential real estate is a more secure option for obvious reasons. If you are keen to invest in Texas commercial real estate, then here are some pros and cons for you to consider before making an informed decision.
Pros of investing in a commercial real estate
- If your commercial property is in the downtown or the commercial hub of the city, chances are high that the property value will appreciate with time. New development in the area will further increase the value of the investment property. This means that investing in a well-located real estate will help you to get a high return on investment (ROI), definitely big pros for your investment.
- You can expect a high return on investment from commercial investments as compared to residential one. A well-located commercial property can help you earn 6-12% of your investment. In some cases, it can go as high as 12-14%. You may also ensure a regular income from your commercial property.
- Since property owners are not individuals but businesses (they are mostly LLCs) so a professional relationship and decorum is maintained with the tenants (who are usually small business owners).
- Commercial spaces are occupied by businesses that usually have a limited working hour. This means that when you work, they work and when you go home, they go home too. You can expect to sleep peacefully at night without worrying about receiving a call at midnight for any emergency, unlike a residential real estate where it is common to receive phone calls from tenants about a lost key or a faucet not working. Moreover, commercial spaces are usually under the surveillance of an alarm monitoring service so if there is an emergency, the alarm monitoring company will take the necessary actions.
- The general concept about the triple net leases is you don’t have to bear the expenses on the property. All the expenses including property tax are taken care of by the lessee. The only expense that you need to bear is the mortgage for your property.
- Commercial real estates have fewer protection laws and hence the law is flexible as compared to the residential real estate where you have to go through a dozen state laws including termination rules, security deposit limit, etc.
Cons of investing in a commercial real estate property
While it may sound a lucrative idea to invest in commercial properties, however there are a few pitfalls too.
- You need to have a lot of responsibility which also demands a lot of time. If you are having a few tenants it is like having multiple leases where you need to take care of public safety, common area maintenance cost adjustments, and a lot of maintenance issues. You need to spend a lot of time managing everything well to maximize your ROI.
- Having a poor management team can be a risky affair. If your management team is less efficient, has less experience, or not compliant then you may face challenges in meeting your target ROI.
- Commercial property investments need a large amount of capital as upfront payment as compared to residential investment. And if you do not manage to find tenants and start earning revenues, it might become difficult to keep up with the initial capital expenditure.
- One of the biggest cons of investing in commercial space is the sensitivity to the economic condition. When businesses expand, the need for commercial spaces rises, and your ROI shoots up. But when there is a recession, an economic downturn, the demands for commercial spaces fall too. Unlike the commercial spaces, residential real estate is always high on demand irrespective of the economic scenario because people will always need a place to live in.
- The value of the investment property can drop sharply especially when the lease term is about to end or when your commercial space is vacant for some time.
Final Words:
Commercial real estate investment involves a lot of money and a lot of risks too. It is important to know all the pitfalls and benefits while you explore the idea of investing in commercial buildings vs residential one.
The above-discussed pros and cons will help you to make an informed decision. If you are looking for investing in Texas commercial real estate, then Cobb-Lundquist & Atnip Inc is here to help you.