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The Pros and Cons of Investing in Commercial Property

Are commercial properties the right real estate investment for you?

Find out by weighing their pros and cons below:

The pros

    1. You can earn more

    Compared to residential properties, commercial real estate has the potential to earn you a much higher income.

    Commercial tenants are capable of paying more rent and the return for commercial real estate can range from 6% to 12% annually. In contrast, the annual property income for residential real estate averages around 1% to 4%.

    And because commercial properties are often centrally located, property values can increase much faster over time. Once property values have sufficiently risen, landlords can make millions in a single sale.

    2. More professional interactions with tenants

    Because your tenants are businesses, dealing with them can be easier than dealing with residential tenants.They will typically have clear goals and requirements, which allows for efficient and straightforward interactions.

    3. Longer lease periods

    Commercial tenants usually lease properties for long durations, giving property owners better cash flow stability.

    On average, commercial leases last at least 12 months. Relocating is costly and businesses don’t want to be constantly moving. Their goal is to find a good location where they can stay indefinitely.

    It’s common for commercial lease terms to last from 3-10 years. Compare this with residential leases which can have a lease period of just 3-6 months.

The cons

    1. Higher initial costs, more expenses

    The high cost of buying and maintaining commercial properties is what makes it hard to get started in this type of investment in the first place.

    Commercial properties need a bigger initial investment to get everything up and running. There are more facilities to repair and maintain, staff and services to pay, and so on.

    Plus, turnover costs for commercial property are also much higher. Preparing a commercial space for its next tenant can cost more.

    2. More time and commitment needed

    Commercial properties need a lot of time and careful active management to ensure that everything’s running smoothly.

    You’ll more than likely be dealing with multiple leases at once so there’s definitely no place for absentee landlords in this type of real estate investment.

    Common area maintenance cost adjustments, repairs, staff leadership, public safety, tenant concerns, etc. are just some of the responsibilities of commercial landlords.

    3. Professional services required

    Maintenance issues in commercial properties need the attention of licensed professionals. This means you can’t do the repairs yourself unless you’re licensed – no matter how good your DIY skills are.

    4. Potential for incidents

    Accidents or damages to property can happen anywhere. They’re unavoidable. But the chances of dealing with them are higher with commercial properties since these are typically accessed by a larger number of people.

In the end, your decision on whether or not you’ll be investing in commercial property is going to rest on your budget, the time commitment you’re willing to make, and your risk profile.

Interested in commercial real estate investment opportunities in Greater Nashville? Need help managing your commercial property? Get in touch with us at Southern Realty Partners at 615.431.8787 and info@partnerwithsouthern.com.

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