Commercial real estate, also referred to as CRE, refers to properties that provide businesses with space and a place to operate. Owners of these assets receive income through rental payments from tenants who rent them out. The four primary classes of commercial property include office space, retail stores, industrial parks, and multifamily rentals.
Investors in commercial property may invest directly or indirectly through ownership of market securities such as real estate investment trusts (REITs) and exchange-traded funds that specialize in commercial real estate stocks. Indirect investments offer a safer, less volatile way to enter the commercial real estate market.
Before investing in commercial or residential properties, the first step is deciding what you hope to gain from the investment. Are you in it for quick profits or do you plan on creating long-term, passive income? If you’re unsure, speak with an experienced commercial real estate agent for help determining which type of property best suits your needs.
Investing in commercial real estate offers investors the potential for significant rental income. This is especially true for areas with large populations and rapid population growth rates, as well as where property values are rising rapidly.
Another major advantage of commercial property is its higher level of stability when it comes to rental income. Unlike residential spaces, where income certainty may be compromised due to lease terms such as “ratchet” clauses that limit future rent increases to previous levels, commercial property owners typically experience continued and increased rent payments in years ahead.
Commercial properties typically have longer lease up period than residential ones, with some exceeding 10 years. This provides investors with reliable and consistent cash flows in their portfolios.
Investing in commercial properties typically entails a larger initial capital outlay than residential real estate purchases. Furthermore, banks tend to have less accommodating Loan-to-Value ratios for commercial assets, making it harder for many investors to secure financing to purchase these properties.
Commercial property owners typically reap greater financial rewards than residential real estate investors. Furthermore, these investors can take advantage of higher property values and favorable leasing rates in certain markets.
Selecting between commercial and residential property is a personal choice, so take your time in making this choice. Consider both short and long-term objectives as well as how much time you have available and your risk tolerance.
When making a choice between commercial and residential real estate, the most important thing to remember is that your decision should be based on your needs and objectives, not those of others. The more informed you are about a property in particular, the higher your chances of success in this market.