Commercial real estate investment is the natural development of housing investment. Experienced real estate investors tend to move to commercial real estate rather than later and for very good reasons.
As your portfolio grows, you will find it very difficult to manage your investments if a large part of them are linked to residential real estate. Imagine if you have 15 million residential real estate. It will be a lot of home and tenants to take care of.
On the other hand, 15 million will buy only a very small number of commercial properties that are relatively easy to handle with much less cost.
Commercial real estate includes offices, industrial sheds, retail stores, bulk stores, retail stores, hospitals, gas stations, motels, hotels, backpackers, health clubs, churches, funerals, orphanages, car dealerships, convenience stores, malls, to name but a few. Each type of commercial real estate investment has its own characteristics, strengths, problems, rewards and risks.
The return on investment in commercial real estate is much higher than residential real estate. Revenue is net and not gross because the tenant pays all outgoing costs. Revenues are also more stable due to the long lease agreements.
It is typical to have a return of approximately 10 percent net for commercial real estate investment and anywhere from 7 percent to 9 percent net return for a main property.
The value of a commercial property is largely decisive in terms of rental quality. In general, the value is determined by withdrawing net contractual leases paid and the use of a capitalization rate to arrive at a value. The value is also determined by the tenants quality and the length of the lease.
The value of a commercial property can significantly decrease if it becomes available. I have seen commercial real estate sold to less than half of their value if they are difficult to rent.
Commercial property management is also much easier because tenants have a strong interest in maintaining the property to a high standard. Tenants usually receive their income from the property. They must keep the property so good and maintain functionality to impress their customers.
I have seen tenants spend hundreds of thousands of dollars to make improvements to the property. Most of these improvements live with the property long after the tenant has left the property.
Property law is more flexible against commercial leases. You can almost words and add a clause that is pleasing to the contracting parties. It is common to charge a fine on outstanding rent or lock the premises for a further rental cost.
The biggest risk in commercial real estate investment is superior to finding a new tenant at a vacant position. In commercial real estate, the requirement of each tenant in terms of size, location, usage and renting payment capacity is so different that it is very difficult to get the right tenant for the right property.
For the reasons mentioned above, it is also difficult to sell a commercial property investment. The higher the value of the property, there are fewer investors to buy the property. Commercial real estate investment is less liquid than other investments because there are very few players in the market. For a residential building there will be hundreds of potential buyers that are not the case with commercial real estate.
Commercial real estate investments are generally sold on capitalization rates and rarely at value in use. It is therefore possible to buy a badly rented commercial property far below market value. You can also increase the value of your commercial property by raising the rent under the landlord or renegotiating the lease terms with regard to renewal.
Financing investments in commercial real estate is more difficult to get when banks look at tenants quality, length and lease terms. They will usually finance up to 50 percent to 66 percent of the real estate value of the property. Lending rates are also marginally higher. You therefore need more capital to buy. This reduces your leverage to buy more properties.
Commercial real estate is where professional investors spend their energy because of higher returns and easy to handle them. For these investors, commercial property is their bread and butter and they run their speculative income through trade in residential real estate.
Some commercial investors focus their attention on improving and increasing the value of their commercial portfolio. While others use their rental returns to finance development projects that show a much higher return but need different and more advanced skills.