On account of its merits like consistent returns, soaring rental value, and a continuous source of passive income, real estate investment in commercial real estate has always lured the investment fraternity. It is supposed to have enormous growth potential with consistent cash flow. Though, some veterans also point their fingers toward its downside. Let’s take a thorough look at the advantages and challenges surrounding commercial properties.
What are Commercial Properties
Retail buildings, industrial buildings, office buildings, warehouses, and even apartment buildings come in the ambit of commercial real estate properties.
Advantages of Commercial Real Estate Investment
No expenses on furnishing
Almost negligible or no furnishing expenses come with good real estate investments in commercial properties. As an investor, the raw property could be handed out to the tenant or occupant. Commercial properties are furnished by the occupant themselves as per their need and aspiration.
Potential of Income
Commercial properties have an edge over rental properties as it has the potential to earn a higher income. Commercial properties manage to bag anything between 6% to 12 % of the purchase price as an annual return. This depends on the area a commercial property is located in. This lucrative return is somewhat exceptional. Orion One32 offers rental up to 12%, Explore investment opportunities.
No hassle to deal with occupant
The tenants of commercial real estate are generally well-established companies or corporate houses. As they maintain a professional approach, there are fewer chances of any hassle or bother in terms of getting rent on time, agreement renewal, misuse of property, and such like. Both occupant and property owner have to follow the earmarked guidelines.
Commercial properties are generally leased for a long time and term. They are leased for 10 to 20 years and even more at a time with yearly rental value appreciation. This ensures the owner a regular and consistent return. The relationship between the owner and occupant of a commercial property is more of a business-to-business relationship. Formal and polished.
No misuse of property
Unlike residential occupants, occupants of commercial properties have to take care of the property as their own. Because, if they do not keep the property in condition, it may give a wrong impression to their customers. Occupants are bound to keep the property spruced up to maintain the look and feel of their business image.
Challenges in commercial property investment
One of the most apparent disadvantages of commercial real estate property is the hefty investment that it demands. It is generally out of the reach of common individuals or retail investors. It is only meant for big fish. So somehow it creates a wall of restriction around it.
Compared to residential property, a loanee of a commercial property has to shell out more bucks in the form of interest. Besides the interest rate, terms and conditions are also determined on the basis of location, investor’s profile, type of property, and the repayment period. The rates of interest on commercial real estate loans are 1.5% to 5% more than on residential property loans.
More upfront capital
In terms of upfront capital, commercial real estate investors need to have more upfront capital than a residential real estate buyer. Loan to value ratio of a commercial real estate property is 20% less than the residential property, so the buyer of a commercial real estate property has to pool more money from their pocket.
Thorough research required
The investor of commercial real estate needs to have thorough market knowledge including the overall cost of acquiring the property, the taxes involved, zonal laws and bylaws for renting out, rental potential, etc. Investors in commercial real estate need meticulous planning and research before investing in a commercial property. Any misjudgment may open the door to a big loss.
No Tax Incentive
Contrary to a home loan, there is no tax benefit for purchasing a commercial property on a loan.
Investing in commercial real estate needs thorough research and one should invest after keeping in mind all the points discussed above. Considering and weighing them all, it is quite convincing that commercial real estate investment is very promising and rewarding.