If you're like any investor, you're always on your mind's
feet; thinking of ways to secure a passive wealth flow. Getting involved
in commercial real estate investments is one such way. Compared to
residential
investment property, commercial real estate investing offers four (4)
benefits.
More secure, long-term cash flow
Commercial real estate investments usually have lease contracts spanning a longer time frame, with ten (10) year periods a common set up. Also, tenants occupying commercial property are not as likely to default on their payments, unlike with residential property. In the event that the tenant does go into liquidation, it's normal for the liquidator to maintain rent payment just to lease forfeiture at bay.
Less maintenance
Tenants of commercial real estate can usually be held liable for the upkeep
of the commercial property. This is a good thing, because with
residential
investment property, the upkeep and overseeing of the properties' condition
is often the landlord's sole problem.
Higher income output
Throughout a defined rental period, commercial properties usually deliver
a comparatively higher income. This is a good thing for commercial real
estate investors, because investors of residential properties often rely
on, the spike in the house's capital value--a good thing when property prices
skyrocket, but not so good during property price crash. Also,
commercial
investment property income has been comparatively stable in growth,
at least compared to gilts and equities over recent times.
Investment choices for both large and small investors
Only a handful of personal investors would have enough money for direct investment in some commercial property. But for smaller investors, there are chances to get into indirect investment, but these options may be limited to some small quantities of unit trusts or life funds (which invest in property) or in buying into shares of a property company. Bigger investors will naturally have more options, such as geared investments in property via partnership structures that are limited.
Although it seems that, on the whole, commercial real estate investments seem to be the better deal, there are, as with any investment, some risks involved:
Liquidity problem
Property, if you compare it to bonds and equities, has poor liquidity. This holds true both in the period spent getting a buyer and in setting up the buy. When market circumstances are bad, the chances of finding a buyer dips even lower.
Not so good diversification
Tough commercial real estate market circumstances tend to ruin those whose investment portfolios are not diverse enough. So, investment in a single commercial property can be a handful of worries, or, quite a challenge even to a good risk manager.
Performance affected by cycles
As yields spike up or dive down depending on commercial property supply and demand, rental rates are just as affected. It could do well or just as decline, as the property market is affected in cycles. Sector performance adds some worries, too, as poor sales and market withdrawal, say, in the retail sector, could begin a trend wherein the need for supermarkets and warehouse properties dive noticeably.
To try and off-set or at least be able to ride out these disadvantages,
three (3) tips can come in handy. If you're planning to buy
commercial
investment property, be aware of: (1) the location, as property value
and income through rent can be affected by factors like convenient access
to transportation; (2) the building type, as tenant needs could alter over
several years; and (3) market factors, because some sectors could do predictably
well in the future, unlike others.
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