Is It Practical to Buy a Commercial Property as an Investment?
Nowadays, there are already several means on how you can make your money grow. You can either put it in the bank through a time deposit scheme or in the form of a mutual fund instead of a savings account. You also have the option of putting it in the stock market or buying life insurance with a variable unit-linked (VUL) scheme. There is also an option for you to use your money to buy a commercial property which can be a self-liquidating asset later on.
Residential Property vs Commercial Property
There are several ways on how to make your money grow in real estate and one of these is by becoming a landlord. This means that you will buy either a residential or a commercial property and have it rented by tenants. How you will manage the property depends on the work you can commit, as well as the expenses you are willing to spend. This is because you can either manage the property yourself, which may entail the need for you to commit most of your time and effort, or have a property management specialist handle all the dirty works with a price. Nevertheless, your time and effort in managing your property, or the price you have to pay for the property management services, will prove to be advantageous in the long run.
If you are keen on investing in commercial property compared to a residential property, there is a great chance that you need to commit more of yourself to do the legwork or spend more for its management. This is because commercial properties generally have more maintenance requirements compared to residential properties. Nevertheless, the revenues and margin of profit garnered through a commercial property prove to outweigh that of a residential property. Commercial properties may be anywhere from retail or office buildings, warehouses or industrial buildings, as well as “mixed-use” buildings. The latter are typically buildings used for a variety of purposes such as retail, office, or apartments.
Advantages of investing in a commercial property
In order to be able to gauge whether it is indeed practical to invest in a commercial property, it is imperative to take a look at some of the advantages brought about by investing in it.
- Revenue Potential
The earning potential of a commercial property is definitely one of the best reasons why it is, but practical to invest in it. More often than not, those who invest in a commercial property venture out in commercial loans because it is deemed as a more practical solution rather than paying a huge amount upfront. This is because of the goal of making the property a self-liquidating asset later on, wherein the mortgage payments will already come from the rent collected from the tenants of the property.
Commercial properties have the potential to earn annual revenue of anywhere from 6% to 12%, depending on the area. Oftentimes, this is enough to cover the mortgage payment of the property, while still leaving room for profit. For this alone, it can be considered that buying a commercial property is already a practical way of investing your money.
- Property Maintenance
The tenants of commercial property often maintain an effort to ensure that their store, business, or office is well-maintained to be pleasing to the public eye. This is because the upkeep of their retail store or office premises affects their business and the perception of their customers. Thus, the interests of the commercial tenants are aligned with the interests of their landlord in terms of maintaining and improving the quality of the property.
Aside from this, the tenants of a commercial building are businesses who want to uphold their professional reputation. This is to protect their livelihood as well as their business status. Thus, the relationship between a landlord and a tenant, in this case, is more professional, keeping most interactions courteous and direct.
- Lease Terms
More often than not, commercial property owners are only concerned about the mortgage payments on the property they own because of triple net leases. A triple net lease is an agreement wherein the lessee directly handles all the property expenses such as real estate taxes. This is especially true for large businesses that aim to maintain a certain standard according to their brand. However, triple net leases are often inapplicable for small businesses, but your commercial property can have a mix of both types of commercial tenants. Apart from this, there are fewer laws that govern commercial leases, compared to the leases involved in residential properties. This is another reason why it is indeed practical to invest your money in a commercial property.
- Price Evaluations
Evaluating the price of a commercial property is deemed to be more objective compared to evaluating the price of a residential property. This is because the price evaluation of a commercial property may be based on actual data such as the income generated by the business of the tenant. Residential properties, on the other hand, are often evaluated based on emotional pricing. This makes for a larger margin of profit, making your investment in a commercial property more practical compared to residential property investment.
- Hours of Operations
Unless your commercial property is a manufacturing site or an office building that operates 24/7, you will be spared from midnight calls because of property repairs or lost keys. More often than not, commercial building tenants operate in the normal daytime working hours, which is why you are less likely to be disturbed in the evening. Apart from this, commercial properties usually have an alarm monitoring system that will notify the proper authorities should anything untoward happen during the night time.
To wrap things up, there are already several means on how you can invest and make your money grow. Investing in the real estate industry is only one of them. Nevertheless, the option of being a landlord of a residential or commercial property may prove to be challenging, but the rewards are nothing short of fulfilling.