Switching From Residential to Commercial Property Investment

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The majority of investors in today’s marketplace are sick and tired of how costly and competitive residential rentals have become. That’s why more and more investors are thinking about investing in commercial real estate instead. Commercial property investment has some similarities to residential investment, and many differences as well.

It may come as a surprise that when discussing property investment, many people will first think of residential real estate, without giving much thought to commercial. But a growing number of individuals are identifying the potential of this sector and are cashing in. More specifically, there is currently a downpour of Baby Boomer investors who are investing in small commercial properties, in what has become an enormously competitive market, but for valid reasons.

Commercial real estate is normally classified as property assets that are primarily used for business purposes. This consists of three sectors – industrial, office and retail. Each of these possess a range of asset classes as well as sectors that have their own cycles which contain very different risks and rewards. Although some commercial properties offer investors yields similar to residential property, which is around 4 percent, some others can achieve a return of up to 10 percent, after costs, depending on the type of asset class and risk rating.

For the common investor that is diversifying into commercial property there are several important factors to consider:

  • Much like investing in residential property, location is really the key.
  • The category of commercial property that you purchase should be strategically located, paying particular attention to zoning laws that govern the site’s use.
  • Consider the future development potential of both the location and the building itself in instances where the present use is no longer viable.
  • There are myriad commercial investment options, including mixed use dwellings, like a retail shop with a dwelling, which offers double the income stream.
  • While the dangers associated with commercial property are more complex than residential, the positives can be significantly greater.

Longer Lease Terms for Commercial Properties

Perhaps the most notable boon of investing in commercial property is that it is characterized by longer leasing covenants than residential property (typically three, five or 10 years). Additionally, commercial tenants will often take better care of a property by ensuring it is maintained and presentable for their customers. But although commercial offers potential for immense capital growth, the high return from commercial property investment isn’t without risks.

Typically, commercial property is less predictable than the residential property markets, with the probability for extended vacancy periods and lower resale for some specialized assets, which are heavily influenced by economic factors like unemployment. Investment in the commercial market can also be tough due to stricter lending conditions, which may dictate that buyers to have a minimum 30 to 50 percent deposit.

In closing, if you are thinking of making the switch from residential to commercial real estate investment, it would be prudent to do your research and make an informed decision, regardless of the circumstances.