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Amelia Wong & Wayne Mason
Relocation Specialist | Silicon Valley Homes Expert Advisor | Real Estate Investor

7 Strategies to Build Wealth in Real Estate – Strategy #7 – Investing in Commercial Real Estate

BUILDING WEALTH IN COMMERCIAL REAL ESTATE

Investing in Commercial properties is much different than investing in single-family homes. It can include retail buildings, professional office buildings, a warehouse, self-storage property, and mixed-use buildings.

There are good reasons to advance your investment strategy to commercial real estate when you are ready. To give you some contract, let’s look at the advantages and challenges of investing in Commercial Real Estate such as a single-story commercial retail building called a “strip mall”

GOOD REASONS TO INVEST IN COMMERCIAL REAL ESTATE

Here are some of the advantages of buying commercial real estate over residential property.

Income Potential

You can earn an annual return between 6% to 12% which can be a better return than single-family residential rentals

Professional Relationships.

You can set-up a Business Entity like an LLC to own commercial property and an S-Corp to operate your commercial property. This allows you to have more of a business-to-business relationship with your tenants.

Public Image

Owning Commercial Real Estate is a great way to maintain an image in the community of a business that provides a great service to the area. This creates a better bond between you and the tenant who is also in the business of making a profit and having a great image. Especially a Nationwide chain or Restaurants or Stores.

Hours of operation. 

It’s usually a daylight business. You work when your tenants work. You may have to handle emergencies after hours on occasion.

More Accurate Price Evaluations 

It’s easier to determine the price of the commercial property you want to purchase. You can evaluate current income the property is producing and calculate the value of the property instead of relying on an appraisal. One measure is the Cap Rate to determine what price the investment should be selling for.

Triple Net

There are variations to triple net leases, but the general concept is that you as the property owner do not have to pay any expenses on the property (as would be the case with residential real estate). The lessee handles all property expenses directly, including real estate taxes. The only expense you’ll have to pay is your mortgage.

Flexible Lease Terms

Consumer protection laws governing commercial leases are less compared to residential real estate deposit and eviction laws.

CHALLENGES OF INVESTING IN COMMERCIAL PROPERTY

While there are many positive reasons to invest in commercial real estate over residential, there are also negative issues to consider.

Your Time

To be a commercial real estate owner, you will have to be more of a manager than with residential properties. You have to be actively involved to be able to maximize your rate of return. You will have multiple leases, manage the common areas, deal with more maintenance requirements and any public safety issues.

Get Professional Help

It is best to hire someone to handle emergencies and any repairs on the property. Make sure you calculate the cost of a maintenance or property manager when evaluating the cash flow of the property. Property management companies can charge between 5-10% of rent revenues for their services, which include lease administration.

Bigger Investment

You will need more money for up-front costs as well as sufficient reserves (working capital) to address any unforeseen expenses.

More Risk

There can be financial risks and liability risks when dealing with more public visitors to your property. Are you ready to take on more risk for more reward?

For more detail on this strategy from NOLO.com go to Pros & Cons of Investing in Commercial Property

Here are the previous strategies for your reference.

Strategy #1 – Buying in a Growing Market

Strategy #2 – Buy a Rental Property

Strategy #3 – Fix and Flip for Profit


Disclaimer: The information provided on this page is for educational purposes only.  Amelia Wong and Robert Wayne Mason, Inc. makes no warranty or representation as to the accuracy, completeness or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall we be liable to you or anyone else for damage stemming from the use or misuse of this information.

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