What to consider before investing in commercial real estate

Before putting your money into commercial real estate, it's important to understand what exactly you're getting into — to be assured that you're not going to be blindsided by any unexpected expenses or complications that may arise.

In this article, we'll discuss several cardinal components to consider before investing in commercial real estate, helping you move forward eyes-wide-open.

Commercial vs residential property: noteworthy differences

Starting with the fundamentals, it's important to note that the nature, process and outcomes of commercial and residential property differ.

The reasons for investing in commercial real estate generally vary from those in residential real estate. Therefore, it's important to have a clear understanding of your goals before making an investment decision.

Differentiating factors include:

• Purpose of property: Commercial real estate serves the needs of businesses, such as warehousing, office space, retail stores, and other activities that require physical space to operate. In contrast, residential property is designated for use as a living space for individuals or families and is not intended for commercial use.
• Length of lease agreement: Typically, residential property leases span between 6 to 12 months, whereas commercial leases are considerably longer, often continuing up to 5 years or more.
• Legislative differences: The laws governing commercial and residential properties differ in various aspects, encompassing zoning regulations, building codes, and tenant rights. Additionally, legislative changes in this domain may occur on a state-by-state basis.

Investing in commercial real estate may present advantages over residential properties and vice versa. Irrespective of the investment choice, achieving long-term success necessitates a comprehensive understanding of both domains, supported by expert advice.

What to take note of before investing in commercial property

To determine if commercial real estate is suitable for you, and to prevent unforeseen pitfalls, consider the following three points:

Financing

Given the intricacies of commercial real estate financing, many individuals opt for caution and engage financial consultants and legal professionals to review the agreement. Seeking a partner for joint financing can expand options and help alleviate financial pressure. Additionally, commercial real estate typically requires a higher deposit than many people anticipate, often around 40% of the total value, as demanded by most banks.

Rental risk

Commercial real estate is renowned for its advantages in the domain of rent, including higher rental income, longer lease terms, and increased motivation on behalf of tenants to upkeep the property. Though these advantages are true, it's important to understand risk.

Investors in commercial real estate may encounter extended periods of vacancy between tenants, particularly for larger properties or those with specialised uses that require a specific tenant type. Therefore, foresight and planning in this area are necessary.

Conduct due diligence

Performing a building inspection before purchasing can prevent significant hurdles in the future. Building inspectors commonly check for:

• Structural integrity.
• Pests.
• Fire safety.
• Electrical malfunctions.

Additionally, you can conduct due diligence by consulting with commercial property experts. Reach out to our friendly team who can help ensure that all areas of the investment are thoroughly evaluated and any risks are identified.