Should you consider investing in commercial property? This article will outline what counts as commercial real estate, as well as the pros and cons of this investment option. We will also take a look at what might be in store for 2022 and beyond.
Commercial real estate, often referred to as “CRE” by industry professionals, is a useful addition to your investment portfolio. Owning commercial real estate that you rent out to other businesses can generate a massive profit, and while there are certainly challenges, it can help diversify and strengthen your overall investment platform.
Should you consider investing in commercial property? If so, what types of CRE would be best for 2022 and beyond? Those are complex questions, but let’s start with a simple explanation for what counts, and what doesn’t count, as commercial real estate.
What Counts as Commercial Property?
Commercial real estate is any property that is used for business or commercial purposes. As long as they are used by a company or a non-profit organization, it will almost certainly be considered commercial property.
Examples of CRE include:
- Office buildings
- Retail outlets
- Warehouses
- Industrial and manufacturing facilities
- Restaurants and cafes
For the sake of this article, we’ll leave apartment buildings off the list. Technically, these properties can be considered residential, as they are used for housing individuals and families. However, the mortgages for purchasing these properties, if they have more than four units, are commercial loans. So large apartment facilities could be considered both.
There are also mixed-use facilities. These properties have a portion dedicated to commercial use, with another section used for residential purposes. A storefront with an upstairs apartment is a typical example. These properties are generally categorized as commercial.
Benefits of Investing in Commercial Property
Investing in commercial property can add a high-return asset to your overall portfolio. The income potential, quite frankly, can be massive. Although there are certainly highs and lows, the return from a commercial property can be much greater than the returns from residential. This alone motivates many investors to have at least a couple commercial properties.
It’s a safe bet that tenants in commercial real estate will, generally, take better care of the property. As business owners, they want to present a clean, safe, professional work environment, and they have a vested interest in maintaining the store or building.
In most cases, businesses work when you work. They operate when you are up and moving; rarely at 2:00 in the morning. You’ll likely receive fewer midnight calls about lost keys or leaking faucets, which are always possible with residential properties.
In many ways, commercial real estate gives greater flexibility to the property owner. As a residential landlord, you are often limited on what you can do, how much you can charge, and when you can terminate a lease.
Downsides to Investing in Commercial Property
Because the income from investing in commercial property depends on a thriving economy, it can be more volatile. Regardless of the economy, people need a place to live. Yes, the economy can impact their ability to make rent checks, but residential space is virtually guaranteed to be in demand. The same can’t be said for commercial space, as a slow economy can shutter businesses and leave CRE owners with no (or few) tenants.
Commercial property can also be more time-consuming for owners. For a variety of reasons, including the complex business contracts and requirements for commercial repairs, it can be harder or more time-consuming to maintain. With residential real estate, you may be able to complete repairs yourself; with commercial, you’ll often need licensing and certification to make any changes.
Commercial real estate, in general, also requires a larger initial investment. These properties, even ones that need significant repairs, can cost millions of dollars. And, as we just noted, you’ll probably need to upgrade the facility to attract commercial tenants. The upfront costs can be massive. Even if you use a loan, the fees and starting costs can be significant. If you need to bring a downpayment (which is certainly the case with a commercial purchase), you can expect hundreds of thousands of dollars to secure the larger loan.
Outlook for Commercial Property: 2022 and Beyond
Predicting the future is, of course, extremely difficult. That said, there are many reasons to believe that investing in commercial property at this time is a solid choice, as long as you are making the right decisions and managing your investment property.
For one, mortgage interest rates remain low. This is well documented for home loans, but it’s also true for commercial properties, In September of this year, the Federal Reserve hinted that interest rates would likely stay low for the foreseeable future, which makes commercial investments with a mortgage all the more profitable.
In real estate, to quote the famous cliche, it’s all about location, location, location. This applies to commercial real estate, but you could add another factor: type, type, type. The type of commercial property you own makes a difference, and investors will likely find that certain types of commercial property are rising, while others are falling.
Office space and retail, it’s safe to assume, will not have the high demand seen in the past. However, warehousing and stockroom spaces could fetch large monthly rental bills.
Location, of course, still matters. In many areas, suburbs are thriving, and commercial often follows residential. So commercial real estate in the suburbs could be a better investment than a comparable space in the heart of the city.
Get an Affordable Loan for Your Property Investment
Commercial real estate can be an important part of your investment portfolio. If you have decided that investing in commercial property is right for you, contact our team today. We would love to help you secure an affordable mortgage that helps you purchase an income-generating commercial property.
From home loans for first-time buyers to investment loans on commercial property, we are here to help with all of your mortgage needs!
