You may already know this, but just in case you don’t, commercial real estate is a trillion-dollar industry. You may have been thinking about transitioning from residential real estate to commercial real estate investing. If so, you’re about to make a very smart move, and we’ll tell you why.
Real estate is arguably the best investment vehicle in the market, all things considered, whether residential or commercial.
However, commercial real estate comes with far more benefits. If you want to take larger ventures and larger risks for equally larger profits this is it. If you’re still not convinced that transitioning from residential to commercial real estate will be lucrative, here are the top reasons why you should do it.
Higher Return of Investment
Commercial real estate investments provide a higher return on investment compared to residential investments. This essentially means that commercial real estate investing gives you the ability to make a lot more money.
Additionally, residential property investors face more expenses compared to commercial investors. They have to contend with maintenance and repair costs.
They pay for insurance, property management fees, council rate, property taxes, and much more. Residential investors spend up to 30% of their returns on these expenses. They have to find out more about all the maintenance costs and repairs necessary to account for expenses.
The case is very different for commercial investors. Commercial property tenants are usually responsible for a majority of these expenses. They pay for insurance, property taxes, and management fees.
You may find that a commercial investor only caters for 5% of the expenses. This translates to a larger ROI in the end.
Commercial real estate property also offers better cash flow and appreciation. Businesses are bound to pay higher rent amounts and stay longer. This translates to consistently turn over for commercial real estate investors.
Easier To Obtain Capital
Most people think that it’s easier to obtain capital to invest in residential real estate properties than it is for commercial investments. This is because you would need a larger amount for commercial real estate than you would residential. However, this is not exactly true because obtaining capital for commercial real estate investing is a lot easier.
Let me explain. You see, in residential real estate investing, you can only obtain capital from Individual investors. These can be private money lenders, hard money lenders, and other traditional financing methods.
When it comes to commercial real estate investing, you have more options to choose from. Apart from the financing options available for residential investing, you can go for hedge funds, private equity firms, and investment groups. You can also pool finances with other commercial property investors and gain access to bigger financing for the investment property.
Investing in commercial real estate requires a higher amount of capital to start. This is one of the most significant reasons why most people prefer to start with residential properties.
For this reason, there’s less competition in the commercial real estate market. Hence more opportunities for the people who are daring enough.
There’s also a wide range of commercial properties to invest in such as offices, retail, apartments, and industrial. There are many sub-types of properties within these types. This means you’ll have more opportunities to succeed in investing in commercial real estate.
It’s a given that all real estate properties increase in value and appreciate over time. However, commercial real estate properties are much quicker. In the residential real estate market, it’s essential to consider the average comps recently sold in a given area to assess the value of a residential property.
You could upgrade a residential property with new additions such as a guest house, swimming pool, or top-of-the-line kitchen. However, you might not be able to sell it at a higher price.
Case in point, forcing appreciation in residential properties is next to impossible. On the other hand, this is relatively easy in commercial real estate investing. Commercial real estate properties are usually valued based on the cash flow and revenue they generate.
This means that if you can find a way to increase the revenue, you can force appreciation. Some of the best ways to increase revenue include finding high-quality tenants, adding amenities, and increasing the rent.
Wellness residential leases last anywhere from 6 to 12 months, commercial leases can be anywhere from 3 to 10 years. This means that commercial real estate investing will give you a lower turnover and lower vacancy rates.
Tenants won’t be moving out as often. Long leases translate to reliable passive income, and you’ll be spared from the headache of putting your property on the market every year.
This is not to say that commercial properties don’t end up with undesirable tenants. However, if you make it a point to vet all your tenants thoroughly, you’re bound to have good tenants for an extended period of time.
Higher Quality Tenants
Business tenants are far better than individual tenants most of the time. It’s possible that you could find high-quality residential tenants, but business tenants are much better and have more benefits. They respect the property more because the business location represents the company image.
This means it will be important for them to maintain the quality of the property. Additionally, commercial real estate investing governed by fair housing laws. When leasing residential properties, owners need to be cautious not to violate the Fair Housing Act.
Commercial real estate property owners can vet renters before leasing out space. With a commercial real estate property, you can ask tenants for bank statements or personal financial statements.
Ask for tax returns, balance sheets, and just about anything else to prove that they will be good tenants. You can also deny them the lease depending on what you don’t like without having to worry about legal consequences.
Reasons To Transition To Commercial Real Estate Investing
There you have it! If you are currently a residential real estate investor and need a better hassle-free investment strategy, commercial real estate investing is a far better option. This will present you with bigger and better investment opportunities, so why not make the switch?
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