Investing in commercial and residential real estate are two very different deals. Commercial can be a profitable investment opportunity that requires a lot of capitol to get started, but residential has a much lower potential for profit and lower risk. In general, commercial real estate can be much more profitable, although it’s somewhat difficult to break into the industry. Here are some things that should encourage you to start investing in commercial real estate while helping you avoid some of the negative aspects that often come along with it.
Pros of Commercial Real Estate Investments:
Passive income: Commercial real estate will likely attract long-term tenants giving you a steady stream of passive monthly income.
Normal wear and tear is covered: Depending on the lease agreement, tenants usually cover the costs of normal wear and tear. In some cases, they also contribute in paying the insurance and property taxes.
Long term leases: Long term leases make investment portfolios much more attractive. Landlords should encourage tenants to sign long-term leases to ensure the stability of their business operations. Incentives can be added to long-term leases to sweeten the deal.
Cons of Commercial Real Estate Investments:
Quick tenant turnover: Depending on location or industry, sometimes buildings can suffer from tenant turnover. Getting tenants who agree for long-term lease can be challenging in some situations. To prevent this problem, choose a location with stable business environment, where businesses typically rent a space for longer periods of time.
Refurbishments: When the tenant leaves, the landlord may discover that the unit needs extensive refurbishment. To prevent this problem, make it clear in the lease agreement the property’s intended uses.
Zoning: Zoning can be a big headache for many landlords. An area may be zoned for manufacturing, retail and residential areas. It can be a problem if after new zoning is implemented, you need to change the purpose of your commercial property.
Taxes: The tax man has his hand in every commercial real estate property. As value of the property skyrockets, the owner will pay more taxes. It can be tricky trying to raise the rent, because the turnover can be high when rents become too expensive.
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