Why You Should Invest in Commercial Real Estate
The real estate market comprises of sellers and buyers. However, people buy or sell real estate for various reasons. Most people are in the real estate for investment purposes. Investors who are actively involved in real estate do it in several ways. However, most real estate investments entail residential and commercial real estate. Commercial real estate is different from residential real estate. Commercial real estate entails land or buildings intended to make a profit while residential real estate entails the single-family type of homes for rental residents.
Commercial real estate
It includes rental residences or properties with the capacity of five or more units. Commercial real estate entails retail space, office space, and industrial-type buildings. It draws investors with much money and business experience. Commercial properties offer more financial reward than residential properties. That also means the risks of commercial real estate are more than residential properties.
When dealing with commercial properties, investors and tenants require the services of a commercial lease attorney. A commercial lease attorney helps business owners with commercial contracts. An incomplete or unfair contract can cost your company a fortune. That is why you need to hire a commercial lease lawyer to help you draft a lease agreement. Visit this website to learn about the importance of hiring an attorney that can assist with commercial real estate leases.
Valuation of commercial properties
Commercial properties are valued using the income approach. Commercial properties are fewer than residential properties; thus, it is hard to get comparable properties that have been sold recently. That explains why they are valued using the income approach and not the sales comparison approach. The income approach uses the income the property gives. It takes the profit a property generates per year then multiplies it by cap rate to arrive at the property’s value.
Reasons for investing in commercial property
Professional relationships- in most cases the owners of commercial properties are companies and not individuals. They operate as a business. Thus, the landlord and tenant have a business-to-business relationship, which is vital in keeping interactions courteous and professional.
Commercial properties give more access to more capital- it is easier to raise large amounts of money for a commercial business deal than a private deal. Commercial investors have unlimited access to financing since money lenders have trust in the income generated from their properties. Investors in commercial real estate can pool their funds together, so they have access to more capital.
Income potential- the best reason to incline to commercial real estate is the amount of revenue it generates. The annual return of the purchase price of commercial properties ranges between 6% and 13% depending on the location. It is typically higher than the return on residential properties. The main reason behind this is that the rent coming from a commercial property is high especially for leases.
Commercial real estate is less competitive- investing in commercial real estate requires an enormous amount of capital. It is for this reason that the number of investors here are less because capital is a limiting factor. That means that the field is less competitive. Most commercial properties are either too large for most residential people or too small for an institutional investor.
More flexible lease terms- the consumer protection laws for commercial real estate governing commercial contracts are fewer than the state laws that govern residential properties. It gives room for commercial investors to negotiate a favorable lease for their businesses. The industry does not have dozens of regulations such as termination rules and security deposit limits.
As an investor, don’t forget to seek legal help during a lease agreement. Make sure you include provisions in your lease agreement. Remember to protect the rights of the tenant in the lease, even if most landlords fail to include the provisions.