There’s a good reason why Chinese investors have spent $21.1 billion on commercial real estate worldwide, with almost $5.9 billion of that money invested in the United States. If done right, renting out commercial properties will reliably bring in higher annual returns than many other investments.
So if you’re looking for a way to grow your portfolio, here are four reasons to invest in commercial property:
1. Commercial real estate brings in greater cash flow
The yield on commercial real estate is usually higher than that on residential properties, both on a per square foot and an initial investment basis. This is especially true if you decide to lease or rent a multi-unit commercial property, says The Babb Group founder and CEO Danielle Babb. The more tenants you have, the more income you can generate.
- Earning potential. With the right location, commercial properties can expect an annual return between six percent and 12 percent of the purchase price, according to Cricket Realty Advisors president Matt Larson. This is much higher compared to a single-family rental, which can expect one percent to four percent annual return at best.
- Cash flow stability. Because commercial real estate leases are usually longer than residential leases, predicting cash flow year-over-year is easier.
2. Commercial properties diversify risk
If you own a commercial property and lease to multiple tenants, there’s a lower chance that you’ll lose your entire rental income in any given month. Sure, you might lose one or two tenants at a time, but you will still have other tenants helping you generate income. As opposed to a single-family residence, where your investment income is dependent on the rent of a sole tenant.
3. Commercial properties operate during limited hours
Businesses usually keep business hours. That means they are only operational during the day, and it’s less likely you’ll be called in the middle of the night to deal with a repair or a lost key, says Larson. For the rare instances in which you have an issue in the evening, you can install an alarm monitoring service that will automatically notify the proper authorities.
4. Tenant relationships are more predictable
Legally, the commercial property landlord-tenant relationship is between two businesses rather than two individuals. According to Larson, this makes the interactions much more professional and polite. “The landlord and tenant have more of a business-to-business customer relationship,” he says.
Before You Invest, Do Your Homework
But don’t assume that owning commercial property is guaranteed to bring you a consistent, high return on your investment. You have to do your research to determine if a property is a smart purchase. Before investing any money, Babb recommends that you answer these questions:
- What were the vacancy rates with the current owners?
- How are current tenants doing financially?
- What do storefront managers like and not like about doing business there? Are they planning to renew their leases?
- What do tenants like about the current management?
- Are any residential properties being built close by?
- How is the property zoned?
- Are any major retailers moving into the area? (If so, that might be a sign there will be more demand for storefronts.)
- What is the population’s median income? Is the median income rising or dropping? Is it at least at the national average?
If you’re confident in your answers and feel that the fundamentals of the property are sound, then investing in commercial real estate may be a nice addition to your investment portfolio.