Investing in commercial real estate can be rewarding, but also high-risk. The risk level depends on the type of property and its use. Commercial properties can range from a home zoned for business to expansive industrial parks.
Some of the more popular commercial real estate investments include retail stores, office buildings, apartment buildings, condominiums, shopping malls, golf courses, and undeveloped land.
There are multiple facets to commercial properties which must be understood beforehand. When real estate used for business enterprises buildings must comply with zoning laws and adhere to provisions outlined in the Americans with Disabilities Act.
Office buildings, shopping malls, and retail outlets must offer sufficient disability parking and specially equipped restroom facilities. Property owners are required to carry adequate liability insurance before leasing services to tenants.
Building permits must be obtained from local zoning commissions when developing raw parcels of land or altering existing buildings. Raw land must be tested and inspected before buildings can be erected. It is particularly important for investors to conduct due diligence prior to submitting purchase offers for raw land zoned for commercial use.
Investors should become familiar with state and county laws surrounding real estate. Purchase agreements should be reviewed by lawyers experienced in building codes and real estate law.
It’s a good idea to become knowledgeable about landlord/tenant laws when leasing commercial real estate. Other legal matters to know include property management needs, liability insurance, and property taxes and insurance.
Investing in commercial properties is typically more expensive than residential properties. To offset costs, investors often partner with others to purchase expensive properties and parcels of land. When investment groups buy apartment buildings, condos, or shopping malls they hire managers and maintenance staff or work with outside service providers. The type of asset management functions required depends on the building and its use. A condominium complex will require more attention than a residential home zoned for business use.
It is significant to determine income to expense ratios before investing in commercial real estate. If tenant retention rates are low, operating costs will outweigh rental income. This is especially important to consider when investing in apartment buildings, shopping malls, and business parks that require multiple tenants to break even. On average, commercial properties must maintain an occupancy rate of 50-percent to meet operating costs.
The cost of commercial real estate is substantially higher than residential property. However, leasing rates are significantly higher as well. While houses can cost $5 to $8 per square foot, commercial properties can be double or triple. Much depends on property type, location, and use of facility.
Investing in commercial real estate can place investors at a higher risk of foreclosure than residential properties. It is crucial to carefully calculate financial risks vs. rewards before investing in this market. Those who take time to learn the ropes have the potential to reap substantial rewards.