Many people think their only real option for investing in real estate to make money is residential real estate. This is furthered by multiple TV shows on flipping houses, but rarely a mention of buying commercial property to rent out to tenants. Here are four common myths about commercial real estate and the real facts.
One common misconception is that commercial real estate costs too much to get into. Yet it is available to even small businesses, which is why you see many businesses build their own building with a smaller space they can rent out to a tenant or use if they expand. Buying a large commercial building takes quite a bit of money, but buying a retail strip center or small office complex is similar in price to a small apartment complex.
A common myth about commercial real estate is that it takes too much time to manage. What they don’t know is that commercial tenants may require far less management than residential tenants. For example, you could find tenants that pay the property insurance and property taxes in addition to rent through Triple Net Gateway.
While a good landlord will still check on the condition of the property and that these bills are paid, eliminating the need to pay them personally reduces the effort it takes to run commercial property. The literal cost of moving a business and the risk of losing customers in the process also means that commercial real estate tenants regularly sign five and ten year leases. The time and effort spent finding tenants for an 8 storefront strip center or three story office building now becomes less work than a 40 unit apartment complex with dozens of leases to be renegotiated each year and a few vacant units to fill at any given time. And that is aside from the number of quality companies that exist just to manage commercial properties down to landscaping and security.
Some people avoid commercial real estate because it seems to involve too much risk. Office properties do have a higher risk than other types of commercial property, since these businesses more readily relocate to someone’s dining room table or the second floor of a strip center. Strip centers themselves and malls are less risky for the landlord because the businesses try to secure long term leases. If the location is good, the closure of one business opens up the slot for another tenant. You can also reduce your risk by selecting triple net tenants, reducing profit potential, but rewarding steady tenants with lower rent and reducing the odds they leave.
One common myth in commercial real estate involves the belief that you cannot find good deals in commercial real estate akin to the foreclosed home or divorcing couple selling their brand new dream home. In reality, deals do come up. The business went bankrupt, but the building is just fine and needs to be sold ASAP. The doctor who ran the practice died and the estate has to sell the office building where the doctor practiced and two tenants still work.
A closely related myth is that running the numbers on a real estate deal takes too long, so you can’t find the deals until they disappear. However, just like the residential real estate evaluation tools to help house flippers know when a house is worth the asking price, you can find similar tools to evaluate commercial real estate.
A variation of this myth is that the only time commercial real estate comes up is when it is in serious need of repair, but we’ve already brought up the fact that businesses regularly sell commercial real estate due to changes in ownership, bankruptcy as well as mundane issues such as their need to move to a bigger location.
Commercial real estate is only too expensive for investors if you assume you have to buy the $100 million dollar office building. Commercial real estate doesn’t take up as much time and effort as residential real estate, and the risk isn’t as high as expected if you buy property in a good location for the type of business. You can find deals in commercial real estate if you hunt, and it doesn’t mean the building is a fixer-upper.