People often look to property investment as a source of income but may have difficulty deciding where to invest. Residential real estate is popular, but investors should also weight the pros and cons of investing in commercial real estate. There are several types of commercial properties, including office buildings. While there is some uncertainty in the market, commercial real estate investment can still be a sound option.
Advantages of Commercial Property Investment
One reason investors may want to look into commercial real estate is that the tenants have an incentive to maintain the property and keep it aesthetically appealing. Offices need to maintain a professional appearance to draw and retain customers, so there is less concern that a renter will damage or deface the property.
Another advantage is increased income potential. While single-family homes typically generate a one percent to four percent annual return, commercial properties generate 6 to 12 percent yearly return of the purchase price. Furthermore, depending on the terms of the lease, the tenant may be responsible for property taxes and insurance. Cost sharing by the tenant means fewer expenditures for the investor and a higher return on the investment.
Commercial real estate investors may also enjoy fewer demands on their time than do residential investors. Offices tend to have limited and set business hours, meaning that maintenance calls and other responsibilities are restricted to those times.
Drawbacks of Commercial Property Investment
A significant disadvantage to commercial office investment is the initial startup cost. Commercial office properties generally require much larger upfront investments than do residential properties, and repair costs can be much higher. It is likely that repairs will have to be outsourced to a contractor, while many residential repairs are handled by the landlord. These expenses must be weighed against the expected annual return.
Another disadvantage is that commercial real estate management is more complicated than residential management. Having multiple companies leasing in the same office building raises complex contractual issues, and requires effective interaction with a larger number of players.
There is also the risk involved with having customers and other individuals visiting the property throughout the day. Damage caused by vandalism, parking lot accidents, and personal injury lawsuits are all inherent risks of commercial property management. There is also the concern of general security and after-hours criminal activity. This raises the additional burden and expense of contracting with an outside security provider, but with proper planning and insurance, these risks can be reduced significantly.
Making a Decision
It is best to consult an experienced commercial real estate broker before making an investment decision. Professional guidance will make the process of commercial office investment as smooth and profitable as possible.