Many investors in the US are still determining if it is the right moment to engage in the commercial real estate market, given the unrest in the residential real estate market. Commercial and residential real estate investing vary markedly. Investors’ ears are perked by rumours of good investment returns and extended tenancy periods for reduced expenses. Undoubtedly, broadening your portfolio or investing in business properties can be a terrific addition.
Purchasing a business property can be a difficult, risky procedure for the uninitiated or inexperienced investor. Nevertheless, a wise investment in commercial real estate can bring significant rewards. And to help you minimize risk and maximize reward, we’ve outlined the main benefits and drawbacks of investing in business property in the US.
How Does Business Property Work?
Before going into details about the pros and cons of business property in the US, it is crucial to understand how business property works.
Business or commercial property is often considered a greater risk asset than residential real estate. It comprises office buildings, factories (industry), stores (retail), daycare centres, and healthcare facilities (social infrastructure). The fundamental distinction between these two categories of real estate is that commercial properties are mainly used for business, while residential properties are used as residences. Business buildings are therefore thought of as higher-risk investments since they are more susceptible to economic disruptions than residential properties. On the plus side, though, they also provide higher yields.
- Potential earnings overall
First, compared to residential properties, commercial assets often have a better potential for income generation. This is due to several factors. First, because almost all individuals in the US use business premises for work, they are typically more valued than residential ones. According to market data, commercial real estate in the US returns between 5% and 12%, whereas residential real estate yields between 3% and 5%. Commercial properties should be favourably oriented from day one, considering the financing price and typical debt levels.
Additionally, many commercial buildings in the United States are big or have space for numerous tenants at once, which increases your chance of making money. It’s not surprising that many people choose to launch a real estate firm with this type of income opportunity, especially given that land values in the US will continue to increase over time, as market research shows.
- You can set up particular leasing conditions.
Many laws in the United States govern residential real estate. There are still laws to protect standards and corporate moral conduct at the federal, local, and state levels, but there are typically fewer regulations regarding business leases. This provides you, the landlord, a bit more leeway in deciding how long the lease will last. For instance, you can ask a company for other papers to investigate them fully.
- Extended leases
Long-term rentals of 3 to 5 years or even longer are occasionally offered for commercial premises in the United States. You can be comfortable for the next several years if you can draw in and keep dependable, long-term tenants like major enterprises, renowned brands, or government agencies.
- Diversified investment portfolio
If you currently own a variety of residential properties in the US, adding a high-quality and strategically placed business property to your portfolio could help you further diversify it. Additionally, get guidance from professionals like solicitors, commercial mortgage brokers, and buyer agents to ensure you receive the finest deal you can manage.
- Lower expenses
The cheaper expenses are one of the main advantages of owning commercial real estate in the United States. Typically, all expenses, including higher council tax and any owner-corporation costs, are the tenant’s responsibility. Additionally, a renter will typically be required to pay for the fit-out and any extra expenses if they want to make significant interior alterations to a space. They will be required to “make excellent” on those improvements after their lease expires.
- Working with tenants is simple.
One of the key advantages of owning commercial property in the US is that the renter is typically a corporation, bank, or retail chain. Dealing with such organizations is rather simple, and getting the rent does not require chasing around. There will be an increase in rental income for the remaining piece of real estate if the tenant is a reputable bank or business on one floor or one portion of the building.
- The initial expenses are higher
Ordinarily, the cost of an office building is more than the cost of a typical house. The nature of the property, investors’ profiles, area, and repayment period will all affect the interest rates and conditions of the deal. However, it is realistic to assume that the financing rates for commercial real estate will be 100 to 200 basis points higher. The loan application process is also more difficult, and the lender takes longer to approve the loan. Additionally, business property loans have a smaller loan-to-value ratio, requiring a bigger down payment to qualify for financing. You will need to make a down payment, closing expenses, and other fees, similar to when buying any other property.
- Diminished tax rebates
There are fewer tax incentives available for commercial real estate investors in the US. The equivalent monthly bill for loan repayment to acquire the business property is not subject to tax benefits or rebates. This is one of the largest disadvantages when weighing the benefits and drawbacks of commercial real estate in the US. However, there are considerable tax benefits for paying for residential property in equivalent monthly instalments. One of the main reasons individuals like residential property is because this break lowers the total cost of purchasing one.
- Maintenance issues
The costs associated with maintaining the upkeep of commercial property are typically higher, increasing their drawbacks. In the context of a residential home, maintenance costs are minimal and restricted to modest fixes, such as tap replacements and minimal electrical and plumbing fixes. In a business setting, maintenance and renovation projects are frequently very large. It’s also crucial to remember that if you take out a home loan and a loan for renovations simultaneously, the interest rates will be the same. Unfortunately, in the case of business property, this feature is not possible.
- Time constraints
Due diligence is required for commercial real estate more so than for residential. It would be best to familiarise yourself with local rules and regulations in the US and thoroughly inspect any properties before making a purchase. It frequently entails devoting significantly more effort to commercial real estate.
- Additional difficulties in securing a tenant
Finding the ideal renter for commercial real estates, like a store or a warehouse, may be considerably more challenging than getting a renter for residential real estate, which is one of the drawbacks when it comes to the benefits and disadvantages of purchasing commercial property. Due to the difficulty locating a tenant, the unit may remain empty after one tenant vacates and another comes in for a longer period. When one tenant vacates the property and another moves in, the owner is required to set away a specified amount for the equated monthly instalment, especially if the property was purchased with a loan.
It’s usually preferable to purchase residential real estate first if you are new to real estate investing because the dangers involved and the amount of business expertise needed are far lower. However, engaging in commercial or business property makes sense if you are an experienced investor with a diverse portfolio of residential properties. Since you may increase your cash flow through higher rental income, broaden your holdings, and lessen your vulnerability to residential economic slowdowns. It also relies on the goals you have for your investment. Although residential properties have lower returns and deferred capital gains, which implies that most of the taxes are paid when you sell your home, commercial buildings produce more income, suggesting there will be some tax ramifications.
Investing in a commercial property or relocating your business to a new location might benefit from making this purchase. In either case, knowing what you are entering is crucial. Ultimately, you are undoubtedly taking a step toward selecting the best choice for your company by assessing the advantages and disadvantages of business property.
- Amplify. 2021. Buying a Commercial Building: Pros and Cons. Retrieved from: https://www.goamplify.com/blog/business/commercial-building-pros-cons/. Retrieved on 23 November 2022.
- Housing. 2022. Pros And Cons Of Investing In Commercial Real Estate. Retrieved from: https://housing.com/news/pros-and-cons-of-investing-in-commercial-real-estate/. Retrieved on 23 November 2022.
- National Property Buyers. 2019. The 9 Pros And Cons Of Investing In Commercial Property. Retrieved from: https://nationalpropertybuyers.com.au/the-9-pros-and-cons-of-investing-in-commercial-property/. Retrieved on 23 November 2022.
- Nolo. 2021. Pros and Cons of Investing in Commercial Real Estate. Retrieved from: https://www.nolo.com/legal-encyclopedia/pros-cons-investing-commercial-real-estate.html. Retrieved on 23 November 2022.