Purchasing a property as a rental can prove to be one of the most important assets of an investor's portfolio, but what kind of property is best for you? Most investors will tell you commercial properties are the best real estate to invest in because of their unique advantages. This is true, but there are some disadvantages as well that might deter some investors from commercial property.
What are the advantages of a commercial property versus a residential or an association? One aspect is the unique lease terms. These terms set commercial properties apart from the rest of the real estate properties. Typically, a normal rental lease is anywhere from three to five years minimum. Because the tenants are tied in for so long, a high amount of income is generated. This also implies that tenant turnover is relatively low. A lease can include an escalator clause, which states that the landlord can raise rent in the middle of a lease agreement in the event of higher inflation or other economic conditions stated in the clause. The lease can also include a portion stating the tenant must share a pro-rata share of certain expenses. This may include some maintenance expenses and property taxes. With that said, there is much less maintenance work involved for the landlord with commercial compared to a residential property.
There are also a few disadvantages. For starters, it can be much more difficult find tenants. It is not uncommon for commercial properties to stay vacant for extended periods of time. Once a tenant has been found and basic terms of the lease have been agreed upon, attorneys from both parties review and negotiate the language of the contract. This process can be time consuming and costly. Financing can prove to be quite a challenge as well. Unfortunately, most lenders are stricter on their requirements for a commercial loan because of the high volume of capital needed. Some lenders require evidence of a sufficient projected cash flow and debt coverage ratio to prove the property will be able to generate enough return to pay back the loan.
There is no right answer to which type of real estate you should invest in. It is all a matter of what resources are available to you and your priorities for your real estate investment. Do your research and find the best fit for you.
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