Advantages and Disadvantages of Commercial Rental Properties
Purchasing a commercial property as a rental can prove to be one of the most important assets of an investor's portfolio and every, but not all types of commercial properties are for everyone. Some savvy investors will tell you commercial rental properties make the best real estate to invest in because of their unique advantages. This is true in most cases, however, there are some disadvantages that may deter some investors from investing in commercial rental property.
What are the advantages of a commercial rental property versus a residential rental property or an association? One aspect is the unique lease terms. These lease terms set commercial properties apart from other types of investment rental properties. Typically, a commercial lease term is anywhere from three to five years. Since the tenants are locked in a longer lease term, a high amount of income is generated from a commercial rental property. This also implies that tenant turnover would be lower.
A commercial lease can include an escalation clause, which basically states that the landlord may raise rent at any time during the lease term in the event of inflation or other economic conditions stated in the clause.
Most commercial leases include a clause stating the tenant must pay a portion of certain expenses. This may include some maintenance expenses such as lawn care, snow removal, parking lot maintenance and resurfacing, roofing expenses, overall site improvements as well as property taxes. Most commercial leases state a tenant is responsible for any and all maintenance required. For example, if a water heater were to fail, it would be considered the tenant's responsibility to fix it. In a residential home, the landlord would be responsible. With that said, there is typically much less maintenance expense on behalf of the landlord with commercial properties in comparison to residential rental properties.
There are also a few disadvantages to owning commercial rental properties. For starters, it can be much more difficult to find tenants. It is not uncommon for commercial properties to remain vacant for extended periods of time. Typically, once a tenant has been found and basic terms of the lease have been agreed upon, attorneys form both parties review and negotiate the language of the contract. This process can be time consuming and costly. Financing for a commercial rental property can prove to be quite a challenge as well. Unfortunately, most lenders are more stringent with 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 income to repay 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.
