Commercial property alternatives
It’s sometimes easy to get too staid as a property investor. If you’re used to residential investing, you tend to stick with it, thus placing most all of your real estate eggs in one basket. If you’ve been doing this for a while, you might want to consider a safer haven for part of your nest egg….commercial property. And by commercial property, it can run the gamut from office and retail space to more niche-oriented, but relatively safe property investments, such as medical office space, hospitals and nursing homes. The entire medical care industry is a safe bet for tenancy in the mid to long term periods.
Building your safety net
You’ll soon discover that locking up tenants for long term leases is a whole lot safer and more predictable, let alone less expensive to administer, than finding tenants each year for every one of your residential rental units. The time factor of not having to constantly be advertising, screening, doing financial and background checks, and dealing with a multitude of residential tenant emergency issues makes renting to commercial tenants a great boon as an alternative.
Office buildings, for example
Consider the benefits of office buildings, where many leases with a wide range of tenants over multiple lease terms helps to increase their overall return on investment, relative to residential property. When one tenant in an office park leaves, the effect will be minimized on the overall performance of the building, compared with residential rental unit buildings, especially smaller multi-family dwellings with less units than apartment houses.
In addition, if you own commercial property, you’ll certainly be negotiating for longer-term leases than only one year. Typical commercial leases will range between three to five years on average. Some, a lot longer, depending upon how much remodeling work a business has to do prior to moving in. The more upfront costs they have to incur to get their store ready, the longer the lease they’ll be looking for, in order to help them amortize the total cost of their renovation in your building. On the other hand, a two year lease in residential property would be considered long. And then you have to spend the time replacing any tenant when they leave.
The upshot of the longer term leases in commercial property? Simple…you’ll be able to plan better, as well as realize a greater degree of security and consistency of cash flow by having longer-term tenants. The steadiness of the income stream is one of the chief advantages of commercial property over residential investments.
Other benefits of commercial property
There are several other key benefits of investing in commercial property relative to residential investing. Consider that commercial real estate offers a wonderful buffer against inflation. This is because most tenant leases, since they are mid-to-long term in nature, have bump-up increases in yearly rents. This acts as a hedge against inflation. This helps build in increased valuation for your commercial property over time. In addition, there tends to be less market volatility amongst commercial buildings. Especially ones that are at or near capacity for rentals. Relative to residential buildings, commercial property will show a much flatter growth line, with fewer sharp spikes or dips.
Lastly, commercial real estate offers the ability for certain tax breaks that may not be available for residential property. For example, if building or renovating in a central city a municipality may be offering commercial property owners certain tax-deferred tax breaks to spur construction in their city. This is just one type of tax benefit that may be available to commercial property owners relative to residential investors.
photos courtesy of miamire.com, businessfinancespecialist.com, barryspringerlaw.com, luxist.com, browninsuranceservices.com