Commercial Real Estate includes property that is used only for business-related activities or to offer a workspace, as opposed to being utilized as a residence, which would fall under the category of residential real estate. Most frequently, renters lease the commercial real estate to conduct businesses that generate cash. This vast category of real estate can range from a huge shopping mall to a single storefront. Read on to know more about its pros and cons.
Advantages of Commercial Real Estate
Some of the advantages of investing in Commercial Real Estate are:
- Potential of income: The earning potential is the best justification for choosing commercial rentals over residential ones. Depending on the region, the state of the economy, and other circumstances, the annual return on the purchase price of commercial properties normally ranges from 6% to 12%. That is a far wider range than what is often found for single-family homes (1% to 4% at most).
- Limited hours of operation: Most companies close their stores at night. That is to say, you are employed when they are. Barring emergency calls like fire alarms or break-ins, when it comes to commercial buildings, you can rest without worrying about receiving a midnight call because a tenant needs repairs or has lost a key. If you own a commercial property, it is also more probable that you have an alarm monitoring service, which enables your alarm provider to alert the appropriate authorities if anything does happen at night.
- Professional relationships: Small business owners take great interest in their enterprises and wish to safeguard their financial security. Commercial property owners are typically LLCs rather than private people that run their investment as a business. Because of this, there is a stronger business-to-business customer relationship between the landlord and the tenant, which helps interactions remain polite and professional.
- Public eye on the property: Retail tenants have a stake in keeping their establishments in good condition because doing otherwise will hurt their bottom line. The interests of commercial renters and property owners are so aligned, assisting the owner in maintaining and enhancing the property’s quality and, ultimately, the value of their investment.
- Almost no furnishing cost: The fact that there is almost zero furnishing expense is one of the benefits of investing in commercial real estate. This is because the tenant will pay for the furnishings once you have rented the space to them. You can therefore provide raw property to your tenant as an investor. This benefit arises from the requirement that any business renting the facility adheres to its operational policies. For example, a departmental store will have an entirely different design than, say, a bank, which will have a specific design.
Disadvantages of Commercial Real Estate
- Heavy investment: When it comes to commercial property, there is a greater level of investment than when it comes to residential property. After considering other financial commitments and demands, one must be willing to invest a sizeable sum during the initial period.
- Costlier loans: Loans are more expensive for commercial than for residential properties. The type of property, investors’ profiles, location, and repayment period will all influence the interest rates and terms and conditions. However, it is realistic to assume that the financing rates for commercial real estate will be 100–200 basis points higher. The loan application process is also more difficult, and the lender—which might be a bank or an NBFC—takes longer to approve the loan.
- Fewer tax incentives: Fewer tax benefits are available to investors in commercial real estate. The EMI for loan repayment to purchase the business property does not qualify for a tax break or rebate. On the other hand, EMIs paid for residential property qualify for large tax benefits.
- Difficulties in finding the right tenant: It could be more difficult to find the ideal tenant for commercial property, such as a shop or showroom than it is for residential property. Due to this, the property may remain empty after one tenant vacates and another moves in for a longer period of time. Also, when one tenant vacates the property and other moves in, the landlord is required to set aside a specified amount for the EMIs (if the property was purchased with a loan).
Commercial or residential property of any kind may offer profitable investment prospects. Compared to residential properties like single-family homes or rented apartments, commercial buildings often provide greater financial rewards but also come with more risks. Hence, it is important to fully comprehend the benefits and drawbacks of investing in commercial real estate in order to make the investment choice that is best for you.
Achyut Group is a trusted brand due to its ethical values among its customer, vendors, and competitors. We believe in creating environment-friendly green buildings by conserving energy, water, and wood. The promoters of Achyut Group combine over 20+ years of experience in the construction legal, finance, and marketing sector.