Pros and Cons Of Investing In Commercial Real Estate

Last Updated on November 20, 2022 by Cooper Hayes

Commercial real estate is one of the two major investment options in the real estate industry. The other one is residential property investment, and each of them offers significant profit potential. As a result, many investors don’t know whether to invest in a commercial land for sale or focus on renting properties out to families and residents.

This conundrum begs the question, “Which is better between commercial or residential real estate?” You need to understand that each land listing and investment option has its strengths and limitations, and knowing them could help you make a more balanced decision for your use case, depending on your location.

A common misconception about commercial land is that it’s only profitable to big-money investors who can cover the massive investment cost outlays. While this sentiment holds to a certain extent, dabbling into commercial land for sale is an excellent way to invest for anyone with accurate information. 

However, one must remember that this investment option has peculiar risk factors. Acquainting yourself with the pros and cons of commercial land investments lets you decide if it’s for you or not. This piece will highlight the various relevant points on commercial property investment.

Pros of Commercial Real Estate

Below are some of the precise edge commercial properties have over the residential option:

1. High Rental Potentials

One of the major characteristics of commercial properties is their high rental potential. They possess more long-term profitability than residential property investments. In many parts of the states, rental yields from commercial land listings are often higher than residential investment portfolios by a wide margin.

To put into context, profits rates from commercial lands are well into the double digits. It could get as high as 14 percent if you acquire Texas commercial property, for instance. Any fair city with excellent marketability would do as well.

Commercial land is the better investment option if you care about the profit prospects.

2. Better Relationship With Tenants

Properties investors usually contact tenants to whom they’d lease the properties at several points during the tenure. With such arrangements, commercial land investments give you a better chance to deal with the occupants effectively.

Since the property doesn’t get leased for residential purposes, your options include corporate bodies, banks, and big retail chains. Their tenancy conditions are often well-balanced, with a lower probability of default. Also, commercial tenancy tends to improve your property’s value over time.

3. Investors Don’t Handle Furnishing Costs

Another significant benefit to commercial property types is that the furnishing cost is the tenant’s responsibility. This factor gives the company the development opportunity to implement their designs and aesthetics on the property rented to them, often as undeveloped land.

It also means that you don’t have to go through the hassle of handling maintenance, repair, and other furnishing costs when you invest, as with residential properties.

4. Shared Interests on the Property

The primary goal of any real estate investor is to have their asset’s value appreciated over time. Thus, a commercial investment option lets you get a lease contract that can make that happen for you.

Since the lessees to your commercial property would likely be limited liability companies and big retail franchises, they’d have a greater need to maintain the building, allowing them to keep their brand reputation.

Such shared interests mean you wouldn’t have to worry about maintenance and furnishing uncertainties throughout the rent’s tenure. Also, the property’s value appreciates more significantly when the lease contract expires, and the next occupants don’t see it as undeveloped land.

5. Limited Monitoring Time

With commercial real estate, you don’t have to monitor your property every second of the day. You’re likely to operate within work periods since your tenants would be a company with work hours themselves.

That means that you close when they close and don’t bother about receiving calls during the night, as residential occupants are prone to do. However, if there’s a case of theft or accident during off-hours, you can set up an automated notification system to keep you in the know about it.

Cons to Commercial Real Estate

While the benefits to commercial assets might be notable, it isn’t without some significant limitations. Some of them are:

1. More Commitment Time

This limitation is a direct byproduct of tenants’ corporate nature in commercial properties. Investors have to treat each one separately, and that might get time-consuming when you rent out to multiple companies.

You’d have to handle annual CAM (Common Area Maintenance) costs adjustments and public safety regulations separately for each leasing contract. When you have more than one lessee in such cases, your commitment time to them rises.

2. Necessary Professional Services

Land investments sometimes allow you to handle property management by yourself depending on the location. However, commercial real estate investment options don’t support DIY methods. That’s because of the many technical information provided by commercial building maintenance standards. 

Depending on the land size and number of leasing contracts you handle, emergencies and other repairs might overwhelm you in no time, so outsourcing management to professional services is necessary.

The downside is that these services could spike the overall investment cost. Depending on the area, property management companies charge up to 12 percent of the monthly or yearly rent. Other deductions may include lease administration as well.

Also, if you’re positive that you can handle the operations by yourself, you’d have to pick up a property management license, which doesn’t come cheap. Overall, it’s best to consider your options to decide if it would pay off to outsource management responsibilities in the long term.

Final Thoughts

Choosing a suitable real estate investment could get complicated because each has its potential and complications. However, many prospects fail to consider the risks on the other side, which could have given a more holistic perspective to the investment option.

If you’ve settled for commercial property investment, such as commercial land for sale, it’s essential to understand that it comes with equal opportunities and risks. The above pros and cons aim to give you a vivid idea, allowing you to decide if it’s the better option over residential real estate for your investment needs.