What is Commercial Property?
Commercial property is a real estate property that is usually used for business purposes only. A commercial property mostly refers to buildings that provide space to businesses; it may also refer to the land which is intended to generate profit. The commercial property has many implications like financing of the building, the tax treatment and the laws which are implied to it.
Investing in Commercial Property?
The key considerations for investors before investing in the commercial property must be through a rigorous assessment of their investment horizon, risk-taking capacity, the purpose of investment that is in as (diversification, long-term investment, and rental return).
It is important to consider the location of the project, project quality, lease covenants (rent, lock-in period, escalation, etc), micro-market performance and benchmarking before planning to invest in the commercial property. It is important to see whether the micro-market is preferred by a diverse occupier mix or a specific industry, this will be useful if the investment is in the future project of commercial property with no pre-leasing activity. Stable income-generating office assets must be a priority for regular income stream requirements, while few risks can be considered for future commercial projects based on the capacity to risk of the investor.
Reasons to Invest in Commercial Property:
Income potential – one of the reasons to invest in commercial property is the earning potential over residential rentals. Commercial properties usually have the purchase price between 6% and 12%, as per the area.
Professional engagements – Many Small business owners want to protect their livelihood and take pride in their businesses. For example, the landlord and tenant have a business to business customer relationship, which helps them keep interactions professional.
Operations at limited hours – usually businesses go home at night. In other words, they work when you work. The authorities or the monitoring service are in charge of taking care of any mishaps that take place in the property without disturbing the owner at midnight.
More objective price evaluations – It is usually easier to evaluate the property prices of commercial property as one can request the current owner’s income statement and determine the price based on it accordingly. If the seller is has a knowledgeable broker, the price should be set such where an investor can earn the area’s prevailing cap rate for the commercial property type they must be looking at (retail, office, industrial, etc.).
It has more flexibility in terms of the lease – a few consumer protection laws govern commercial leases, opposite of the dozens of state laws, like the security deposit limits and the termination rules that may cover the residential and commercial real estate.
Triple net leases – There are variations to triple net leases, but the general concept is that one as the property owner does not have to pay any expenses on the property. The lessee handles all direct property expenses, including the real estate tax. The only expense one has to pay is the mortgage. Strip malls have a variety of triple nets and are not usually done with smaller businesses, but these lease types are optimal and one can’t get them with residential properties.