Not all successful real estate investors get their start investing in residential properties, but most do. The reasons why are pretty simple: It requires a lot less money to get started, in some cases, and there are more options for investment, from flipping houses to buying homes as long- or short-term rentals or leasing commercial property.
After mastering that segment of the marketplace, however, the most confident and aggressive investors usually move into commercial properties, as well. When done right, the financial rewards are simply bigger than what can be achieved with residential properties—but the risks are bigger, as well.
For new investors, there is sometimes a little confusion about what we mean when we’re talking about commercial properties. After all, if you’re leasing out a single-family residence, it sure feels like a commercial investment! Nevertheless, commercial real estate usually refers to one of the following:
- retail buildings
- office buildings
- industrial buildings
- apartment buildings
- mixed-use buildings, where the property may have a mix of retail, office, and residences
Each of these types of properties has its advantages and risks for investors. It takes experience to be able to effectively size them up quickly. But there are some very compelling reasons why so many residential investors move into the commercial market.
1. Less Maintenance
Maintenance problems and property damage are a major expense when it comes to residential investing. The headaches here are smaller with commercial properties. Because commercial properties are intended for business use, tenants are more likely to do their part in keeping the property well-groomed and in good condition, especially when they receive customers on a day-to-day basis.
2. Income Security
By leasing your property for a longer-term contract, you can usually buy yourself a few years before you will need to deal with vacancies when the lease expires and the tenant chooses not to renew the contract. That provides better income security and higher cash flow than residential, single-family homes.
3. Bigger ROI
Commercial real estate has the potential for a significantly higher return on investment (ROI) compared to most residential properties since the lease terms typically require much higher monthly rents than the average rent of a single-family home. Other income streams may be available, too, such as parking fees, maintenance fees, etc.
4. Faster Appreciation
Unlike the assessment of a residential property’s value, which is often based on the average comps of surrounding properties, the value of a commercial real estate is more often based on the total amount of revenue generated by the property. The more revenue your tenants provide, the more your property is worth, no matter what’s next door.
5. Triple Net Leasing
A triple net lease (NNN) is a lease agreement in which the lessee shall be in charge of paying all property expenses, including building insurance, real estate taxes, and the cost of repairs and maintenance, on top of the rent and utilities. Chain outlets and other successful concepts typically prefer this kind of arrangement because it allows them to maintain the property according to their brand and have better control over their image. It also takes all those expenses (and the accompanying stress) off the property owner’s shoulders.
If you’re ready to start dipping your toes into the commercial real estate investment market in Houston or anywhere else, it’s a good idea to work with an experienced lender like ZeusLending.com.
The No. 1 rule of real estate is “You make money when you buy,” so don’t waste time waiting for the perfect opportunity or the perfect team. Set your minimum deal criteria and keep looking until you find a property that meets it.