What Are The Pros & Cons With Investing In Commercial Property
Property investment has always been a great way to increase your profit, as property usually offers a great return on investment. Commercial property is spaces rented by business such as shops in retail centres. There is some debate amongst investors about whether you should invest in residential properties or commercial properties. In this article, we’ll examine some pros and cons of investing in commercial property to help you decide if you should add some commercial properties to your portfolio.
One of the biggest advantages is the long lease period. Many commercial properties are leased for two to ten years. Residential leases tend to be shorter, lasting around 12 months. This means that commercial properties can be used by investors to provide some stability to their portfolios. Additionally, if a business has invested in customising the property and building brand awareness they are more likely to want to stay with the property than residential renters who find it relatively easy to move to a new property. This also means that business tenants will take better care of a property than residential tenants.
Another huge benefit of investing in a commercial property is the high return on investment. The average yield for a commercial property is around eight and 12 percent, while residential properties usually only provide 3.6 percent. The key to earning a high yield is to purchase a property in a high-demand area. Additionally, paying rates for residential properties can become very expensive, especially if you own multiple residential properties. In commercial properties, however, the tenants are responsible for paying the rates.
However, there are some potential downsides to investing in commercial property. One of the biggest is that it can take a long time to find a tenant. Vacant buildings can cost you money as you pay for things like maintenance and, as it can months before you find a tenant, these costs can add up quickly. Additionally, the value of the property is tied closely to economic conditions, if the economy should falter the value of your property will fall. These changes in property value occur much quicker in commercial properties than they do in residential properties.
Another potential problem in the commercial property market is that your property prices can be strongly impacted by newer buildings in the area. If a developer builds a new property with more benefits than yours, tenants might decide to move there. You are also exposed to the risk of new infrastructure changes causing tenants to leave your property for areas with better infrastructure. This can lead you exposed to changes in the area which could cause sharp drops in the value of your property and make it harder to find tenants.
While commercial property has many upsides, it also has some downsides. Hopefully now that you are aware of these potential benefits and risks you can make an educated decision about whether you include a commercial property in your investment portfolio.