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Is commercial property a good Investment?
Investment is one of the most important decisions one take in his life. Each and every one of us wants to have an income generating property in our investment portfolio to expand our funds and generate that extra income. Commercial property investment is seen as one of the most profitable and safest forms of investment. Investment is purely a money matter and, therefore, involves risks. Before investing, one should carefully measure the advantages and disadvantages of the proposal to make an informed decision.
Investment in commercial property is not an easy task. Commercial property can be bought either through direct investment or through REIT’s. In the first case, investors can easily go through different properties and takes the decision. But the use of another form comes into picture when an investor does not possess the required capital to directly invest in the commercial real estate. There are various types of REIT’s such as equity, mortgage, Hybrid etc.
Investment yields good returns whether it is in a commercial or residential real estate. But for those with limited funds, commercial properties offer more rewards in financial terms as compared to the residential properties. Commercial properties usually include office buildings, apartment buildings, warehouses etc.
To clearly understand the investments in commercial property, one has to examine the both the benefits & the risk involved in it. Commercial properties offer the following benefits:
- Income generation
One of the main reasons to invest in commercial property is its earning potential. Such properties generally offer high rates of return i.e. s6-12% per annum depending on the area.
- Flexibility in operations
Commercial estates provide flexibility in lease terms for the investors. There are only a few laws that govern commercial leases, unlike the dozens of state laws, such as security deposit limits and termination rules. Commercial properties are not liable to such laws.
- No extra expenses for the owner
Another major benefit of owning a commercial property is that the owner is not required to pay any expenses such as real estate taxes etc., on the property. All the direct, as well as indirect expenses are to be handled by the lessee.
- Easy price evaluations
The price of commercial properties can be evaluated very easily by just demanding the income statement of the current owner and then determining what the prices should be.
All these benefits provoke investors to place their money in commercial properties but, to fully understand the investment it becomes important to look at the risks investors have to undertake. While focusing on the positive side of investing in commercial property, one should not neglect the downside to investing in commercial real estate. The major negative issues to be considered are:
- Shortage of time
When the investor has two or more tenants, it becomes difficult for him to manage time with every tenant. Being an absentee landlord would not help to maximize return on the amount invested.
- Requirement of high initial investment
To own a commercial property, one typically requires high capital up front to get the best property in the city. Even after acquiring a commercial property in a good area, one has to expect large capital expenditures to follow. Therefore in the initial stages, the investor has to keep his hands full of money to expect higher gains in future.
- Occurrence of risks
Commercial properties are associated with many types of risks. Property rate fluctuations are the most obvious risks one has to face. Sometimes, these rates shoot up and in other times investors have to face hardships.
Investment is a crucial decision and has to be taken wisely. An investor should not only focus on profit on the sale of the appreciated commercial property but also on the rental cash flows from the property. Unlike other properties such as residential estates, the income that can be generated from the commercial property is what determines its value. Investors are required to weigh the pros and cons of investing in commercial properties as these types of investments are appropriate for investors who tend to move to the near and in-retirement phase of their life.
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