Is Commercial Real Estate a Good Investment?

In the realm of investment opportunities, commercial real estate may seem daunting to people. To many, however, it stands out as a formidable player in the investment landscape. The promise of lucrative returns and long-term stability can be quite enticing for investors. The question on many minds is whether investing in commercial real estate is a prudent choice.

What IS a “Commercial Property?”

This term might refer to any number of things, including but not limited to: 

• retail buildings like the corner store
• office buildings
• warehouses and manufacturing facilities
• larger apartment buildings (over 5 units)
• “mixed use” buildings such as a building that has a barbershop on the first floor and an apartment or multiple apartments above it

The Allure of Commercial Real Estate:

The appeal of a commercial property investment lies in the potential for regular rental income, capital appreciation, and tax advantages. Unlike residential properties, commercial properties often involve longer lease terms and lower tenant turnover, providing a stable income stream.

If a property can be acquired for cash or favorable financing terms, owners will likely see a quicker and larger return on investment for a commercial property versus a residential property (single family home, smaller apartment building, etc.).

Diversification and Stability:

Diversifying one’s investment portfolio is a fundamental principle for risk management. Commercial real estate’s performance is not directly correlated with traditional asset classes like stocks and bonds so it may be an attractive option. This can enhance portfolio stability, especially during economic downturns when commercial properties may continue to generate income even as other investments falter.

Risks and Rewards:

While the potential rewards of investing in commercial real estate are enticing, it’s crucial to acknowledge the associated risks. Market fluctuations, economic downturns, and unexpected vacancies can impact returns.

All sources agree that it is extremely important to do thorough due diligence and really understand the local market dynamics before committing to commercial real estate investments. A knowledgeable commercial real estate advisor can help you navigate these market dynamics and due diligence materials. They are plugged in, so to speak, to the various markets they serve and can offer valuable insight into recent trends.

The Role of Economic Trends:

Forbes.com points out that economic trends play a pivotal role in determining the profitability of commercial real estate investments. Factors such as job growth, population expansion, and technological advancements can significantly influence demand for commercial spaces. Investors should keep a keen eye on these indicators to make informed decisions about where and when to invest.

Here at Verani Realty, we frequently pull and review demographics for both our seller and buyer clients to ensure they are fully informed about the properties and areas they are looking to buy or sell in.

Navigating the Financing Landscape:

Financial prudence is key when investing in commercial real estate. “The Motley Fool” (Fool.com) advises investors to carefully assess financing options, interest rates, and potential cash flow to ensure the sustainability of the investment (and we can’t say that we disagree with them there).

In addition to having a downpayment (typically closer to 25% in commercial real estate), investors should make sure they have an initial capital reserve fund set up. They should plan to place 3%-5% of gross rents into this fund each month to plan for long-term improvements or unexpected expenses such as repairs (this is separate from capital improvements).

So is Commercial Real Estate the right investment for you?

Obviously the question of whether commercial real estate is a good investment is multifaceted. The allure of stable income, potential for capital appreciation, and diversification benefits make it an attractive option for many investors. However, the risks associated with market fluctuations and economic downturns necessitate a thorough understanding of the intricacies of commercial real estate investing.

As with any investment, careful research, due diligence, and strategic planning are essential. By leveraging insights from reputable sources, such as your local commercial real estate advisor, investors can navigate the complex terrain of commercial real estate and make informed decisions that align with their financial goals.

The Verani Realty Commercial Division’s team of Advisors has a combined experience of over 100 years in the industry. If you’re considering investing in or divesting a commercial property, please give us a call at 603-845-2500 and speak with one of our well-qualified Advisors today!