Say you have successfully purchased your first house and added a condominium in your investment portfolio but are planning on adding commercial property to complete the set, then rejoice, you have come to the right page.
Commercial real estate is property that is utilized solely for business-related purposes or to provide a workspace. More often than not, commercial properties are leased to tenants to conduct income-generating activities. This broad category of realty can include properties such as retailers of all kinds, office space, hotels/resorts, shopping malls, healthcare and industrial facilities.
Despite having their own cycle with differing risks and rewards, investing in commercial properties is a great and quicker way to grow your money.
Here is a breakdown of things you need to know about investing in commercial real estate: -
A Way To Balance Your Investment Portfolio
Recessions or pandemics such as the Covid-19 outbreak that effected the entire world have led many investors abruptly swotting their expectations for the real estate market.
As one of the most economically sensitive of asset classes, properties tend to rise precipitously as economic growth becomes engrained, only to crash when the tide turns.
However, it is always important to have some balance in your investment portfolio. While some may argue otherwise, we suggest an approximate of 90:10 ratio, the former being in stocks while the rest in real estate by the time you hit 35-45 years old.
Valued Differently Compared to Residential Ones
Compared to residential real estate, the income produced by commercial properties are directly proportionate to its usable square footage and recent statistics have shown that commercial properties typically have an annual return, off the purchase price, between 5% and 10%, depending on the locale, current economic situation, and other external factors (such as a pandemic). That is a much higher range than that of single-family home properties, which is 1% to 4% at best.
Diversifies Your Investment Risks
As an investment vehicle, commercial properties provide some diversity to your investment portfolio, expressly if it is currently encumbered with savings, stock and bonds etc.
Since commercial real estate investments can generate income through tenants that aren’t tied directly to the stock market, stable commercial properties are able to provide you with the potential for reliable and predictable cash streams.
On top of that, if you happen to own a commercial lot with say 10 tenants and lose one of them, you would only be losing one-tenth of the income generated from said property, compared to losing the entire rent from the loss of a tenant in a single-family dwelling.
Offers Greater Cash Flow
Rental earnings from stable commercial properties mean potential steady and predictable cash flow, which translates into possible protection and diversification during financial market instability.
For instance, should you lease or rent out a multi-unit commercial real estate, you would logically have more tenants in order to engender income, in contrast to individual-family house. This is due to the yield being generally higher per square foot in commercial real estate compared to residential property.
Generally Longer Leases
Aside from protection laws governing commercial leases, such as security deposit and termination rules, the lease term period in commercial realty is generally longer, hence making your cash flow more stable in the long run.
Valued Differently by Banks
Naturally, the bigger the commercial property is (due to more square footage), the higher the valuation of it than a smaller one in the same location. However, unlike residential real estate which normally requires a 10 percent down payment upon its purchase, commercial properties typically demand a higher down payment estimated at roughly around 30 percent more on average.
The views and opinions expressed in this article are those of the authors and not intended to malign any company, individual or necessarily reflect the official policy or position of any agency or organization. Focal Times is a subsidiary of Maxworld Consulting Sdn Bhd, a regional organization founded by a mixture of agile and experienced corporate finance, venture capital and industrial experts. This establishment focuses on sharing current banking affairs, latest property developments and updates and more.