Some of the greatest investment opportunities lie in property, whether it is residential, or commercial. But if your main goal is cash flow, and not only capital growth, then you want to opt for commercial, even better, industrial property, since industrial properties are the ones that can offer more financial turnover. It is important to understand both positive and negative aspects of such a high investment before you get into it.
First off, what exactly falls under “commercial property”?
While residential property is one of a kind, there are multiple types of properties that can refer to commercial ones. Some of them are retail buildings, office buildings, various warehouses, apartment building, industrial buildings, and “mixed-use” buildings (pretty self-explanatory), and others.
While it is known that commercial real estate brings you higher cash flow, where the residential property brings only around 4%, industrial properties are on the highest mark of rental returns (up to 10%).
When it comes to managing different types of commercial real estates, there are different things to consider, and each type of this kind of property is going to demand a different managing approach. So, let’s consider and examine some of the cons and pros of buying the industrial properties.
Pros Of Buying Industrial Properties
1. Higher Income Potential
The biggest positive aspect of investing in industrial property is high rental yield. It is not unusual for an industrial real estate to earn as much as 10% pa, where with other commercial properties you can earn as much as 5-8%pa.
2. Maintaining The Building
It is in your tenant’s interest to take good care of the building, especially if they have a retail and storefront area since it directly affects their business. Also, most (usually all) maintenance expenses fall onto your tenants, whereas residential real estate owner has many more expenses. They need to pay for various repairs, water expenses, maintenance, and other property fees. In the end, it sums up to be around 30% of rent for residential, and just around 5% of commercial property rent that goes for expenses.
3. You Do Not Have To Be Alert All The Time
Any kind of business, whether it is a retail, office, or factory, never works 24 hours per day, meaning that you will get some time to rest without being alert for midnight emergency calls from your tenants, calling to say that something needs urgent repair, or that something has gone wrong. On top of that, commercial property tenants almost always have monitoring alarm systems, so if anything does go wrong in those closed hours, proper authorities will be notified, without you having to worry about it.
4. More Objective Price
Often it is much easier to set the price of a commercial real estate because you can ask for the current owner’s income statement, and see what price would be appropriate, based on that. Also, the downside of the residential real estate it that it is prone to emotional pricing since it is a step off from a business and one step into your tenants’ private life, and private problems that may lead to smaller or delayed rent.
Cons Of Buying Industrial Properties
1. Time Investment
If you own an industrial building with more than one tenant, it is likely that you will have more to manage than you would have with a residential building. Even though that some maintenance parts are falling on your tenant, you cannot be absent and expect to maximize the return on your investment. With commercial real estate, it is likely that you are dealing with more than one leases, annual CAM adjustments, public safety concerns and so on. Basically, not everything can fall onto your tenant shoulders, it is your responsibility as well.
2. Hiring Professional Help
It is unlikely that you will be able to handle all the repairs and maintenance issues that occur, even if you are used to managing all these things by yourself. In which case, there is a pretty high chance that at some point, you will have to hire a professional to help you with emergencies and fixes. Beware that property management businesses charge usually between 5% and 10% of the rent, which also includes lease administration.
3. Higher Risk
Commercial property is usually more crowded then residential one, which means that there is a greater risk of someone getting hurt or doing something to damage your property, which would then fall under your responsibility. Incidents like cars accidentally hitting patrons on parking lots, or vandals destroying your property happen all the time, and they are much increased if it is a commercial real estate.
Also, there is a vacancy risk to consider. When you lose your tenants, it usually takes months, even a year, you find another one, whereas residential real estate owners can find another tenant in just a week or few.
Take your time to consider all the pros and cons, before you make an investment of your life. If your main goal is cash flow, definitely go for the industrial real estate, but if you are not a risk taker, and your priority is the growth of your capital, the investment in residential real estate might be a better solution to consider.