7 Reasons to Invest in Commercial Real Estate (And Not Buy-To-Lets)
When most people think about property investing, they imagine buying units and renting them out to young professionals or families. However, in today’s market, there is a stronger case to invest in commercial real estate than ever before. It remains an untapped market, and only a few investors are exploring it, meaning the opportunities are often far greater than many people expect.
But what are the specific reasons you’d want to get into commercial real estate and avoid buy-to-lets?
Higher Income Potential
The first reason is the higher income potential of many commercial real estate projects. Because there’s less ownership competition, the possibility of exceptional appreciation is substantially higher.
For example, buy-to-lets generally rise in line with general property appreciation, and rents only cover the mortgage and bills, meaning the yield is low. However, with commercial property, the opposite is often true. The actual structure itself doesn’t usually grow much in value, but the amount of income it can generate is extraordinary, especially if you rent the units inside it to regular companies.
You can also convert it to domestic properties and sell it in some cases. However, here, the goal is to appreciate the existing capital and make a lump sum return.
Lower Maintenance Responsibility
Another reason to invest in commercial property is the lower maintenance requirements. Many commercial leases specify that tenants have to deal with maintenance and repairs, meaning that your risk is far lower. You don’t have to deal with handymen and other staff to keep units functional, as you do with domestic homes. Furthermore, you have fewer “living standard” responsibilities, meaning that if something does go wrong, it is essentially the responsibility of the businesses residing on your property and not you. If they damage something or fail to maintain their units, they are on the hook for most of the payments, not you.
That’s not to say that arrangements are 100% risk-free, just that the property damage risk is considerably less in commercial real estate than in other investments.
Professional Tenants
Then, there is the fact that when you rent out commercial spaces, you get professional tenants. Many companies that will rent space from you will have proven business models and multiple locations elsewhere. And even if they don’t, you can still vet them through their public records, growth plans, and other official metrics that you simply don’t get with domestic renters.
This professionalism means that you can stick with leases for longer. You have more runway to ask tenants to sign for two to three years, allowing you to make a higher and more consistent return over time while also giving you the option of taking the business to court if they fail to uphold their end of the deal.
Scalability
Commercial property is also substantially more scalable than many domestic rental options. A single multi-tenant unit or office block can house dozens of clients who all pay on time every month.
You can also use CRE software to manage many of these tenants, again reducing admin costs. These solutions allow you to add or subtract tenants at will, giving you more freedom and allowing you to make the best possible use of the space available.
Longer Lease Terms
We previously mentioned it was possible to sign renters up for leases of 2 to 3 years. However, many established commercial real estate investors aim for substantially longer than that: sometimes as much as 5 to 10 years. Again, this provides more sustainable and stable income and contrasts wildly with conventional domestic property agreements that last between 6 and 12 months.
Tax Advantages
Depending on where you invest, there may also be tax advantages of investing in commercial properties compared to conventional rental apartments. Commercial real estate often qualifies for significantly more tax-deductible appreciation, meaning you can take home much more money at the end of the day, bumping your net income. These benefits, including the ability to subtract your mortgage from costs, may not be available through other schemes.
Economic Resilience
Finally, you may experience superior economic resilience when investing in commercial real estate. Because companies are locked into long-term contracts, they can’t just sell up and exit (unless they go out of business). So, even if there is a downturn, the likelihood of your income drying up is low.
Furthermore, some sectors can actually thrive during recessions, like logistics. So, if you can invest in warehouses or other facilities these companies need, you may find yourself in counter-cyclical demand, which is an envious position to be in.
This is a collaborative post.
