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The Pros and Cons of Investment Real Estate - Part 2

October 21, 2019
As Part 1 of this blog discussed, investing in commercial real estate – retail and office buildings, warehouses, industrial buildings, and mixed use properties – potentially can represent a lucrative opportunity for small business owners to generate additional wealth and secure a sound financial future for themselves and their families.
 
Investment real estate is not foolproof, though. While there are definitely advantages to investing in commercial properties, as illustrated in Part 1, prospective investors need to carefully consider a number of factors before parting with their hard-earned dollars.
 
Prime among those considerations is the fact that commercial real estate is likely to require a significant upfront capital investment, particularly when compared to investing in a residential property in the same general location. Given that, potential investors shouldn’t count on loans from a few friends or family members to raise the kind of capital that will be needed for a major investment (unless those friends and family members are particularly wealthy). 
 
It is also important to recognize that the acquisition cost is not the only expense an investor is likely to encounter. Large capital expenditures to fix a furnace, replace a roof, or take care of another major repair are always a possibility. As a result, it is essential to have access to sufficient capital for both the upfront investment and any possible renovations as they arise.
 
Another factor to consider with regard to such expenditures is that properly licensed, professional help will likely be needed for repairs and maintenance. If you’re doing repairs on a residential property, you may be able to get by with using your brother-in-law who is particularly handy with tools. Commercial properties, though, usually require more than someone who can handle simple home repairs. The cost to bring in that licensed electrician or HVAC technician could represent another major expense which investors will need to account for in order to properly care for the property.
 
Finally, prospective investors should always factor in potential property management expenses when evaluating how much to pay for a property. Investors, of course, can handle property management themselves, but that means regularly dealing with multiple leases, annual CAM (common area maintenance) adjustments which are passed onto the tenants, and maintenance issues. Property management companies can be hired to handle the majority of that work, but usually charge 5-10% of total lease revenues for their services.  
 
Beyond costs, it is important for prospective owners to understand that commercial properties inherently carry a heightened level of risk, particularly when compared to a residential property. By their very nature, commercial properties have more public visitors on any given day than a residence. And more outside visitors means more chances for someone to trip on a step, get stuck in an elevator, or slip on ice or snow that hasn’t been shoveled in the parking lot. It means more opportunities for a car to hit another car or, worse, a visitor on the property, one of the retail tenants to be robbed (bringing unwanted public attention), or someone to vandalize the building.
 
While incidents such as these obviously can happen anywhere, the chances they will occur increase exponentially at a commercial property. Given that, potential investors need to go into the investment with their eyes wide open. They also need to understand that they and the property should be well-insured.
 
So do the benefits of investing in commercial real estate outweigh any potential concerns? Frankly, it all depends on the individual investor. There are no guarantees that an investment property will appreciate in value or how quickly a return on investment can be expected. If the property is in a good location and sufficient research is done before investing, though, it’s safe to assume the value will increase annually.     
 
The best advice for anyone interested in investment real estate is do your homework. Investing in commercial properties can be a very profitable venture, one of which many small business owners have taken advantage. But it is not without risks. If you are considering such an investment, be sure to contact the business lending experts at Point Breeze Credit Union. They’ll be happy to answer your questions and provide the kind of information you will need to make an informed decision as to whether real estate investing is the right choice for you.