Are commercial real estate investments worth it?

Investing in commercial real estate can be a good way to make money and build wealth. This type of real estate includes office buildings, retail stores, and warehouses. It often offers higher returns than residential properties, but it also comes with risks and requires more management. 

In this article, Mortgage Introducer will help you learn everything you need to know about commercial real estate investment. We will tackle which type of commercial property is most profitable and help determine a good ROI for this kind of real estate investment. We will also help you understand whether it is the right time to invest in commercial properties now. 

To our usual pool of mortgage industry readers, this is another one of our client education pieces. For those with clients who are interested in learning about commercial real estate investments in the country, make sure that you share this article with them! 

Is commercial real estate investment a good way to earn profits? 

The straightforward answer is yes, commercial real estate investment can be a profitable option for those who want to earn extra income. However, it’s important to understand the mixed outlook of the commercial real estate market. You need to be comfortable with some risk and you should also think long term.  

If these apply to you, then you will mostly bring your portfolio to the next level and increase your cash flow. The same is true once you find the property that most benefits your business. 

What type of commercial property is most profitable? 

When investing in commercial property, it is important to do your research to know which types of properties are most profitable. That way, you will be able to totally commit to your investment. Here are some types of commercial property that typically guarantee the best return for your money: 

1. properties with a high number of tenants 
2. properties in areas with growth 
3. properties with triple net leases 

Take a look at our in-depth discussion of each commercial real estate investment type: 

1. Properties with a high number of tenants 

Properties with a high number of tenants are usually the most profitable commercial real estate. Think of it this way: the more tenants you have, the more profits you can earn. As such, choosing a property with a high number of tenants is one way of getting an excellent return from a commercial investment. 

Examples of high-tenant properties are: 

• apartment complexes 
• storage facilities 
• student housing 
• recreational vehicle (RV) parks 

The more tenants you have, the higher your earnings become. And with higher demand for your property, the less you will have to concern yourself with finding tenants at little notice. 

2. Properties in areas with growth 

Properties that are in high-traffic areas are particularly good in the retail world. They have a greater tendency to draw tenants who will renew their leases. These areas also tend to attract new tenants if current occupants leave for any reason. Another example of an area with the potential for growth is a new suburb, which can be a magnet for real estate investors. 

Aside from properties in areas with growth, you should choose the right real estate investment opportunities that can yield positive results for your wealth portfolio. 

3. Properties with triple net leases 

Triple net leases typically refer to single-tenant spaces. These tenants usually sign long-term leases. This type of commercial real estate investment is profitable because it places the responsibility of paying for maintenance in the tenant’s hands. The same is true for building insurance and real estate taxes. 

It also allows you to enjoy a stable income from your investment, instead of estimating payment based on projected costs. In other words, you do not have to worry about continual maintenance, which can be beneficial to millennials who want to invest in real estate but do not want to quit their day jobs. This investment can fit any lifestyle. 

Want to learn about some key trends and opportunities in commercial properties? Check out this clip: 

What is a good ROI for commercial real estate investment? 

A good return on investment (ROI) for commercial real estate investments depends on many factors such as: 

• type of property 
• location of the property 
• conditions of the real estate market 
• state of the UK economy 

Your personal investment objectives also have a role to play in determining whether your ROI is satisfactory or not. But as a general rule, a good ROI for commercial real estate investing is a figure higher than that of the average annual ROI in the country. For instance, the average ROI for commercial real estate can be 8-9%. If your ROI is higher than that, then you can consider it a good investment. 

An ROI that is above average does not automatically mean that the risks are lower, nor does it reflect the overall state of the real estate market. As such, you need to be informed about the latest in the industry as much as possible. Subscribe to our newsletter to get updates on commercial real estate and related industries. 

Comparing with residential real estate investments 

When it comes to commercial real estate investments, a good ROI is typically higher than the ROI on residential real estate investments. Commercial properties tend to have: 

• longer lease terms 
• higher rental rates 
• lower vacancy rates 

What makes commercial property a good investment? 

While successfully managing these investments can have its complexities, there are many advantages. Here are a few reasons why commercial property is a good investment: 

1. income potential 
2. professional relationships 
3. limited hours of operation 
4. more objective price evaluations 

Let us discuss each of these reasons why commercial real estate investments are profitable: 

1. Income potential 

This is the number one reason why commercial property is a good investment. Depending on the area and other factors, commercial properties can have a steady annual return off their purchase price. In the UK, commercial real estate investments have an average return of 7.5% per year. 

2. Professional relationships 

An owner of a commercial property is more likely to run the property as a small business, if for no other reason than to help protect their livelihood. That makes the landlord-to-tenant relationship more like a business-to-business customer relationship, helping to keep any interaction professional and beneficial for both parties. 

3. Limited hours of operation 

Most businesses stop their operations during nighttime. This means that you normally do not have to work unless they work. Some exceptions include being called out during a fire alarm or for break-ins. But even then, for commercial properties, you might want to have an alarm monitoring service that will notify the authorities on your behalf. 

4. More objective price evaluations 

It is usually easier to evaluate the prices of a commercial property than a residential property. The reason is that you often request the owner’s income statement and use that to determine the price. An experienced real estate broker will usually do this for a price. Residential properties, on the other hand, have a tendency to follow more emotional pricing. 

When is the right time to invest in commercial properties? 

Due to the COVID-19 pandemic, the commercial real estate investments sector has drastically altered over the past few years. Trends are changing but its effects still linger. Compared to previous years pre-pandemic, commercial real estate trends are still down. 

Does this mean that now is not the right time to go for commercial real estate investments? Not necessarily. While numerous types of commercial properties are still on the decline, some are bouncing back—they have adjusted and adapted to the new normal. With this, the question is less about the time and more about the type of commercial real estate investment that you want to look at. 

Commercial real estate investment types to go for 

When we talk about commercial real estate investments, we usually think about these kinds of infrastructures: 

• office buildings 
• retail spaces 
• industrial buildings 
• rental properties 
• multi-family housing 
• warehouses 

You can also try exploring other types of commercial real estate investments that are becoming more popular. For instance, the climbing demand for warehouse spaces and industrial real estate. What’s more, the increase in online shopping and the importance of quick shipping has meant fulfillment facilities are also in higher demand. 

Keep an eye out, then, for commercial properties that might be in demand due to certain internal and external economic factors. Be extra cautious before deciding whether it is the right time to invest in commercial properties. 

Since future trends in commercial real estate investment are gearing toward multi-family properties, you should consider if you want to enter the market. Making a decision to invest in commercial properties can be easier when you discuss it with your real estate agent and a competent mortgage professional. Try looking for one on our Global Best in Mortgage page. 

Is it worth it to invest in commercial real estate? 

Investing in commercial real estate can be worthwhile, as it often provides higher returns compared to residential properties. It can generate steady income through leases and has the potential for property value appreciation. 

However, it also involves higher risks and initial capital. It can also have ongoing management responsibilities. Market conditions, location, and property type play crucial roles in determining success. It is important to conduct thorough research and consider your budget and financial goals before investing. 

Commercial space is one of the real estate investments to choose. Learn the other types of real estate investments for your budget and goals. Check out our list for more.

Would you try investing in commercial real estate properties? Tell us what you think in the comments section below .