Commercial Real Estate Investing: Pros and Cons

Before deciding whether to invest in commercial or residential real estate, it’s important to weigh the advantages and disadvantages of each, and consider which option is best for your individual needs. Commercial investment properties certainly have their pros and cons.

Commerical Pros
Long-Term Leases
Commercial real estate leases last much longer than residential leases, which is beneficial for a number of reasons. For starters, long leases ensure a steady cash flow for anywhere between three to twenty years, depending on the terms of your lease. Long leases, like single-tenant net leases, also mean you won’t be dealing with vacancies as much as you would with a residential property, in which leases typically last only one year.

Commercial tenants also typically use single, double or triple net leases, meaning they may pay for recurring costs such as insurance, utilities and taxes on your property. Net leases are common in commercial real estate.

Higher Returns
With a commercial property, the cash flow and rate of return is often much higher because you have more space to rent out.

A single-family rental property may go for a higher monthly rent than a single apartment unit. Nonetheless, multi-unit and multi-family properties, like quadruplexes’ income, often add up to much more than that whole house.

More Qualified Tenants and Fewer Tenant Obligations
With residential rental properties, it’s sometimes a gamble to find tenants who will consistently pay the rent on time, not break the lease, and not inflict damage on the property. However, in the case of commercial properties, tenants are usually businesses, corporations or something similar, making them more likely to follow your rules and respect the space.

In addition, residential properties often have more laws and protections for tenants that you would have to deal with.

“The big advantage for commercial real estate over residential real estate is that you have a completely different class of tenants,” said Josh DeShong, a real estate investor and founder of the real estate investing marketplace, Trelly. “​​You don’t have the same kind of consumer protections that you would have in residential.”

Easier to Increase Property Value
A residential property’s value is determined by the value of other properties in the neighborhood and specific characteristics of the property, like number of bathrooms and bedrooms, for instance. However, the value of a commercial property is based on the revenue generated by the property. So, if a commercial property has a high cash flow, then the value of the property is higher. If the property owner finds the right tenant, then they could easily increase their property value much more quickly than with a residential property.

Commercial Cons
More Dependent on Economic Trends
In economic downturns like the COVID-19 pandemic, commercial properties are usually the first to be hit, as retailers and small businesses suffer the most.

More Research and Money
Commercial real estate investing requires more money and research than residential investing. Commercial deals are generally more complicated and take more time to evaluate. Investors also need a lot more upfront money to purchase a commercial property, rather than a single-family home, for example.

Competition From Large Retailers
As a whole, small business retail has not been performing well in the U.S. because of competition from online retailers and larger companies like Walmart or Target. As a result, there are many empty commercial spaces across the country, and it takes an average of six months to lease out a commercial space. This is another risk when it comes to commercial property investment, especially if the real estate market is down.

More Zoning Laws
Commercial properties also deal with more zoning laws than residential, and building permits are more complicated to obtain. This case is especially true for build-to-suit properties that require special signage, or large retail shopping centers with outparcels.

Finding Commercial Financing
The stakes are higher with commercial real estate. Finding an experienced commercial mortgage broker is your best option. Experienced brokers have a sprawling network of banks, credit unions, hard money lenders and debt fund lenders who can help you get the best terms and rates for your project.