Commercial real estate is a high-return opportunity for persons interested in diversifying portfolios and producing income. It is essential to balance all pros and cons associated with any investment. Real estate developer Dov Hertz feels that “A real estate transaction is akin to walking through a minefield.”. Such investors have always been able to sidestep and pivot when necessary. Let’s dive into the advantages and disadvantages of investing in commercial real estate:.
Benefits of Investing in Commercial Real Estate
1. Higher Potential Income Generally, commercial properties require higher rental value than residential properties, meaning that the potential income on such an investment would be considerable.
2. Longer Leases: Commercial leases could run for many years. They therefore give a relatively more stable, longer income stream than the short-term residential real estate typically offers.
3. Commercial Relations Business negotiations usually occur with companies; therefore, professional relations are bound to be established, which would benefit further investments or business deals. According to Dov Hertz, “Real estate negotiations are personal. Create a relation with the person on the other side.”
4. Diverse Tenant Base: Commercial properties allow various businesses, thus reducing the risks associated with vacancy in comparison to single-family residential properties.
5. Appreciation Potential As commercial properties tend to appreciate in value with time, there is an overall increase in the worth of investments.
6. Tax Benefits: Commercial real estate investors stand to enjoy several tax write-offs, such as depreciation, interest on mortgages, and property taxes.
7. Portfolio Diversification: Real estate can really diversify a portfolio; thus, the investments will be relatively lower.
Disadvantages of Commercial Real Estate Investment
1. More Costly: Commercial property which technically involves maintenance, property management repairs may be rather costly at the initiation and on a continued basis.
2. Vacancy Risk: A commercial property may lose some amount of income through vacancy or market fluctuations, hence adversely affecting profitability.
3. Market Sensitivity: The value of commercial real property is relatively sensitive to changes in economic conditions and market sentiment, hence high downswing risk.
4. Quality of Tenants: The quality of the commercial tenants varies widely; some commercial enterprises are more sensitive to the economic changes or change in market performance.
5. Complexity: Dov Hertz states that, “investment in commercial property tends to be a lot more complex compared to residential real estate investment.” These properties are most often subject to big regulations and zoning laws that will affect usage and value.
6. Liquidity Issues: CRE is much less liquid than other forms of investment- takes far longer to sell, and such sales require an extremely specialized market.
Conclusion.
Some of the disadvantages of the trading of commercial real estate include higher costs and market sensitivity with more potential income coupled with a longer lease term. Pros and cons of investing in commercial real estate appropriately serve investors with the right decisions to be taken into account with financial goals and risk tolerance.
Here is another related article : NYC Developer Dov Hertz discusses Developing Iconic NYC Sites on a Podcast