Some of the unique and beneficial aspects of commercial real estate investing (over residential real estate investing) include:
The hallmark benefit of investing in commercial real estate is higher potential income. Most commercial properties bring in a higher rent per square foot of space. Plus, you have multiple spaces generating rental income all under one roof. So, many of the maintenance and repair costs are “fix once and done” and spread across many leases. Higher rental income and lower maintenance costs lead to a more profitable investment.
Multiple Streams of Cash Flow
Commercial leases provide a relatively consistent and reliable stream of rental income. And the properties also generally provide multiple streams of income. For example, you can charge for parking spaces separate from leased office space, for example. You can also provide vending machines and a workout room in office buildings. And you can install coin-operated washing machines in apartment buildings. Often, tenants will pay operating expenses, real estate taxes, and property insurance in addition to the monthly rent. This is known as a “triple net lease.” It is an industry standard in certain types of commercial real estate.
Another advantage of commercial real estate is less competition. Investing in office buildings and shopping centers is an overwhelming endeavor for many investors. A bidding war for single-family homes in my area is not uncommon. This drives up the cost of doing business. But buying a commercial property is out of the comfort zone for most investors. So there’s much less competition.
Longer Leases Reduce Risk
Commercial buildings generally have longer tenant lease agreements than residential properties. Agreements are often for 24–36 months, and notice to vacate is typically longer than 30 days. A more predictable cash flow and less vacancy reduce the risk for investors.
If you own an apartment building and lose one of your 10 tenants, you lose only one-tenth of that property’s income. If you lose a tenant in a single-family house, you’ve lost your entire income.