Investing in commercial real estate can be highly rewarding but is not without its own risks and challenges.
It’s important to be in the know which will help you make informed judgements on your investment decisions. Broadway Property can provide expert guidance, helping you understand the market, mitigate risks, and achieve your investment goals.
Here’s a breakdown of the risks versus rewards of commercial real estate, and how you can make the most out of your investment.
Rewards
- High Financial Return: The greatest appeal of the commercial property market is the potential for higher financial return (yields). Having a commercial property investment ensures steady cash flow where there are longer term leases in place, and typically has higher yields in comparison to residential properties.
- Growth and Value Potential: Commercial properties often experience positive growth in overall value due to changes in infrastructure and other local developments. Over time, many owners tend to make quality-of-life improvements to their properties as well, which increases their leasing and selling potential in the future.
- Stability and Security: Commercial property leases tend to be structured on longer terms (from 3-10 years typically) meaning it is a stable and predictable way to generate revenue without the risk of regular downtime and change over of tenants.
- Tax Benefits: Given that rent is a source of income, commercial property owners can apply for tax deductions for depreciation, mortgage interest, or operating expenses.
Risks:
- High Initial Cost: The high initial cost of purchasing a commercial property can be challenging for some potential investors. The equity requirement to purchase can be higher compared to residential investments.
- Vacancy Periods: During periods of vacancy, owners are responsible for outgoings and re-leasing costs, while there is no revenue being received from rental payments.
- Economic Vulnerability: Commercial real estate is particularly vulnerable to economic changes, ascertain industries can face sudden impacts on a macroeconomic scale, this can lead to changes in tenant demand, which can impact on vacancy rates and letting up periods.
- Tenant Unpredictability: Similarly, commercial tenants are subject to the success and failure of their respective business industries, which can lead to unpredictability in their long term tenure. Factors like bankruptcy, non-payment of rent, and early termination of leases are all potential tenant-based risks.
While the commercial property market is not without risks, there are ways in which you can identify risks before purchasing commercial real estate as well as mitigate risks within your property investment portfolio.
Diversifying your investment portfolio by having exposure to multiple asset classes and location can reduce risks associated with singular industries and tenants. In addition, the right upfront purchase advice and professional property and asset management can deal with risk mitigation and value extraction strategies over the long term and provide a better long term return for owners.
Consulting a professional is the best way to minimise potential risks, and at Broadway Property, the professional team is committed to helping you enter the commercial real estate sector in the most profitable and secure way possible.
We can help you decide which property may be best for your budget and business needs, and help you navigate the uncertainty of the real estate industry.