Investing In Retail Space – Pros & Cons
The Different Pros And Cons To Investing In Retail Space
The majority of people consider investment in property to be a good long-term investment, but is this always the case? Surely investing in a commercial real estate property, such as retail space, is not as beneficial as investing in a residential property? The smart property investors do not choose between the two and would rather look at properties to suit their portfolio. This article will help you make an informed decision by showing the pros and cons of investing in retail space.
What Are The Pros Of Investing In Retail Space?
1. High Returns On The Investment
According to research, the average rental return for residential properties across the United States is between 3% and 5%. This can be considered useful, but it is in no way more beneficial than the gross rental return of between 9% and 12% for commercial real estate properties.
2. Longer Leases
Dependent on the state you are in, the average residential tenancy contract will have a turnover between six and 12 months. A commercial tenancy, however, will present with an average tenant turnover of between three and ten years. Furthermore, tenants tend to stay longer in a commercial property, particularly when they have invested capital into customizing the retail space. This is one of the reasons why you should allow a commercial space tenant leeway when personalizing the property with their own capital.
3. Smaller Deposits
Commercial real estate, particularly retail spaces, is typically lower priced as compared to the average residential property. This means that you will only need to pay a small capital outlay to obtain one of these properties. For example, a small retail space can cost as little as $90,000 as opposed to a small apartment at $300,000. By investing in a commercial property soon, you will be able to enter the real estate market soon and save for potential resident property investments.
4. No Rates And Other Expenses
Contrary to residential properties where the landlord is liable for paying property rates, such as water and body corporate, this is not the case with commercial properties. As a commercial tenant, he or she will be responsible for these expenses.
What Are The Cons To Investing In Real Estate?
Despite the above benefits encouraging investing in retail estate, there are potential risks that you need to be aware of before making any commitments.
1. Commercial Real Estate Is Sensitive To Economic Conditions
When the economy is strong and “healthy”, real estate and retail business with flourish. This means that there is a great demand for commercial properties and the market value of retail spaces will rise. However, when there is an economic downturn, the demand for these types of premises will fall and a reverse in income will be experienced. Residential properties do not present with this degree of sensitivity to a company’s economic climate.
2. It Is More Difficult To Find Tenants
Finding tenants may seem like a simple task, but this is not the case for commercial real estate. While retail properties are able to attract long-term lease contracts, finding the tenant to commit to these contracts can be difficult. It is not uncommon for a piece of commercial real estate to have long vacancies where they stand empty. During this time you will be responsible for all the costs associated with the property, as well as any upkeep needed to maintain the structure.
3. Changes In Area Can Be Detrimental To The Property
While it is possible for changes in the surrounding area’s infrastructure to boost the value of a property and attract investment, it is also possible for changes to swing the other way. If the area becomes less desirable, the property could fall in value and may experience long vacancies due to the positioning of the property.
4. Value Can Drop Immediately
One needs to remember that the value of a commercial property relies not only on the area, but also on the lease of the property. When a commercial space becomes vacant, or if the lease is about to expire, the value of the building is likely to fall. In contrast, any price falls that are associated with residential properties are experienced over a period of time and are often less dramatic.
5. Vulnerability To Changes In Supply
Changes in supply conditions can be detrimental for potential property investors. Any increases in new real estate on the market in the same area will create threats for existing tenants looking to expand. Strong supply can also reduce potential yields, and this needs to be considered before committing to a commercial lease.
So, Commercial Or Residential?
Taking all the information above into account, it can be seen that investing in retail space as a commercial building can be highly beneficial and risky. To ensure you are making a good investment, it is important to take these into account and see if they meet your needs. For any kind of assistance in commercial real estate, contact us for the expert realty advisors.
Also, check out how to become a successful commercial real estate broker if you want to get into the commercial real estate business.