Property investors generally put their money into one of two broad categories of properties: commercial and residential. The latter category consists of single-family homes and individual homes divided into multiple apartments. Just about everything else is considered commercial property – including multi-unit apartment complexes.
Both property categories offer their advantages and disadvantages. But according to Salt Lake City’s Actium Partners, a private lender who specializes in hard money and bridge loans for real estate transactions, the advantages of investing in commercial property are a huge draw to many of their clients.
Here are four reasons some property investors prefer commercial properties over residential:
1. Long-Term Leases.
Leases on residential properties tend to run for 12 months. As a result, the investor needs to work extremely hard to get tenants to renew or face the prospect of annual turnover. Things are different with commercial property. By and large, commercial leases tend to be for 2 to 3 years. In some states, even 5-year leases are allowed.
The end result is that commercial tenants tend to lease for longer periods of time. Commercial entities are also less likely to pick up and move unless there is a very compelling reason to do so. Property investors end up with long-term tenants rather than constant turnover. And for the record, private lenders like Actium Partners like to see this sort of thing. Long-term tenancy means commercial property stability.
2. Fewer Maintenance Obligations.
Though there are exceptions to the rule, a standard commercial lease stipulates that tenants are responsible for most maintenance. Tenants handle their own lawn care and landscaping. They take care of routine maintenance like cleaning and minor repairs. A commercial lease might even stipulate that the tenant handle major repairs as well.
Putting the maintenance responsibility on the tenant allows commercial investors to be more hands-off. They don’t have to be involved in day-to-day operations. They also don’t have to set aside large amounts of cash to cover maintenance issues.
3. Significant Profit Potential.
Although both residential and commercial properties offer very healthy profit margins, the margin on commercial properties tends to be higher. Why? Because commercial leases tend to be more expensive per square foot. In other words, commercial property is more valuable to businesses than residential property is to individual renters. A higher value per square foot translates into a higher profit margin.
There is one decided disadvantage in this regard: commercial real estate is more subject to market fluctuation. In times of inflation or economic stagnation, rents tend to fall because there isn’t as much demand for property. On the other hand, residential property is less susceptible because people will always need a place to live.
4. Fewer Funding Challenges.
Finally, there are fewer funding challenges when buying commercial real estate. According to Actium Partners, hard money is often the best option because it allows an investor to quickly obtain a piece of property without having to jump through a whole lot of hoops. Hard money makes it possible to acquire a new piece of property in days rather than months.
Residential properties can also be obtained through hard money, but the number of private lenders willing to get into the residential market are limited. In many cases, investors are left with obtaining conventional mortgages. With those mortgages come all the hassles every homeowner is familiar with.
Both commercial and residential property make for sound investments. To some investors though, commercial is the only way to go. They compare all the advantages of both types of properties and prefer what they get from the commercial sector over what its residential counterpart offers.
