7 Reasons Why Commercial Property is a Good Investment

Many people shy away from investing in commercial property because they think it must be complicated, out of their price range, or simply unattainable based on their level of knowledge at the time.

Even people who have been successful in residential real estate investment are sometimes intimidated at the thought of investing in commercial property due to a lack of understanding on just ‘how does commercial property work’.

The fact is there are a number of reasons why commercial property is considered a good investment. As with anything else you do in life, once you understand the process of investing in commercial property you won’t be intimidated by it.

Here are 7 reasons why commercial property is a good investment:

1. Secure Income. Income made by commercial property investors is relatively secure – as far as investment income goes! Commercial property leases are typically for much longer terms than residential leases. It’s not nearly as common for a business tenant to default on their lease because it’s difficult to relocate a business and expect clientele to find you in your new location. Also, in many commercial lease agreements the tenant is required to provided and maintain a bank guarantee on the rental.

2. Guaranteed Rental Increases. A commercial lease almost always has base rental increases structured in the lease terms. This guarantees the property owner rental increases over time and allows both the landlord and tenant to plan ahead regarding their cash flow. It would be extremely rare for a residential lease situation to have this type of guaranteed rental increase built into the lease agreement.

3. Insulation From Operating Cost Increases. In most commercial property lease agreements rising operating costs for the property are the responsibility of the tenant. If the cost of maintaining a commercial property increases, the owner of the property rarely experiences a cash flow difference as the tenant pays those increases.

4. Higher Annual Return and Capital Growth Than Most Investments. The annual average income return on commercial property investments shows a return of 7.5% over 10 years. According to reliable records on commercial property over a period of 30 years, the annual return for income and capital growth is 12.1%.

5. Strong Performance Record. Between the years 1971 and 2001, after taking risk into account, direct commercial property performed more strongly than the other main types of investments.

6. Create a Diversified Portfolio. All investors understand the need for having a diversified portfolio to minimize risk and increase the potential of their returns. Adding commercial property investments helps diversify your portfolio.

7. Tangible Investment. Investing in commercial property is a bricks and mortar
investment, unlike less tangible assets such as government bonds or shares where in extreme cases values can go into free fall.

Investing in commercial property isn’t overly difficult, but you do need to know what you’re doing.

For example, there are other terms in commercial lease documentation that are every bit as critical as the terms setting out who pays what property expenses. Get any of these wrong and, as the property owner, you could end up being out of pocket. In some cases the costs can be significant, so it’s right to be a bit cautious regarding commercial property investing – just get the right advice!

If you’re informed about what to look for in a commercial lease, however, and you get the lease checked out by professional advisors before anyone signs, investing in commercial property is not only a possibility – but it offers 7 reasons for being a good investment.