Wealthy investors have long viewed real estate as a top tier investment. In fact, direct ownership of residential and commercial properties was the number one alternative investment pick of millionaires surveyed.*
Commercial property values have increased since the lows of 2009. With the real estate market on the upswing, it seems like the ideal time to consider buying commercial property. Evaluating the potential risks and rewards of buying commercial property can help you make the right decision for your portfolio.
What Is Considered Commercial Property?
Commercial property is essentially anything that isn’t a single-family residence, including:
- Office buildings
- Industrial space
- Retail space
- Hotels
- Restaurants
- Multi-family units (Apartment buildings)
- Gas stations
- Land
A few of the most popular commercial property investments in Arkansas are multi-family buildings and mobile home parks. Investing in a multi-family building allows the investor to select their level of risk and have a steady source of cash flow coming in from rentals. Mobile home parks often have a lower cost of financing, a large customer base, and even owner-financing options on occasion. In any case, a commercial property appraisal can help ensure that the property you are considering is a wise investment.
Potential Rewards of Buying Commercial Property
There are several advantages to investing in commercial property, and right now, the timing of these investments is better than ever with the commercial property price index continuing to rise according to reports from the third quarter of 2015.
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Income Potential. The best reason for investing in commercial real estate is the potential income that you can receive from rentals. In fact, the income potential of commercial property is on the rise nationally with a 6% increase in asking rents from a year ago. Many commercial leases have much longer terms than their residential counterparts do, so you have the potential for greater cash-flow stability with long-term tenants.
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Portfolio Diversification. A key benefit of owning commercial property is that it provides you with a way to lower the overall volatility of your investment portfolio. As commercial real estate does not move in synch with other investments, such as stocks and bonds, this is the ideal vehicle for overall portfolio diversification. If there is a financial collapse in another sector, your real estate investments may be less adversely affected and vice versa.
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Hedge Inflation. Because property values and rents have historically increased, owning commercial property is the perfect way to hedge inflation. The ability to adjust rents over time only adds to this benefit. It has been found that over five-year holding periods, commercial real estate outpaces inflation.
Risks With Commercial Property Investment
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Investment Needed. Investing in commercial property often requires a large investment, both in capital and time. The down payment requirement can be substantial, and there may be some large capital expenditures for repairs and maintenance required before it is ready to lease.
Also, you will need to spend time and money to put the right team in place to properly manage things such as construction, leasing, building maintenance, and other processes involved with owning commercial real estate.
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Professional Help. A winning investment begins with your commercial real estate appraisers and real estate agents, and continues until you have solid property management in place. These professionals can also make sure that the property you select makes sense for your investment strategy and business plan.
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Liability. Finally, one of the biggest risks to any real estate investment is that an accident or injury will occur on your property and that you will be held responsible as the owner. In commercial real estate, this risk is magnified as there will be many more people on your property, more cars in your parking lots and, therefore, more potential for incidents. A thorough risk assessment and proper insurance coverage can help you to mitigate these risks.
Commercial Property Investment
While the U.S. commercial property market fell into a slump during the 2008-2009 recession, the outlook now for buying commercial property has never been better. Washington-based Urban Land Institute recently released a real estate trends forecast that predicts strong growth in commercial real estate prices through at least 2017.
As you weigh the risks and rewards of investing in commercial real estate, be sure to consult with an expert and obtain a commercial property appraisal so that you are putting your investment dollars into the right properties. A professional real estate appraisal company will be able to tell you if the neighborhood, amenities, and the property itself are right for your investment portfolio.
If you have questions about buying commercial property or need a commercial property appraisal in Arkansas, contact Ferstl Valuation Services at 501.313.0641 to schedule a free consultation.
*According to Bloomberg Magazine
