With the potential for a high annual rate of return and relative stability when compared to other types of investments, you may be thinking about investing in commercial real estate. The reality is, for wealthy individuals and companies that want to diversify their portfolio, the commercial property market offers a wealth of opportunity.
As we tell all of our clients, the more you know, the more empowered you are to make wise decisions for your financial future. So, to help you decide if commercial real estate may be right for your portfolio, we’ve put together this essential fact sheet for understanding the pros and cons of commercial property investing.
What’s the average annual rate of return for commercial real estate?
Overall, the annual average return for private commercial property investment is similar to the return for stocks, when you look at a substantial timeframe. According to the National Council of Real Estate Investment Fiduciaries, the average 25-year return as of May 2019 was 9.4 percent. Over the past two decades, the S&P 500 Index, which tracks the 500 largest companies in the US, had an average annual return of 9.8 percent.
What’s the advantage of commercial property over residential?
While both commercial and residential property can both be a smart way to diversify your investments, the commercial market can offer greater profit potential. There are several reasons for this.
First, commercial leases are generally set for longer terms than residential ones. With a three, seven, or even 10-year lease, you’ll experience more stability. Plus, you won’t have to deal with the costs of finding a new tenant every year or two when a lease is up and the tenant decides to move out – most residential leases are for one year.
Also, with commercial property, you can choose from a range of property types. From office buildings and retail shops to agricultural land and development land, each type of commercial real estate offers its own unique risk profile and ability to generate income.
We can talk to you about the nuances of each option so you can choose the most suitable investment for your objectives.
How difficult is it to get a commercial property loan?
Commercial property is often more expensive than residential property. And, it can also be more difficult to secure a commercial loan. You may need a larger down payment than you would for residential property investment, depending on the type of property you’re interested in buying.
Also, you’ll have to pay off the loan faster – with commercial financing, lenders often set the loan for between five and 20 years, with a longer amortization period. This means you’d make loan payments for several years based on the amortization period, and then would have to make a balloon payment of the remaining balance once the term is over.
What are the risks?
While you may be able to generate a healthy, stable income for years with commercial investing, there are risks. The biggest one is an economic downturn. In recessions, your tenant could have trouble managing their lease payments. They could even go out of business. Once that happens, if the economy isn’t strong, you’ll have a hard time finding new tenants.
This is why it’s important to consider the type of property when looking at commercial real estate and think about which industries still perform fairly well in an economic downturn.
To find out more about the possibilities of investing in commercial properties, reach out to the expert team at The Yellowstone Group. We’re happy to discuss your options and assist you with the process.