STRATEGY
COMMERCIAL
Finding the Right REI for You COMMERCIAL REAL ESTATE: IS THE RISK WORTH THE REWARD?
by W. J. Mencarow
sking “what is the best real es- tate investment?” is the wrong
A
question. The right question is, “what is the best real estate invest- ment for me?” There is no “best” type of real estate investment. You have to compare the pros and cons of each and decide what fits you. It all depends upon how much money and time you are willing and able to invest, how much you know about the property type, how much risk you are willing to take, and what your goals are. When you know all that you can choose the type (or types) of real estate that is right for you. In this series we have looked at the pros and cons of investing in single- family houses, multifamily properties, and farmland. Now we will consider commercial proper- ty. It is a great investment...until it isn’t. A significant advantage is that commercial property has the highest cashflow of any real estate invest- ment. The rents per square foot are much higher than for residential property. In addition, many commer- cial leases require that the landlord receives a percentage of the tenant’s income and that the tenant pays for much of the maintenance.
Commercial leases often require tenants to pay for repairs up to a cer- tain dollar amount. Most commercial leases also assess tenants for their share of the costs of repairs to the roof, HVAC, and parking lot based upon the square footage of the space they rent. Leases in multi-tenant properties usually include the “load factor.” In addition to paying to lease the space that the business uses, an additional charge is levied for common areas. For example, if a 100,000 square foot space is leased in a multi-tenant building with a 10,000 square foot lobby, the load factor is 10 percent, which means each tenant pays an additional 10 percent of the lease rate. Commercial leases are longer than residential leases. It is not uncommon for commercial leases to run ten or more years with annual rent increases. Because commercial real estate
is rented to businesses rather than to individuals, they are subject to fewer government regulations than residential properties. Commercial tenants normally de- posit rent directly into the landlord’s bank account. For a landlord, there is nothing like knowing the rent will be in your account on the first of every month. Another plus is that commercial tenants do not call their landlords in the middle of the night, if ever. A commercial property is more expensive than residential real estate, so the down payment will be significantly higher. Lenders require twenty, thirty or even more percent down and a higher interest rate than residential loans. In addition, the tax benefits of owning commercial real estate are not as good as residential (39 years of depreciation for com- mercial compared to 27.5 years for residential). Everyone wants a place to live,
74 | think realty magazine :: november 2020
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