Many recognize real estate as one of the most secure ways to multiply wealth and strengthen and diversify one's investment portfolio.
With such a massive selection of properties available, it is essential to understand what commercial and residential properties offer and what their risks are.
Commercial real estate typically involves properties that are used for non-residential purposes which typically include offices, stores, warehouses, manufacturing facilities and more.
Even though investing in commercial real estate can contribute to an investor’s overall better financial conditions, and ensure successful wealth creation in the long run, it still has a lot of risks.
Why Is Commercial Real Estate Riskier than Residential Real Estate?
In today’s blog, we will discuss why commercial real estate is much riskier than investing in residential real estate.
Sensitive to Economic Changes
Whenever there is a recession or a slowdown in the economy, investors in commercial real estate are likely to suffer greatly as businesses begin to suffer huge losses. If the economic changes affect the growth of the business negatively, it will result in them shutting down which will lead to losses on the part of the commercial property owners and also make it hard for them to hunt for new tenants.
Requires a Higher Investment
Unlike residential properties, commercial properties are not as seamless to invest in. Investors have to really take their time and explore the market for the best possible options and understand the potential of the available properties. Expert assistance will help immensely in this process.
To add to this, the initial investment is also much higher than investing in residential real estate.
Since you have to offer a lot more capital initially to buy the commercial property, it creates a much stronger barrier to entry.
High Costs for Maintenance
Managing and keeping commercial property in top shape becomes super complicated when you compare it to the simple maintenance of residential properties. Since there are more units in commercial buildings, making sure the rent is received on time and taking care of the necessary repairs can become quite challenging.
Risk of Damage
Unlike residential properties, commercial ones have a lot more foot traffic as customers visit them on a daily basis, leading to a higher risk of property damage.
Extended Periods of Vacancy
Not all businesses thrive. Some may close down while others relocate, leaving the owner to hunt for another tenant. It takes a lot longer to find a suitable tenant for your commercial property, leading to the property to remain vacant for a long time.
And when you add to this the fact that many businesses have to compete with megastores, it becomes even harder to run a successful business.
The Need For Professional Assistance
Looking for a tenant, collecting rents, and the upkeep of the property involve a lot of effort which may not be possible for the individual owner to handle on their own. In this case, working with a property management company to help you find the right tenant, assist in the leasing process, and record and report profits and the overall cash flow is highly beneficial.
They will also help inspect the property and make sure the property is always safe from any damage.
One thing to note is that property management companies will usually take 5 to 10% of the rental income as compensation for their services. However, enlisting their services will help you save a lot of time and effort in the long run.
Harder to Resell
One of the reasons why commercial properties are hard to resell is that they are much more expensive and the pool of buyers is very limited.
Not to mention, reaching out to more buyers requires a lot of marketing, which will only add to the owner’s expenses and take up a lot of time, leading to the property staying longer in the market and delaying its profitability.
A Final Word
Whether you go for a residential property or a commercial one, it is always better to take the time to do your research and understand the advantages and disadvantages of both before you move further.
We hope our blog provided you with a better understanding of the risks involved in buying a commercial property so you can make an educated decision.
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