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Why is investing in Commercial Real Estate more appealing to some investors than capitalizing on Residential Real Estate?

Posted by Admin on September 19, 2018
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It remains to be seen if it is necessarily better to invest in Commercial properties, rather than Residential Units. It is just about a more select client base as both are widely different. I know people that only invest in Residential Properties, but then again, I also know others that only invest in multi-floor townhouse style triple-deckers. There are also many that will only invest in office buildings, or only in beachfront condos, or retirement communities. Then there are the people who will invest in anything and everything under the sun with no apprehension.

I feel that both hold advantage for different reasons so today we will consider commercial properties as a much sounder investment than residential properties simply because:

-Commercial units can lease for more per foot.

-Commercial tenants improve properties because it in turn helps improve their business, so most commercial units will be in better shape now then when it was first commercially leased. On the other hand, residential tenants tend to damage Residential Properties because they don’t care about your property the way you do and get especially lazy towards the end of the lease because they know that their deposit of a month’s rent will be kept regardless of the situation.

-Commercial tenants only call you if something tragic has happened like the ceiling has collapsed or there was an explosion. Residential tenants tend to think that they buy the landlord when renting the property and will demand that the investor focus as they will complain about anything and everything.

Commercial tenants tend to lease for much longer terms than residential tenants which is also a huge plus. Some of my friends’ commercial tenants have been in their spaces for over 10 years. So, if you think about it realistically, the property my friend invested in back in 2008 has maintained full occupancy since it was first released for sale in 2008. Now that doesn’t mean all are the same. There are many commercial tenants who are more short term, like three to five years, but they are just starting their businesses. Residential tenants tend to move out in one year to three years.

I just heard about one commercial tenant yesterday who is quite the norm for small business owners (she pays her rent about three days to a week early every month… yesterday was the 27th) that her company “never” plans to leave my friends property. Her high-end hair salon business is doing extremely well in his property and she only pays 90,000 a month in rent in a prime location. The property is paid already paid off. Every 18-months my friend is paid as much in rent, as the property originally cost him back in 2008 so that looks quite appealing to an investor.

The downside of investing in Commercial Property is that residential units typically lease faster. A Commercial Property may be vacant for a year, or a few years before it’s leased, while residential units may be vacant for a month or two before leasing.

Having just leased a space to a small restaurant in one of his properties this week, my friend had it sitting vacant for just over a year. The tenant’s signed a 125,000 lease per year for a total of six years with 1.75% annual increases built in to the contract. They are also responsible for paying their own utilities, and they also cover the cost of property taxes, insurance and maintenance on this semi-furnished free-standing building.

Lease terms like the ones explained above are much harder to achieve with residential properties. The cost of living expenses in Bangkok vary greatly to the income earned as most residential properties lay dormant until the right buyer comes along which is easier said than done in most cases.

With that in mind, there are many pluses to finding the right Commercial Property at the right price. As some focus on one end of the market, be a trailblazer in the Commercial market and see your returns in 5 years or less.

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