At last, the housing market slowly recovers from the dismal numbers we’ve seen in the past few years. Many investors are now wondering if residential properties are better long-term investments than commercial income properties. Although there are many reasons to invest in residential properties, commercial income properties still have many advantages.
Why go for commercial properties?
To begin with, commercial tenants are generally more responsible for the property than residential tenants. There are exceptions of course, but logically, residential tenants do not have the same motivation for maintaining the property. Their contracts are considerably shorter and they have fewer consequences if they let the property fall into disrepair. Commercial income property tenants, however, are very motivated. Without a well-maintained property, they will not have the customers required to make their business succeed. Similarly, the contracts are much longer than residential tenant contracts. Knowing they’ll be responsible for the property for years makes commercial tenants more invested in the state of the property.
Another aspect of commercial income properties that may make them a stronger investment choice than residential properties is the type of financing each tenant can secure. Although subject to a background credit check, residential tenants do not typically require loans to enter into a rental agreement. Commercial properties usually require investment loans which are strictly regulated by the financial industry. They require additional capital on the part of the tenant to secure the loan. A bank will not invest in a commercial tenant that they do not think will be successful, making the bank the first line of defense for the property owner looking for a reliable tenant.
Finally, the value of commercial income properties is assessed in a fundamentally different way than residential properties. Residential properties are valued based on the relative value of all the properties in the area. The prices rise (and fall) as a group and at a rate the market will support. Because of this, an individual residential property is not able to stand out at a much higher value than the rest of the surrounding properties. There is only so much growth a property can achieve, and it’s largely out of the hands of both the tenant and the property owner. Commercial income properties on the other hand, are valued based on the income they produce. Although affected by the surrounding properties in terms of the volume and type of traffic it receives, the tenant’s success directly affects the value of the property. It becomes easy for a savvy investor with a well-managed commercial tenant to grow their business and their portfolio.
How to profit from commercial properties
For a free consultation and to learn more about investing in commercial income properties, please call Chris Schellin, president of Westwood Net Lease Advisors at 314-563-2208, [email protected], or click here to use our contact form.
