What Are the Advantages of Investing in Commercial Office Space
For someone who invests in real estate assets, understanding the
landscape of commercial real estate is critical. Although the
majority of investors have a portfolio heavy in residential assets,
there are several advantages to owning commercial real estate.
By definition, commercial real estate includes retail space, office
buildings, warehouses, malls, industrial buildings, and 'mixed use'
Although there are some reasons why investors don’t target commercial
real estate, this article is going to discuss the benefits.
Advantages of Owning a Commercial Asset
Higher yields: Based on prior trends, commercial
assets generally yield a six percent return, compared to a residential
asset that yields three to four percent. At the high end of the range,
a commercial asset can yield as much as 10 to 11 percent per annum.
Lower maintenance expenses: With regards to commercial buildings,
tenants often do their own upkeep in the interest of serving their customers
better. Secondly, in most commercial leases the tenant pays the maintenance
expenses on the property. On the flip side, the cost of maintenance for
residential homes tends to be higher due to the wear and tear of multiple
Better valuation: Because commercial assets generally have a higher
yield, they also have a higher valuation when compared to residential buildings.
Longer leases: Commercial leases generally have longer leases and
higher income opportunities than residential properties. Average lease terms are
three to five years. Yet, depending on the condition of the market, a landlord
can draw up a lease for a term of five to 10 years.
Strategy of leveraging: Leveraging a commercial asset is a strategy
used by landlords to maximize their return on investment (ROI). A favorable
leveraging position looks like this. The loan you take out on the building must have
a lower interest rate than the investment’s return percentage. The better your
commercial asset performs the more money in your pocket.
Faster appreciation: Commercial assets often appreciate faster than
residential assets in the long run. This happens because a commercial asset can
attract more investors due to the longer, more stable leases, and the ability
to attract high quality tenants.
Tax depreciation advantages: As an investor in a commercial building
you are eligible for significant tax advantages by way of depreciation and improvements
made to the building.
Protection against inflation: Commercial assets have a built-in protection
against inflation because their leases are designed to increase rents periodically.
Another form of protection occurs when the lease specifies that expenses are the
responsibility of tenants.
Larger number of investors: Even though residential assets can attract a
healthy number of investors, commercial assets have the potential to attract even more
investors. Therefore, the chances of having a successful disposal process is higher with
a commercial asset.