3 Reasons to Invest in Commercial Real Estate
harkins / June 20, 2016
If you’re thinking of investing in real estate, you may be trying to decide whether you should invest in residential real estate or commercial real estate. While it may not seem like it at first glance, there are many advantages to investing in commercial over residential real estate. Here are three specific reasons why you should consider commercial real estate.
Most residential leases are about one year in length with a tenant option to renewal year. Sometimes residential landlords can get two or three years for the lease but that’s much less likely. Most of these residential leases end up in month-to-month status which means that tenants can move on very quickly.
In commercial real estate, leases are rarely only one year as it’s less beneficial to both parties. While the landlord wants a longer lease to ensure the space will be filled and they’ll be receiving rent, the tenant wants a longer lease so they’ll know the overhead expenses of their business over a longer period of time. It’s also very important for a retail store to stay in one location so they can build a customer base that can easily find them.
Improvements to the Property
When a tenant moves into a residential property, the unit is usually ready for them to move in. Tenants may add some personal touches but it’s usually quite limited. Businesses, on the other hand, need to tailor their property to their business. This is called a “fit out.” For example, if a restaurant moves in, they’ll need the necessary kitchen equipment installed. While landlords can contribute to the price of the renovation, and that should be reflected in the rent, the tenant will usually pay for the majority of it. The fact that the tenant is investing so much into the property to renovate it means that they are far less likely to abandon the property.
Collateral is collected by landlords to protect them from potential losses because of the tenant. For residential leases, collateral is usually a security deposit. This is usually the price of around one month’s rent. States have laws that protect the tenants by restricting what a security deposit can be. This isn’t the case with commercial real estate. The security deposit for a commercial property can be whatever the tenant and landlord agree on. This can include the landlord receiving all fit out should the tenant go into default or a personal guarantee that they’ll be liable for all damages and lost rent.
For those considering investing in real estate, residential properties may seem like the best route. However, there are several advantages to investing in commercial real estate that you don’t see in residential real estate. If you are thinking of investing in commercial real estate, contact Harkins Commercial Real Estate today.
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