At first glance, investing in commercial real estate may seem to be a quick and easy way to obtain a quicker, higher return on your capital. However, this many not always be the case. Though there seems to be a growing demand for commercial real estate, despite the global financial crisis, this market can also be risky for first timers, especially while dealing with larger projects like malls and office buildings.
The first thing to keep in mind is that investing in commercial real estate is much riskier than residential real estate. It would also require more capital down or equity as well as extra financing and insurance arrangements, which can be more expensive and are extremely complex procedures. Additionally, not only are commercial properties more expensive to purchase, they are also more costly to maintain.
Risks Involved
No investment comes without risks and commercial real estate is no exception. One of the biggest risks of investing in this market is the large amount of capital you require to start. There is no guarantee as to when you can recover the entire capital. Secondly, though getting into real estate business is easy, without sound knowledge of the market, one can be easily duped.
Another big risk is that your capital gets tied up for a very long time and you must have the capacity to bear further expenses for a longer period until you finally start receiving returns for your investment. Also, recession can affect commercial real estate investors in a big way. During recession, businesses suffer and your property may produce little or no income for a while, a report by Money Control reveals.
Trends and Advantages
Despite the risks, commercial real estate is a booming industry as more small time business owners are looking to lease posh offices and every business wants to have a store in big malls. People prefer to these one-stop shopping arcades to scattered shops. Owing to these preferences, the need for bigger office buildings, larger malls and other commercial properties is rising rapidly. One of the biggest advantages of investing in commercial real estate is that its value is not based on comparison sales. The sale value of your property doesn't depend on what the building next to yours is selling for. Moreover, since initial investments are higher, returns from commercial real estate are also higher and tend to increase in value over time. Such investments are also known to generate returns for a longer period of time.
Before entering into any investments, you need to do a thorough research of the market. The main objective of investing in commercial real estate is leasing a property to gain maximum returns. Hence, you need to be aware of what your obligations as a lessor is so that you don't end up investing more than your returns.