Commercial property can help diversify a real estate portfolio. Investors who own mostly single-family houses and smaller apartment buildings are always at risk of losing money while units are vacant. Many people rent for the convenience of being able to move after their lease expires. With the term of most residential leases only being one year or less, too many transient tenants can cause a landlord to have to spend a lot of time marketing.
Lease terms for commercial property tend to be much longer. Many commercial tenants sign leases for five years or more. A commercial lease could also be structured so the tenant handles most of the maintenance. With long-term tenants and not much work to do to maintain the property, commercial investing seems to be the ideal opportunity for a real estate buyer. However, there are some things anyone interested in getting into this market should know before attempting to buy a piece of property.
Banks require a larger down payment than they do for a residential property. Investors should expect to need to have at least 30 percent as a down payment.
Commercial real estate is leased based on the usable square footage plus a portion of the rentable square footage. Knowing these figures can help an investor decide whether or not to buy commercial property in Madison, Wisconsin.
The income potential in commercial real estate is much higher than with residential property. Investors can expect to earn between 6 and 12 percent per year as opposed to the 1 to 4 percent earnings on a residential property.
It isn’t always necessary to have the 30 to 35 percent down payment to buy commercial property. The trick is to find a property owner who is motivated to sell and enter into a master lease agreement with them. This type of arrangement allows an investor to have total control of the property while paying the deed holder an agreed-upon monthly amount. The master lease agreement will state the selling price of the property, and the buyer will have the option to purchase the property for that price within the specified time frame. This poses a significant advantage for savvy investors who are able to boost the value of the property before they finalize the sale.
Before investing in commercial real estate, it’s important that potential buyers talk to current tenants and nearby business owners about the state of their businesses. A property might be a bad investment if the turnover in the area is unusually high or if the business owners are seeing losses instead of profits. It’s also important to talk to a lawyer who focuses on commercial real estate before entering into any agreements. This due diligence can help a new investor avoid purchasing a property without significant income potential.