Commercial Real Estate Myths Debunked
Commercial real estate (CRE) is enticing for both veteran and newbie investors because of its higher income potential and comparatively stable vacancy rates when compared to residential properties.
With the increased financial opportunities, many investors are curious about the potential of commercial properties but held back by assumed difficulties and challenges with buying and maintaining them. There are no guarantees in investing, but we’re dispelling some common myths and misunderstandings surrounding CRE investments:
- It's too expensive. This is the myth we hear most often. Many people think you need to be a full-time investor, a well-off entrepreneur, or inherently wealthy to afford commercial property in today’s market. Although you will need significant investment capital, many lenders and banks are willing to finance CRE because of its potential for a high return on investment (ROI). If you aren’t in a place to purchase your own property, you can consider Real Estate Investment Trusts (REITs), which allow you to own a piece of real estate, managed by professionals, with a lower buy-in. Your financial risk is lower and you won't need to deal with any management headaches.
- It’s too risky. Like with any investment – no risk, no reward. CRE investments are no different, but they do not inherently carry a higher risk than other types of investments. During the 2008 recession, even the most conservative 401(K) portfolios struggled. It’s also worth noting that CRE investments historically outperform stock portfolios and bounce back quicker after an economic downturn.
- It takes too much time. If you’ve ever owned a home, you know that repairs and maintenance can be an ongoing nuisance. So, it seems reasonable to expect that to be compounded when you own a large-scale office building, shopping center, or multi-family complex, and you’d be correct. There is no getting around the time it takes to properly manage a physical building as well as keep up relations with tenants, but this can be alleviated by hiring a quality property management team. You’ll need to be a part of bigger discussions but hiring a property manager will alleviate the majority of day-to-day to-dos and annoying distractions.
- There’s no short-term ROI. It is correct to think of real estate as more of a long-term investment without major returns for at least 10 years but CRE properties can produce short-term returns. According to Investopedia, CRE investments offer an average annual return of 9.5%, which is slightly more than the S&P 500 Index. Through rent collection, commercial investors are in a good position to capitalize on return from the moment they purchase their property. Considering non-traditional investment opportunities offers a lucrative and relatively safe way to diversify one’s investments and real estate is a top contender for a balanced portfolio.
The intrinsic challenges and risks that come with CRE investments are similar to those you’ll face with any real estate investment. The financial risk is higher, but your long-term earning potential is also far greater. If you’re considering investing in CRE but are hesitant because of some of the challenges you may face, we’re here to help. We understand the local market and help guide your decisions and find an ideal property, if you decide that’s the best move for you. Feel free to get in touch with us any time!