If you are looking to diversify your portfolio, commercial real estate is worth considering. Even though it requires a much more complex set of knowledge, research, time, and expenses, the reward will be worthy. Let’s take a look

How Commercial differ from Residential Real Estate

1. Purpose: Residential property is any property that has between one and four residential units. This can include a single-family home, a townhome, a condo, a mobile home, or a multiplex building. Commercial property, on the other hand, refers to properties that have five or more units such as office spaces, retail spaces, warehouses, and even hotels.

2. Relationship between landlords and tenants: Residential landlord plays a larger role because it’s where the tenants spend most of their time and actually live the space; while commercial property investment is supported by the work of other businesses. In other words, the more successful businesses are, the better commercial tenants.

3. The initial cost to invest in Commercial Real Estate is more expensive than residential with lots of challenges.

However, higher risks also come with higher rewards. Here are some potential benefits of commercial property investment:

1. Higher return on investment: The average annual rental yield of commercial properties is 6-12%, depending on particular areas. This is much higher than the residential properties’ ranges of 1-4%.

2. Stability and consistency of income: While residential properties are typically held on short leases (often 12 months), commercial properties have longer lease terms between three and 10 years. The longer leases of commercial properties usually allow for the rent to increase every year of the lease, thus increasing the return on investment as the lease progresses.

3. More qualified tenants and fewer obligations: Unlike residential properties where tenants may change frequently, commercial tenants are usually business companies or big corporations. Therefore, they are more likely to follow your rules and respect the space. In addition, residential properties often have more laws and protections for tenants that you would have to deal with.

4. Low maintenance and furnishing cost: One of the most attractive features of investing in commercial properties is zero furnishing cost of the property. Because branding is important to business, commercial tenants will furnish the property with their personal taste.

5. Appreciation value: CRE provides stellar appreciation over time. Also, most commercial investors carry mortgages on their property. This allows them to leverage their investment dollar, while at the same time building equity in the property.

6. Tax Advantages: With commercial real estate, there are many ways to reduce or eliminate capital gains to reduce tax dollars.

7. Inflation Hedge: Commercial real estate can offset the long-term impact of inflation because of the fact that property rents can be adjusted with inflation, which is often the result of strong economic growth. This is quite different from investments such as stocks or bonds, in which inflation can yield diminishing returns.