The collapse of stock markets combined with global financial turmoil has caused many individuals to rethink their investment strategies. One of the best alternatives to market-traded equities is commercial real estate, which has traditionally been resistant to the volatility inherent in stocks, commodities, and mutual funds. Many financial planners recommend 20% to 30% of an investment portfolio be comprised of real estate assets.
Investors often consider residential real estate as a means to build their portfolios. However, becoming a landlord is an enormous undertaking that requires market experience, contacts, knowledge, and a large capital investment. The physical presence of the landlord is often required in order to maintain the property, as well as negotiate any tenant disagreements that arise. Loss of a tenant in a residential property means no income, and the landlord must assume the entire cost of maintenance, taxes, insurance, utilities, and debt service until another tenant is found.
In contrast, an investment in professionally managed commercial property has many advantages over venturing privately into residential real estate.
- Stable investment with high returns
- Tenants sign long-term net rent leases and also pay all occupancy costs (property tax, insurance, utilities, cost of maintenance, and cost of management)
- Vacancy risk is greatly reduced in multi-tenant properties
- Landlords have greater powers of legal recourse if commercial tenants default on a lease than is the case with residential tenants
- Management company negotiates leases, takes care of property maintenance, resolves disputes and collects rents, releasing owners from concern for day-to-day management of the property
Advantages of Commercial Property Investment
The value of commercial property is largely derived from the income the property produces, so it is less subject to market fluctuations than residential real estate. Commercial leases are long-term, typically three, five or ten years, which means the income and value are sustained over short-term economic slowdowns.
- The basis of most of the wealth in the world
- An excellent hedge against inflation
- A solid, appreciating asset with inherent value
- Many financial planners recommend 20% to 30% of an investment portfolio be comprised of real estate