Many people focus only on residential when considering an investment in real estate. However, commercial opportunities shouldn’t be overlooked when adding to your portfolio. Although, at first glance, commercial real estate may seem more intimidating, there are many reasons to consider it:
Higher returns
Commercial properties tend to be more lucrative and produce higher returns than residential. While there is no official Canadian study, the US-based National Council of Real Estate Investment Fiduciaries reports an annual average return of 12.7% from commercial properties. The average return from residential properties is around 8.8%.
More qualified tenants
When you rent a residential property, the tenant has no motivation to take care of the unit. However, a commercial tenant has often invested their life savings into the business and is usually dedicated to keeping the building in pristine condition.
Long-term rentals
Unlike residential properties where turnover is high, commercial tenants are usually there for the long term. Once a business is well-established, the owner doesn’t want to disrupt its customer base by moving to a new location. As a result, it’s not uncommon to see five and ten-year lease agreements. Long-term rentals produce a much more reliable source of income without constantly searching for new tenants.
Landlords have more rights
It is almost impossible to evict a bad tenant from a residential property. However, a commercial agreement is far more detailed and specific, and it’s much easier to lock out a tenant who breaches the contract.
What Does the Market Look Like For Commercial Investors?
Even as the pandemic caused countless shutdowns and triggered many businesses to sell, commercial inventory hit a record low in 2021. According to the 2022 Canadian Economic Outlook and Market Fundamentals Report, we can expect strong economic conditions in the coming year.
This booming industrial sector, combined with low inventory, is great news if you currently own a commercial property. With real estate prices as high as they are, you stand to see a significant return on your investment if you decide to sell it now.
Should You Use a Commercial Realtor® or Will a Residential Agent Do?
There are many similarities between the two property types. Legally, an agent can represent any type of building or property. However, selling commercial is often far more complicated, and agents have more rigorous training to understand the different processes involved.
The Rules Are Different For Commercial
Residential properties can range from condos, single-family homes, duplexes or townhouses, but the rules are the same for each. Commercial properties are another story. There are retail stores, office buildings, restaurants, gyms and recreational areas, and the processes can be different for each of them. Certified agents almost always have a degree in finance or business, making them more qualified to understand the complexities and legalities of commercial contracts.
Commercial Buildings Can Be a Harder Sell
If you list a residential home in this market, the sale is almost guaranteed. Each listing often has multiple offers and even bidding wars from qualified buyers. As we mentioned, there is also a shortage in inventory for industrial properties. However, the pool of potential buyers is much smaller. Everyone needs a place to live. Not everyone needs or wants to start a business. Since there are fewer buyers, your agent will need to have an effective marketing system in place to sell your property. An agent with many years of experience in selling commercial properties will have more connections and be able to network with more people to find a qualified buyer for your building.
The Transaction is Larger
Commercial properties almost always involve more money than a residential home, and there is much more at stake. Every part of the transaction becomes more complicated, from getting financing, acquiring all of the necessary permits to run the business to the closing costs involved in the land transfer. It’s essential to work with a Realtor® who has dealt with these situations and knows how to handle them.
It’s All About the Numbers
In a residential sale, emotions play a huge role. If the buyer falls in love with the house, the value automatically goes up. When selling commercial, it’s all about the numbers. The value of the property is directly proportional to how much income it can generate. There is no chance to negotiate based on beautiful features like the fixtures or incredible amenities unless you can prove it will add to the bottom line. Buyer education becomes even more crucial when selling a commercial building. As a result, you need an agent who can understand and analyze the numbers and negotiate based on pure income potential.