Commercial vs Residential
Commercial real estate refers to properties that are used for business purposes, such as office buildings, retail stores, or warehouses. These properties are often larger and may require more maintenance and management than residential properties. Residential real estate refers to properties that are used for housing, such as apartments, houses, or condominiums. These properties are typically smaller and may have fewer maintenance and management needs.
Both commercial and residential real estate can be bought and sold, but they are often valued differently based on their intended use and location. Commercial real estate may be more expensive due to its larger size and potential for higher rental income, while residential real estate is typically valued based on factors such as proximity to schools and other amenities.
7 Benefits of Purchasing Commercial Rentals
Purchasing a commercial rental property can be a lucrative investment for individuals. Not only does it provide a steady stream of income, but it also has numerous benefits that can enhance the overall financial stability and growth of an investor. Let’s take a look at 10 fact-supported benefits of buying a commercial rental property:
1. Diverse Income Streams
Owning a commercial rental property allows for multiple income streams, including rent from tenants, lease renewals, and property appreciation. According to the National Association of Realtors, commercial property values increased by 4.9% in 2021, providing a valuable opportunity for growth and potential profits.
2. Long-term Stability
Commercial properties tend to have longer leases than residential properties, providing a stable and consistent source of income over an extended period of time. In fact, the average commercial lease length is around 5-10 years, while the average residential lease is only 1 year.
Commercial properties also tend to have a higher demand than residential properties. This is because businesses require space to operate and are willing to pay higher rent for suitable locations. This means that commercial landlords are likely to have a consistent stream of income from their rentals.
3. Tax Benefits
Commercial rentals offer tax benefits because they can be classified as business expenses. This means that the costs associated with renting a commercial property, such as rent payments and maintenance expenses, can be deducted from a business’s taxable income. This can result in significant tax savings for investors.
One specific example of a tax benefit associated with commercial rentals is the ability to claim a deduction for the depreciation of the property. This means that a business can claim a deduction for the gradual decrease in property value over time. This can be especially beneficial for businesses that own multiple commercial properties, allowing them to claim a larger deduction for each property.
Another tax benefit of commercial rentals is the ability to claim a deduction for any expenses related to the property, such as repairs and renovations. This can be a significant benefit for businesses that need to make significant upgrades or repairs to the property to keep it in good condition. By claiming these expenses as business deductions, businesses can reduce their taxable income and save money on taxes.
4. Passive Income
As an owner of a commercial rental property, you have the opportunity to generate a consistent stream of income without actively managing the property on a daily basis. This is because the property is either being managed by a professional property manager or the tenants themselves are responsible for the maintenance and upkeep of the property. This means that you are able to focus your time and resources on other things, such as growing your business or investing in other opportunities.
5. Potential for Multiple Tenants
Commercial properties often have the potential to house multiple tenants, providing a greater opportunity for income compared to a single-family residential property. According to the Census Bureau, the average commercial property has 3.4 tenants, compared to 1.8 for a residential property.
If each tenant is paying a few thousand dollars in rent each month, you can quickly build a sizeable monthly income. And if you lose one tenant, your income isn’t completely cut off. You can continue to collect the rent from the remaining tenants while you seek a tenant for the open space in your commercial property.
6. Stronger Negotiation Power
Commercial properties often have more leverage in negotiations with tenants due to the longer lease lengths and multiple tenants. Prospective tenants may also be very keen to rent space in your commercial property if the location is great for business. This can lead to higher rental rates and a stronger financial return on your investment.
7. Flexibility in Use
Having a commercial property that can be used for multiple purposes allows you to adapt to changing market trends and tenant needs. For example, if a retail store closes down in a shopping center, you can easily convert the space into an office or industrial use. This flexibility helps you to continue generating revenue from the property and avoid the costly process of finding a new tenant for a specific type of use.
Additionally, the ability to use commercial property for multiple purposes allows you to appeal to a broader range of potential tenants, increasing the chances of finding a tenant quickly and maximizing profits. Overall, the flexibility in the use of commercial properties is a valuable asset for investors looking to maximize the potential of their investment.
Taking the Plunge
Owning a commercial rental property provides a variety of benefits that can enhance the financial stability and growth of an investor. These benefits include diverse income streams, long-term stability, tax benefits, passive income, the potential for multiple tenants, stronger negotiation power, and flexibility in use.
By considering these benefits and conducting thorough research, investing in a commercial rental property can be a smart financial decision. If you are ready to take the plunge and purchase a commercial rental property, reach out to a trusted realtor and consult with your financial advisor to learn what options are available to you.
Learn Build Profit is a financial literacy blog providing expert insights on income investing and passive income generation through dividend stocks and real estate.