Real Estate Investment Real Estate Investing Guide for Beginners in Newca | Page 13

rules, that cover residential real estate. For more on commercial leases, see the Nolo
book Negotiate the Best Lease for Your Business, by Janet Portman and Fred Steingold.
The Downside of Investing in Commercial Property
While there are many positive reasons to invest in commercial real estate over residential,
there are also negative issues to consider.
 Time commitment. If you own a commercial retail building with five tenants, or even
just a few, you have more to manage than you do with a residential investment. You
can’t be an absentee landlord and maximize the return on your investment. With
commercial, you are likely dealing with multiple leases, annual CAM adjustments
(Common Area Maintenance costs that tenants are responsible for), more
maintenance issues, and public safety concerns. In a nutshell, you have more to
manage; and just as your tenants have to worry about the public eye, you do as well.
 Professional help required. If you are a do-it-yourselfer, you better be licensed if you
are going to handle the maintenance issues at a commercial property. The likelihood
is you will not be prepared to handle maintenance issues yourself and you will need
to hire someone to help with emergencies and repairs. While this added cost isn’t
ideal, you’ll need to add it on to your set of expenses in order to properly care for the
property. Remember to factor in property management expenses when evaluating
the price to pay for a commercial investment property. Property management
companies can charge between 5-10% of rent revenues for their services, which
include lease administration. Evaluate beforehand if you want to manage leasing and
the relationships yourself, or if you want to outsource those responsibilities.
 Bigger initial investment. Acquiring a commercial property typically requires more
capital up front than acquiring a residential rental in the same area, so it’s often more
difficult to get your foot in the door. Once you’ve acquired a commercial property, you
can expect some large capital expenditures to follow. Your property might be
humming along for a few months and wham, here comes a $10,000 bill to address
roofing repairs or a new furnace. With more customers there are more facilities to
maintain and therefore more costs. What you hope is that the gains in revenue
outweigh the gains in costs, to support purchasing a commercial property over a
residential one.
 More risks. Properties intended for commercial use have more public visitors and
therefore have more people on the property each day that can get hurt or do
something to damage your property. Cars can hit patrons in parking lots, people can
slip on ice during the winter, and vandals can spray paint the sides of the building.
Incidents like these can occur anywhere, but chances of experiencing something like
these events go up when investing in commercial properties. If you're risk adverse,
you may want to look more closely at putting your money in residential properties.