If you’re new to the commercial real estate market, you might be overwhelmed by the unfamiliar terms and regulations you’re coming across. But right now is actually an excellent time to start investing in commercial real estate. Here are three reasons you should consider doing so, and soon:
- Commercial Real Estate Offers High Returns
In general, commercial real estate offers higher returns to investors than residential real estate when considered on a yield-per-square-foot basis. Commercial real estate also provides returns more quickly, resulting in greater cash flow for loan payment or reinvestment.
It appears that the commercial real estate market, which is currently growing, will continue to do so next year. The U.S. economy should see more growth in 2015 than it has since before the global financial crisis in both capital expenditures and employment. These are two key factors that drive commercial rental rates. It’s also expected that industrial vacancies will decrease slightly by the fourth quarter of 2015, falling from 8.8 to 8.4 percent, according to the National Association of Realtors. That means this is a smart time to consider buying or building a commercial property.
- Construction Loan Rates Are Favorable
Commercial building is back on track. That’s due to a number of market factors, including the rising value of properties and the generally low construction loan rates that are available. You can check back on our recent blog entries for a fuller explanation of what construction loans are and how to get a construction loan when you need it, but essentially, these are short-term loans that finance the construction of a new commercial property.
As in most lending situations, construction loan rates are based on a number of factors including your personal and business history, as well as the outlook of the commercial property you’re proposing. It’s important to keep in mind that construction loans generally have only a one-year term. However, they are often packaged with longer-term mortgages so that you don’t need to obtain two separate loans. Interest rates for these might be as low as 3.5% for a five-year loan to 4.5% for a 20-year fixed loan.
- Diversifying Decreases Overall Risk
Even though it appears that the overall real estate market is improving, we’ve seen before that it can drop very suddenly. However, residential and commercial real estate markets usually operate in different ways. This means that diversifying an investment portfolio with commercial real estate can lower your total risk, since not all your property values are likely to be on the same trajectories all the time.
On a smaller scale, owning commercial property can also lower your risk because these buildings often have multiple tenants. If you have five tenants (whether that’s occupants in an apartment building or businesses in a strip mall) and one leaves, you retain four-fifths of your income during your search for a replacement tenant. That can mitigate cash flow problems and ensure you won’t have trouble paying your commercial mortgage loans.
What other questions do you have about commercial real estate financing? Ask or share your expertise in the comments.