Buying commercial real estate might be an intimidating prospect for a first-time buyer, but it is one of the most accessible and lucrative asset classes out there for a beginner.

Commercial properties, unlike residential real estate, generally require much less direct management and fewer nuances in tenant relations, offering more predictable income and scalable operations along with higher returns.

Regardless of whether you are considering office space, retail centers, industrial properties, or multi-family apartment buildings, commercial real estate possesses a wide variety of characteristics that make it a thrilling entry point for new investors.

Let’s dive deep into five reasons commercial real estate is the easiest asset class for beginners:

1. Stable and Predictable Cash Flow

One of the key attractions of commercial real estate is its potential to provide stable and predictable cash flow. Leases between commercial properties and businesses are usually long-term, ranging from 3 to 10 years in most cases, and in many cases, even beyond that. Extended terms for a lease give owners more stable streams of income for the time as agreed upon with tenants, minimizing tenant turnover that is much more common for residential properties.

A commercial lease can also be structured to include escalations in rents overtime, so the income on your investment can grow predictably year after year. An example of this might be a clause in a lease, whereby the rent increases by a fixed percentage on renewal annually, thereby keeping up with inflation and taking profitability on the property up.

Most commercial leases are, besides, organized as Triple Net (NNN) leases where the tenant covers all the expenses of the property including its taxes, insurance, and maintenance. This way, the owner of the property is set to enjoy more passive income and thereby fewer headaches associated with managing the unexpected costs.

This makes it easier for new investors to project future earnings and be in control of their investment because of this stable and predictable flow of income.

2. Easier Funding and Access to Capital

Contrary to popular belief, it is at times easier to raise capital for a commercial piece of real estate than a residential property, particularly a large income-generating asset. Financing for these properties is generally easier to secure because they are viewed as less of a risk for lenders. Why? Because they are tied to businesses, and the likelihood of default upon rent collection is much lower than that with a residential tenant.

The other major factor is that while the individual financial situation of the borrower forms the basis of commercial property funding, it does not rely solely on this. They consider the capacity of generating income from the property as a basis for funding. Therefore, if the commercial property has strong tenants and long-term leases, it is likely that banks and lenders will grant loans to buy such property.

Under some circumstances, some banks may even finance up to 75-80% of the value of the property.
Moreover, as crowdfunding channels and real estate investment syndications become more popular, new investors are introduced to more creative financing channels that do not necessarily require the need of taking loans or having large amounts in reserve. This opens up the commercial real estate marketplace to investors who may not have access to a large sum of money in savings to invest at time of entry.

3. Professional Property Management and Less Day-to-Day Involvement

Residential property management can feel like a full-time job, especially for first time investors who aren’t familiar with common tenant problems, maintenance issues, and all the details of day-to-day management.

Commercial investment properties tend to attract tenants with an interest in keeping up the space that they lease; after all, it is their business, and their workplace.

This will make the property owner have reduced daily management requirements. The businesses need their premises to be kept running and attractive; thus, they may commit their own capital to keep the space running, which could be an enhancement that adds value to the property over time.

Furthermore, because many commercial properties are leased for long periods of time, the process of vacancy and renewal that represents tenant turnover is very limited, thereby minimizing the time involved, also on proxy. Investors can also outsource everything from tenant interaction to maintenance by hiring professional property management companies, thus offering an almost completely hands-off investment opportunity.

This is very helpful for new investors who lack the experience or desire to manage the day-to-day operations of a property.

4. Scalability and Higher Returns

Commercial real estate offers more scalability opportunities than residential properties. When people go out to invest in residential real estate, scaling up usually is mostly the purchase of multiple houses. They each have a different crop of tenants and so require different maintenance techniques. This may become cumbersome for a new investor very fast.

Commercial real estate facilitates more scalable operations with fewer properties. Instead of buying 10 single-family homes, each rented to a different tenant, you might buy one multi-family apartment building or an office complex with a dozen or more under one roof.

Consolidation always serves to make management easier and can often result in greater returns on investment.
Commercial properties are also likely to have much better earning potential in most cases.

Their yields may vary between 4 and 5% for residential properties but returns in the range of 8 to 12% can easily be expected from commercial properties, and sometimes even much more.

This is partly because it’s commercial tenants that are businesses generating revenues through operation, thus more likely to pay premium rents for well-placed properties.

Another benefit driving higher returns is that through the income of the property, you can leverage it to obtain better financing terms.

Since lenders rely on the income potential of the property, you can often get a better interest rate and more favorable terms, which increases your overall return on investment.

5. Diversification and Portfolio Security

Commercial real estate is an investment that is quite unique and an excellent source of diversification. That’s very important because most investments carry risks with them, and diversification helps to reduce these risks. For example, residential investments are greatly dominated by the economy at large and employment levels, but the case is different when it comes to commercial real estate.

Industrial properties often get influenced by the manufacturing sector and retail properties are dependent upon consumer spending. This sector-based variability would tend to provide investors with a degree of protection from economic downturns.

It means diversification for new investors by investing into different types of commercial properties, that may include office buildings, retail spaces, or industrial warehouses, spreading risks in different economic conditions. Having multiple income streams from different types of properties can dilute the volatility of what may sometimes happen in the residential real estate market.

But because commercial leases are usually much longer than the residential type, the risk of tenant turnover is much lower as well, thereby providing more stability to your investment. This long-term security is, of course, especially appealing to new investors as they seek a less risky, more predictable asset class.

Conclusion

Commercial property is an excellent opportunity for new investors and creates a whole range of benefits that surprisingly make the asset class accessible and profitable for the investor. Features such as stabilized and predictable cash flow, easier financing, and less day-to-day involvement would surely excite those investors looking to build wealth through real estate without the typical headaches of residential property management.

As with all investments, just a little bit of research and due diligence must take place before getting into something. Commercial real estate can be a very profitable and relatively low-risk opportunity for the new investor looking to achieve long-term financial growth when the fundamentals are in place, though.