The Pros and Cons of Owning Commercial Real Estate

If you are interested in real estate as an investment, or you want to diversify your real estate holdings, commercial real estate might be for you! With commercial real estate, you can earn a steady income and still have the potential to earn a great return when you sell.

The idea of buying a commercial property can be intimidating, but with good research and guidance from an experienced real estate agent, you can find a property that fits your budget and your property management experience.

Is commercial property ownership the next step in your investment journey? Get ready to dive into the pros and cons of owning commercial real estate in Canada.

What is Commercial Real Estate Exactly?

Commercial real estate is any property that is used to generate income. They are normally purchased for their income potential but also for long-term capital appreciation. Tenants for these properties tend to be businesses, but residential properties like apartment buildings and multi-family dwellings can also be considered commercial properties if you are buying them for income.

Commercial properties include, but are not limited to:

• Apartment buildings, multi-family homes, and mixed-use properties
• Office buildings
• Self-storage facilities
• Retail spaces, including stand-alone storefronts, shopping plazas, and malls,
• Industrial buildings such as warehouses, distribution centers, and manufacturing facilities
• Long-term care facilities
• Health-care facilities and health spas
• Student housing
• Co-working spaces
• Car dealerships and auto repair shops
• Hotels, motels, resorts, event venues, and other hospitality properties
• Agricultural properties and farms
• Vacant land
• Restaurants and coffee shops

The Pros of Owning Commercial Real Estate

There are some great advantages to owning commercial real estate in Canada, including:

Higher Income Potential

Compared to residential properties, the income potential for commercial properties is much higher, even when you consider the higher cost. In general, commercial properties offer a higher annual return on investment than residential properties in the same market.

Steady Income Stream

Commercial real estate gives you a reliable source of monthly income as long as your vacancy rates are reasonable. This can help supplement your regular income, add to your retirement funds, and even replace your income if you decide to become a full-time investor and property manager.

Longer Leases

Leases for commercial properties tend to be longer (often five to 10 years), which gives you financial stability and lowers the costs involved with tenant turnover.

Growth in Value

Over time, the value of a commercial property can increase if it is in the right area. You can also add to its value with renovations and upgrades and by adding amenities.

Location is everything in real estate and plays an important role in capital appreciation. For example,  choosing a commercial building in an up-and-coming neighbourhood is a smart investment strategy for properties like hotels, restaurants, and retail spaces, which are likely to see an increase in value as these areas become more popular.

Diversification of Your Investment Portfolio

If you already have investments in residential properties, commercial real estate is a good way to diversify your holdings. A diversified portfolio is less vulnerable to fluctuations in the overall market and will put you in a more stable financial position over the long term.

Tax Benefits

There are a number of tax benefits that can come with owning commercial real estate in Canada, including deductions for property taxes, mortgage interest, and some operating expenses.

The Cons of Owning Commercial Real Estate

The upsides of owning commercial real estate industry in Canada are considerable, but there are also disadvantages to be aware of:

Higher Cost

On average, commercial properties require a higher capital investment than residential ones. However, there are plenty of options to finance your purchase, making commercial real estate an accessible option for many types of investors.

Depending on the condition of the property, you may need to do repairs, hire a contractor or cleaners, and cover hidden costs, which can make it longer to start earning consistent income from the property.

It Can Be Risky

As is the case with any investment, there are no guarantees with commercial real estate. The commercial property market fluctuates, and there is always a chance that a property’s value could fall or that it could fail to attract tenants.

Another risk you may face is the potential for damage to your property; commercial properties, especially retail, are more vulnerable to damage and vandalism, as well as wear and tear from normal usage.

Sound research about the property, the neighbourhood, market trends, and regulatory changes is key to getting a property that will rent out easily, will not be subject to rezoning, and will continue to increase in value. Getting good advice and guidance from an experienced real estate professional can be extremely helpful as well. As always, be sure to do your due diligence before making an investment.

Requires a Time Investment

As the owner of a property, you are in charge! This involves anything from dealing with tenants to ensuring that everything is up and running smoothly on-site. If you own several properties, it can become a bit overwhelming when they all need attention at the same time.

The good news is that there are plenty of experienced property managers out there who can handle all of this for you! This will take a bite out of our income stream but can be worth it for people who are short on time, lack property management skills, or are not interested in this part of commercial property ownership.

Final Thoughts

There are many advantages to investing in commercial real estate, but the drawbacks also need to be considered. Research, due diligence, good guidance, and a solid investment strategy are key to making this exciting investment opportunity profitable for you.

Ready to explore some options? RE/MAX has agents who specialize in commercial real estate. They understand the market and can help you choose a property that suits your needs, your budget, and your investment goals.