Whether you’re a seasoned single-family investor or new to real estate, there are several benefits to investing in commercial assets rather than single-family real estate.

Single-family residential investing is often viewed as a training ground for commercial real estate. It’s easy to see why. Conventional wisdom says to start small with less expensive, more manageable properties. Then, once you gain some experience, build a portfolio, and become financially independent, you can graduate to more expensive, more dynamic commercial assets. So, while it’s not universal, it’s easy to understand why so many investors start in single-family and eventually make the leap to commercial.

Whether you’re a seasoned single-family investor or coming cold to commercial real estate, there are several benefits to investing in commercial assets over single-family real estate.

Potential for Higher Returns

Commercial properties generally require a higher initial capital investment than single-family homes, but they also come with the potential for higher returns, for a variety of reasons.

Office buildings, retail, and industrial/flex space—like multifamily—typically have several tenants, each paying rent, compared to a single-tenant SFR. This creates multiple income streams for the investor. Additionally, managing a single multi-unit commercial property can be more cost-effective than managing multiple SFRs, because many of the managerial tasks (e.g., property visits, maintenance supervision, and tenant relations) are centralized in one location, reducing time spent and travel expenses.

Add to these the fact that a landlord can negotiate bulk rates for maintenance, repairs, and service contracts, and the overall operating efficiencies allow the investor to achieve economies of scale, decreasing capital expenditures and maximizing returns while saving the landlord valuable hours.

Going Bigger Via Syndication

The best way to combat the biggest knock on commercial investing (i.e, the high financial barrier for entry) is to raise capital from other investors through syndication to fund your deals  .

In general, syndication is when a group of investors pools their money to make a property purchase. This strategy allows an active investor to purchase commercial assets without having to front all the capital themselves. At the same time, it allows passive investors the opportunity to either (1) invest in a commercial asset they otherwise wouldn’t be able to afford or (2) to diversify—to invest in multiple commercial assets, owning many slices of different pies rather than a single pie.

Tax Benefits

Tax benefits are among the most appealing characteristics of investing in real estate. In commercial, investors can benefit from numerous tax deductions, including write-offs for depreciation, expenses, and interest payments. These deductions can often offset the income generated from the property, potentially allowing you to report zero or even negative income for tax purposes.

Your tax accountant can also use methods like cost segregation, the 1031 exchange, and the Deferred Sales Trust to reduce taxes. SFR investors can also use these methods, but they are more commonly deployed in commercial real estate due to larger transaction values and greater potential tax implications.

Forced Appreciation

Forcing appreciation in real estate refers to actively taking steps to increase the value of a property rather than waiting for market forces to do so. Supply and demand, interest rates, and economic growth are typically the biggest driving forces of single-family appreciation. In commercial, appreciation is often linked to the property’s income-producing potential, as the assets are frequently valued based on income streams. Raising rents, streamlining operations to cut costs, and making physical improvements are all examples of ways to force appreciation.

Sometimes, a commercial investor can enjoy forced appreciation without having to spend a dime. Commercial tenants in office, retail, industrial, and other asset classes often sign long-term leases, as location stability is good for business. In some cases, a tenant will spend their own money to modernize a space, upgrade flooring and fixtures, or enhance curb appeal. They do this to benefit their personal business, but the property owner reaps the rewards in the form of forced appreciation.

Respect for the Property

If you’ve ever been a landlord, chances are you’ve had a problem tenant. Although no asset class is tenant-proof, commercial properties beyond multifamily typically have corporations and businesses as tenants. These tenants often prioritize keeping the property in good condition because it represents their company’s image.

Flexible Lease Terms

Commercial leases have fewer consumer protection rules compared to residential leases, which are subject to extensive state regulations, including guidelines on security deposits and lease termination. This flexibility allows landlords to creatively structure leases to maximize rents and, in many cases, provide the flexibility tenants need to remain tenants as their businesses grow (or struggle).

Rent escalations are a perfect example for maximizing revenue. Instead of offering fixed-rent amounts, landlords can implement periodic rent increases tied to inflation or market rent rates, ensuring the lease remains market-relevant over time. They can also implement “graduated rents,” in which case they offer a low introductory rent to attract startups and small businesses but build in predetermined increases over time. Both of these strategies limit vacancy.

Landlords can also extend exclusivity rights to a tenant, preventing the landlord from leasing other spaces within the property to a competitor. They can also offer co-tenancy benefits, meaning a landlord offers reduced rents if certain anchor tenants occupy the property, ensuring smaller tenants benefit from the foot traffic or prestige.

These are just a few examples of flexible lease terms that allow landlords to appeal to prospective tenants, all while manipulating income streams to maximize revenue.

Triple-Net Leases

Many landlords benefit from triple-net leases, which is a lease structure in which, in addition to rent, the tenant is responsible for paying all the property’s operating expenses, including property taxes, insurance, and maintenance. Major retail chains frequently choose triple-net leases because they want to control the look and feel of their real estate, especially if it’s a recognizable regional or national brand. For investors, this translates to a low-maintenance income source.

Long-Term Relationships

Nobody likes turnover. Commercial leases are generally longer than residential leases, plus commercial tenants often find it in their best interest to remain long-term occupants of their leased spaces. This is largely because many commercial tenants invest significantly in customizing and outfitting spaces to suit their operational needs, which makes relocation costly and disruptive. Businesses value operational continuity, and consistently relocating can be disruptive to operations, employee commutes, and client accessibility, resulting in a loss of employees, or worse, business.

Given the flexible lease terms available to commercial tenants, along with all the other benefits of being a commercial investor over a single-family landlord, it’s easier for landlords to keep tenants happy and cultivate long-term business relationships, without sacrificing their bottom line.

Tags | Rentals | Taxes
  • Paul Mueller

    Paul Mueller is a writer and real estate investor based in Tampa, Florida. He is the content director at Best Ever CRE, home of the Best Real Estate Investing Advice Ever podcast, and a contributing writer at Fast Company.

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