Buying commercial property for rental income can be a brilliant investment. However, if you are a beginner planning to dip your toes in the world of real estate investment for the very first time, it is always a good idea to understand the benefits and drawbacks of the available options before making any big decisions. Whether you are looking to purchase an office or a retail space, here are some of the most noteworthy pros and cons of buying commercial property that you must be aware of.
Before we discuss the advantages and disadvantages of buying commercial property for investment or personal use, let’s take a quick look at different types of commercial properties.
MOST POPULAR TYPES OF COMMERCIAL PROPERTIES
Commercial real estate usually includes:
- Shops or retail buildings
- Office buildings
- Industrial buildings
- Mixed-use buildings that comprise shops, office spaces and residential apartments
Here is a checklist for buying commercial real estate that can further help you out.
Now that we’ve got that out of the way, let’s move on to the pros and cons of buying commercial property in Pakistan.
PROS OF BUYING COMMERCIAL PROPERTY
These are the major advantages of investing in commercial property.
- Higher capital gains
- Relatively long leases
- Portfolio diversification
- Professional relationships
Let’s discuss each of these pros of buying commercial property in further detail.
HIGH CAPITAL GAINS
A well-located commercial property can generate higher rental income than almost any type of residential property. Along with offering a greater annual rate of return, the value of retail and office buildings also appreciates over time given that they are properly maintained and looked after. New infrastructure projects and the development of residential projects in the area can also increase the value of the commercial real estate.
Although a higher return on investment is usually the biggest motivation behind those looking to enter the commercial real estate market, one of the most noteworthy pros of buying commercial property is that it provides a stable and constant stream of income.
RELATIVELY LONG LEASES
Since commercial properties are usually occupied by businesses and corporations instead of individual tenants, their leases and rental contracts are for a relatively long period of time. This is because well-established businesses risk losing their customers if they pack up and relocate to another part of the city.
In addition to that, large corporations, reputable brands, leading banks, government departments and other reliable businesses are less likely to default on their rental payments, ensuring a continuous source of income.
OPPORTUNITY TO DIVERSIFY YOUR PORTFOLIO
If you already own an apartment or house for additional rental income, buying commercial property for investment can be a great way to further diversify your portfolio. However, you’ll need to make sure the property is located at an ideal location and has a sound infrastructure. Buildings that have a secured parking space and are easily accessible from the main road may be costlier than those located a little further away, but they can potentially generate higher returns and eventually make up for the difference.
For more information, make sure to take a look at our guide detailing the factors for successful commercial investment in Pakistan.
BUILDING PROFESSIONAL RELATIONSHIPS
One of the major pros of buying commercial property is that it allows you an opportunity to build long-lasting relationships with other businesses and corporations. Moreover, most commercial buildings operate under a Limited Liability Company (LLC) structure, which can protect your investment and minimize liabilities in the long run. Since business-to-business relationships tend to be more professional and courteous, forming an LLC can help keeps things simpler and easier between the owner(s) and tenants.
CONS OF BUYING COMMERCIAL PROPERTY
These are some disadvantages of commercial property investment.
- Heavy upfront investment
- Sensitive to economic conditions
- Maintenance issues
Now that we know about the cons of buying commercial property, let’s discuss each of these reasons in a bit more detail.
REQUIRES MORE CAPITAL
Whether you are buying a shop as an investment or for personal use, it is likely to be more expensive than the residential units of the same size in the neighbourhood.
Compared to residential properties, commercial real estate requires a larger upfront investment. In addition to the initial investment, you must also be ready to pay for the additional expenses that will inadvertently arise later down the road, such as electrical or plumbing issues, etc. Shops and office buildings with modern amenities and those located in high-traffic areas are bound to be costlier than the older, more remote ones.
However, as mentioned above, commercial properties also generate a higher ROI and usually witness greater value appreciation.
AFFECTED BY ECONOMIC CONDITIONS
Perhaps the biggest con of buying commercial property is its sensitivity to economic conditions. Retail services and other businesses are directly related to the strength of the economy. In case of an economic downturn or recession, the demand for commercial properties usually falls whereas the demand for residential properties only sees a slight dip, since people always need a place to live.
On the other hand, when the economy becomes more stable and continues to gain strength, the commercial real estate market also flourishes.
REPAIRS AND MAINTENANCE ISSUES
Last but not least, commercial properties require a lot more maintenance than residential ones. This is because a lot more people visit commercial premises, increasing the need for upkeep and repairs. You also need to make sure your property has a sound infrastructure and reduce the risk of accidents through proper maintenance of staircases, elevators and other parts of the building.
Owners of commercial buildings should also be aware of which equipment needs to be repaired or replaced to avoid any liabilities or property damage.
The aforementioned pros and cons of buying commercial property are only meant to inform you about the benefits and drawbacks of this type of investment. Investing in both residential or commercial real estate requires a lot of research and due diligence. Therefore, it is recommended to get in touch with the reliable property experts at Zameen.com or hire a real estate agent to ensure high returns on your investment.
Meanwhile, here are a few guides that commercial real estate buyers may find helpful.
- Commercial vs. residential property: where should you invest?
- Top areas for buy commercial real estate in Lahore
- Most popular areas for commercial investment in Karachi