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Real estate investment, like any other type of investing, comes in a variety of flavors. When people consider becoming a landlord, they are usually thinking of renting out a single family home or another type of residential property (condo, townhouse, etc.). Although rentals of this nature make up the vast majority of investment properties owned by independent investors, the flashiest real estate investors in the world (think Donald Trump) cash in on commercial properties. Read on for a look at the pros and cons of investing in commercial properties. (To learn more about real estate, read Smart Real Estate Transactions and Tax Deductions For Rental Property Owners.)
What are commercial properties?
Loosely speaking, commercial properties are properties that are leased out to provide a workspace rather than a living space. Commercial real estate includes office buildings, strip malls, restaurants and shops (both in the shopping and industrial sense).
In most cases, properties are sold by the building - one office building, one restaurant, one factory, etc. However, if a developer wants more capital to expand a project or wishes to see the returns more quickly, the project will be broken down into smaller units rather than sold as a whole. (To read more about commercial properties, check out our Exploring Real Estate Investments tutorial.)
Advantages to Commercial Real Estate
One of the biggest advantages of commercial real estate is the attractive leasing rates. In areas where the amount of new construction is either limited by land or law, commercial real estate can have impressive returns and considerable monthly cash flow.
Rental rates are usually calculated as price per square foot. For example, the U.S. national average in 2007 for a grade A office hovered around $22 per square foot. Prices in downtown Tokyo, where further development is all but impossible, are about $130 per square foot. Industrial buildings generally rent at a lower rate, but they also have lower overhead costs compared to an office tower.
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