Property is often hailed as one of the safest financial investments you can make. There is the belief that property always appreciates over time and is a stable and great way to build wealth. While that can certainly be true much of the time, it’s not a given. So much depends on the location and the market, but also the kind of property you invest in.
For those considering purchasing a commercial property, assuming it will better your financial standings, there are some things you need to know. Owning commercial property can be incredibly expensive, and here are the reasons why.
The Value Of Commercial Properties Can Be More Volatile
Investing in residential property is usually a pretty safe move, but the same can’t be said for commercial properties. These properties may be located in up-and-coming areas of the city or town, but that location may not take off. Just because there are plans for it to become a robust area doesn’t mean others will buy up commercial properties there.
Being the only business in an area may sound like a good thing because there’s no competition, but it also means it’s less likely to be discovered organically. People need a specific reason to be in that area, which makes marketing your business a bigger battle.
All of these factors play into the value of the commercial property, which means there is less of a guarantee that it increases with time. Even if it does increase, it can result in smaller gains than a residential property is capable of.
Monthly Payments Are Usually High
This is just basic math, but the monthly payments will be higher. The mortgage payments, utilities, maintenance costs, services, and so forth will all cost much more than for a residential property. You’ll need to have a fair amount of floating capital each month to ensure you can make all the payments. Keep in mind that many of these payments will also fluctuate monthly, so you need to be flexible.
Although this may be a somewhat extreme example, physical casinos have enormous overhead costs. As a result, many operators are instead focusing on online platforms where they have less overhead and can offer promotions—a player receives a 200% bonus, for example—that bring in more business. Depending on what industry you operate in, operating your business online means you won’t have to worry about wear and tear on a commercial property.
The Public Can Treat Commercial Properties With Little Regard
If you own a personal residence, you (probably) treat it with respect, take care of it, and try to keep it in great condition. Unfortunately, the same can’t be said about commercial properties. The public often has little regard for commercial properties because, simply put, they aren’t theirs.
If a commercial property looks like it’s in a poor state, that can negatively reflect on your business. This means you have to address issues as they pop up, which can get pricey. It can be a constant cycle of repairs, updates, and renovations.
You Need To Be Sure The Property Is Always Occupied
When a commercial property sits empty, the bills can add up fast. The only way an investment in a commercial property makes sense is when it’s fully leased or rented out. This allows you, the property owner, to pay the bills and most likely also make revenue.
Keeping a property fully occupied can be harder than it sounds. You may need to invest money in advertising the property and listing it with a real estate agent that specializes in commercial properties. What’s more, you’re vulnerable to market shocks such as inflation, slowdowns, and recessions, all of which can cost you a lot of money.
Property Taxes Can Quite Be High
Whether you’re looking at a residential or commercial property, there are always additional costs outside the purchase price or mortgage costs. Property taxes can be extremely high on commercial properties, based on the location. Then there’s the fact that whatever the property tax is when you first purchase the property doesn’t stay that way. This is an expense that tends to rise year over year, so you need to be sure you can absorb those increases over the long haul.
It is the local government that determines the property tax on commercial properties. The rate is determined by all kinds of factors, including the activities that the property is used for and how they contribute to the cost of services and facilities used.
In terms of how commercial properties are assessed, the income a property can make is often factored into the equation.
You Need To Invest Time In Commercial Properties
Besides the obvious additional costs of owning commercial property, there is also the time investment required. This one is harder to measure and estimate, but it’s important to include. You need to spend time researching the market, location, trends, zoning, and regulatory changes that could affect the property, the neighborhood, customer demographics if the property will house a business, and so much more.
For all of these reasons, it can make sense to work with a property management company or consultant, which is another added cost.
Make Sure You Know What You’re Getting Into
Even with all of these expenses, it can still make good financial sense to invest in a commercial property. Just be sure to do thorough due diligence, understanding all the expenses that go along with property ownership. You don’t want to regret your decision a year, or several years, from now and realize the value of the property has decreased and it’s not bringing in the income you were hoping for.
