Previously in our rental series, we covered the pros and cons of residential rentals and the basics of residential and commercial rentals. In the final installment, we want to talk about the pros and cons of commercial rental properties.
Commercial property provides a lucrative income stream for investors who know what they’re getting into. It helps to have a little business acumen to make a commercial rental pay off. Those new to the commercial rental space may need the help of an experienced tax accountant to fully understand the tax implications of such an investment.
Here’s a quick overview of the pros and cons of commercial rentals from Adams Accounting Solutions.
The Pros of Commercial Rentals
There are several benefits of owning commercial rental property.
Great income potential. Many real estate investors get into the commercial rental space because of the revenue potential. Rather than having income from one or two single-family homes, commercial spaces provide multiple streams of income because they house several tenants at a time.
Help covering the costs of ownership. Commercial property owners can often pass some of the costs of owning the building to tenants in the form of a net lease. This means each month’s rent also includes a portion to cover maintenance, taxes, and insurance on the building, providing the owner with a buffer for the future and ensuring money is available for more extensive repairs or maintenance when needed.
Own your office. If you need office space, a commercial rental fills that need. Not only do you have other tenants in the building, but you can office there yourself. Check with your accountant to verify any tax implications involved with owning the building and using space within it for your own business purposes.
Professional tenants. Since the tenants in your building are businesses or corporations, they can provide financial information proving their ability to pay the rent for the foreseeable future. This is a significant selling point over residential rentals. Businesses are used to providing financials that show they’re solvent. Knowing you won’t have to chase the rent every month puts your mind at ease, at least on that point.
Longer terms. Since you’re renting space to businesses or corporations, you can request a longer lease term. Rather than tenants signing a one-year lease — as is common with residential rentals — lease terms can be five years or more. In fact, tenants will appreciate the longer lease term. It helps with cash flow on both sides of the equation.
The Cons of Commercial Rentals
Commercial rentals have a few cons to be aware of before signing the purchase agreement.
High entry barrier. While it’s relatively easy to buy a small house to use as a rental property, it’s considerably more challenging to muster the cash to purchase a commercial building. Initial investments are steep, putting this option out of reach for some investors.
More challenging to finance. Commercial property also has different rules when it comes to financing the purchase. Lenders view commercial property purchases as riskier than residential. This results in higher interest rates and shorter loan terms — sometimes as short as five years. Lenders may also want investors to show that they’ve purchased a commercial property in the past, something that’s impossible if this is your first one.
Limited exit ability. If you decide to sell your commercial property, it can take a long time. Not only do you have to find the right buyer, but market conditions usually come into play, as well. If you decide to invest in commercial rental property, make sure you’re in it for the long term.
Still Think Commercial Rentals Are for You?
If you’re serious about investing in commercial real estate, talk it over with an experienced accountant before you complete the deal. There are many costs associated with buying and running a commercial rental property, and your accountant will help you determine the impact of those costs on your taxes. This is an area best not left to chance.
Adams Accounting Solutions is happy to answer questions and help clients figure out what their taxes will look like if they dive into such an investment. We’ll help you put a plan in place so that you know what to expect at tax time. Give us a call to schedule an appointment today!
