Investing in commercial real estate: pros and cons

Hello. In this article we will talk about investing in real estate.

Today you will learn:

Why investing in real estate is profitable;
What are the types of real estate investments?
What real estate can and should be invested in;
How you can earn money with a minimum investment.

Investments in real estate have long been considered one of the most reliable ways to invest money. In people's minds, real estate is associated with reliability and constant rising prices. But is this really so? Is it profitable to invest in real estate given the realities of today's market?

Real estate investment goals

Money should make money. This most important principle of investing was formally formulated in the late 17th century. And despite his age, he is still relevant.

That is why any investment goal is to generate income.

Real estate investing also has this goal.

Intermediate goals (ways in which you can earn income) are:

Obtaining property for renting it out;
Resale of property;

The first of these methods is much more stable and accurate. Almost any real estate can be guaranteed to be rented out, regardless of its type and quality. This is the most stable and low-income method of investment, with the exception of a bank deposit.

Earning money from the resale of real estate is a more interesting, risky and valuable way to earn money. It is quite difficult to resell real estate purchased for less money, but nevertheless, regardless of the economic situation, some real estate continues to rise in price.

But most investors prefer to rent out real estate for the first time and receive funds spent on investments, and after that think about selling it.

This method allows you to maximize your income because:

An apartment in Moscow costs 10 million. Every year its cost increases by 5% - 500 thousand rubles. They pay 60 thousand rubles – 720 thousand rubles for rent. Total income is 1 million 220 thousand rubles or 12% per annum.

The essence of real estate investing

As mentioned above, the essence of investing in real estate is its purchase and subsequent use for profit. Purchasing an apartment for personal use is not considered an investment: it is the purchase of a potential investment asset. But renting out living space is already an investment.

The main benefit from investing of this kind is always the same: making a profit, usually in the form of cash. But there may be additional benefits. Example: Cyprus government program for investing in real estate to obtain citizenship. But such investment options are rarer. And the additional benefit is usually secondary to making a profit.

Types of real estate investments

Real estate investment is a real investment.

There are four main types of real estate investments:

Investments in commercial real estate;
Investments in residential real estate;
Investments in real estate construction;
Investments in real estate abroad.

Each of them has its own characteristics and distinctive features, which characterize not only the real estate itself as an investment object, but also as a whole approach to investing money. Each of them differs in its own risks that the investor takes, strategies, and, accordingly, profit.

Investments in residential real estate

Investment in residential real estate means the purchase of:

Rooms;
Apartments;
Houses;
And other residential premises.

Residential real estate is good because the barrier to entry into this investment is quite low, the risks are minimal, and the investment is guaranteed to pay off. But at the same time, you can’t count on large short-term income.

The minimum investment amount varies greatly depending on the region.

Investments in commercial real estate

Investments in commercial real estate are a more complex type of investment that will require the investor to have good knowledge and analytical skills.

Commercial real estate as an investment object includes:

The shops;
Bars;
Restaurants;
Warehouses;
Offices;
Other premises.

Commercial real estate is used by other entrepreneurs or companies to make a profit. Profit also comes from renting out premises, as well as from a possible increase in the value of commercial real estate. But if living space is steadily becoming more expensive, then with commerce everything is not so simple.

Commercial real estate has been firmly showing negative price dynamics over the past few years, while demonstrating a huge drop in demand. This, of course, is due to the crisis, but also to the lack of development of small and medium-sized businesses, which primarily need rent.

A distinctive feature of commercial real estate is the high barrier to entry into business. Private individuals will no longer be able to simply buy an office or bar and rent it out. The problem of finding clients is also very acute for entrepreneurs. After all, contracts are concluded long-term, and a dilemma arises: either look for a more advantageous offer, or work with this particular client.

The risks are also quite high. Choosing a suitable property for a beginner is quite difficult, and you will also need to make competent repairs, attract the right clients and conclude a contract with them. The income in commercial real estate is much higher than in residential real estate, but the payback period remains the same: 8-10 years.

Investing in construction

The riskiest and most profitable type of real estate investment. It can be divided into two large categories: investment in the usual sense, and purchasing housing at an early stage of construction.

In the first case, a person invests his money in construction work, and after its completion, depending on the share, he receives a profit. A familiar scheme for all investors, and there is nothing new in it. Profit is determined according to investment.

The second method is much more interesting. Some construction companies sell apartments in their buildings even before they are built. This helps to attract additional funds for construction and complete the work. Such apartments are usually ready in 1-2 years, and the price at the time of their readiness is 1.5-2 times higher than the original one. But, it should be remembered that investing in construction is a much riskier activity than purchasing finished real estate.

You need to invest in construction wisely, studying every legal and economic aspect of the company, its reliability, experience in the market and reviews. With good investment, you can both win on the difference between the purchase price and the sale price, and get real estate at a lower cost, thereby reducing acquisition costs.

Comparative characteristics of types of investments

In order to better understand what is more profitable for you, we will present you with a comparative description of the types of investments:

Investments in residential real estate	Investments in commercial real estate	Investments in real estate construction
Attachments	Average	Maximum	Minimum
Income	Minimum	Maximum	Average
Payback	8-10 years	8-10 years	2-6 years
Liquidity	Average	Maximum	Minimum
Risks	Low	Average	Maximum
Which categories of investors are recommended?	Everyone	For beginners and more experienced	For experienced investors

As you can see, investing in commercial and residential real estate is suitable for both beginners and intermediate-experienced investors due to its simplicity and average stability. But despite this, the most profitable, in terms of payback, is investing in construction. And it is also the most risky.

Investing in residential real estate is suitable for everyone due to its high stability. There is no need to think that the investment will not pay off. They are guaranteed to generate income, regardless of the circumstances.f

Advantages of commercial real estate.

It is the advantages of commercial real estate that attract serious investors to invest their capital in such an instrument for generating income.

When investing in commercial real estate, the payback period is lower, and the profit received is usually higher than when investing in residential real estate. The sales ratio, or the difference in net profit for residential real estate, is 6-7%. Whereas for commercial properties it can reach from 8 to 12%.
If the state cares about the economic development of the country, then demand, as a rule, only grows. Any business, be it a small business or a large business, requires premises for employees to work, i.e. offices. Many sales or manufacturing operations require warehouses and hangars. Small industrial workshops are also in demand for small-scale production.
As an owner, you can influence the profitability of your property in various ways. For example, improving its appearance, technical condition, access roads, and so on. Another way is to change your commercial real estate profile. As an example, instead of a store or office space on the 1st floor, you can open a sports center or cafe. There are plenty of options. You need to think and analyze. Some investors follow the same path, buying apartments on the ground floors and converting them into non-residential properties, with subsequent rental for shops or dental offices.
Long term. I bought it, organized everything and rented it out. Forgotten for many years (if there is a normal manager or transferred to trust management to a real estate agency).
If you invest in the maintenance and repair of a building in a timely manner, its total value only grows over the years. Those. In addition to receiving rental income, you also benefit from rising prices.
Possibility of obtaining loans for other needs, secured by real estate (up to 80% of the value of the property). Banks are happy to lend to people who have significant capital in the form of apartments, offices or warehouses.
Slow response of the real estate market to the economic situation in the world. Those. Even in the event of a stock market crash, prices for real estate and their rentals fall only after a significant period of time.

Well, where there are pros, there are also cons.

Let's be honest - there are no perfect financial instruments for generating income. Since we have listed the advantages of commercial real estate, we will now touch on their disadvantages.

Requires large starting capital. The difference with residential real estate can be significantly different.
Low liquidity of invested funds due to the high cost of objects and the difficulty of quick sale. Therefore, if you do not have other sources of cash flow, you should not invest all your capital in real estate.
The difficulty of predicting the rise or fall of prices for real estate itself, as well as its rent, due to the influence of economic turmoil in the country and the world.
Commercial real estate is more susceptible to the influence of third-party unfavorable factors, such as a drop in demand due to the economic crisis, devaluation of the national currency, a drop in production in certain industrial sectors, and so on. While the demand for residential real estate is steadily growing, since the population cannot live on the street, new families are created, children are born, they move to other cities to work or study, and so on.

Don’t forget that you can speed up the payback period of any project if you purchase it at the design and foundation stage. The difference in the final price of the completed property in this case can reach from 15 to 30%, which accelerates the return on investment in your pocket.

Read more: Goskomregister checking the readiness of documents online

Commercial real estate is a fairly broad category that includes properties that are intended to be used for profit . It includes retail and office premises, as well as cafes and restaurants, premises for medical offices and various service enterprises.

Pros and cons of investing in real estate

pros	Minuses
Stability	Illiquid investment object
Constant growth in asset values	Long payback
Passive source of income	Fixed maintenance costs
Minimal risks	High tax rate

Now about each point in a little more detail:

Pros:

Stability . It's hard to argue with this. Investments in real estate are one of the most reliable and stable sources of income. Regardless of the time of year, economic and political situation, housing and business sites are always needed by everyone.

Constant growth in asset values . Typically typical for residential real estate. Over a long distance, real estate behaves like gold – it steadily and confidently increases in value.

Passive source of income . By renting out real estate, or waiting for the price to rise, the investor spends a minimal amount of effort.

Minimal risks . As follows from the second point, housing and a place for business are always needed, so even in the most unfavorable times for the economy, there will be an opportunity to sell real estate or rent it out.

Minuses:

An illiquid investment . Liquidity is the ability of an object to quickly turn into money without loss of value. Low liquidity of real estate means that it is difficult to sell it for its real value. Of course, you can sell an apartment/shop/any other premises very quickly by making a big discount, but this only indicates low liquidity and, accordingly, difficulty in selling.

Long payback period . The most significant disadvantage of all. A payback period of 8-10 years is quite long even for long-term investment. Medium and small businesses pay for themselves in a period of 1 month to 2 years. And the financial investments there are the same.

Fixed maintenance costs . Utility bills and other expenses, if they are not borne by the tenant, fall on the shoulders of the investor. They significantly reduce income, forcing you to spend additional money.

The owner of the property will have to pay property tax when leasing, either income tax (if it is an organization) or personal income tax (personal income tax). And after selling the property, you will also need to pay taxes, which makes the amount of income less by 13%.

It is up to each investor to decide what will outweigh - stability and constancy, or low liquidity, income and payback.

Investments in commercial real estate - for advanced investors

Commercial real estate is a non-residential property (warehouse, office, hairdresser, hotel, gym, business center, supermarket). The main idea of purchasing such objects is exclusively for renting or subsequent resale.

Commercial real estate was in great demand in our country until 2014. After which came a geopolitical crisis, sanctions, flight of foreign capital, depreciation of the ruble in relation to “hard” currencies. Since then, the price of commercial properties has begun to fall, and its profitability also leaves much to be desired.

Prices for commercial real estate in Moscow and the region can be significant amounts that are beyond the reach of ordinary investors (the cost amounts to tens of millions of rubles). Few people can afford to buy even an object worth 5 million rubles. Depending on the region, prices may be significantly lower, but renting it out will not be as profitable.

As I noted above, prices have dropped significantly. Therefore, those who invested in commercial real estate in 2014 are now at a loss of 20-30%, while the rental price has also decreased. These investors just have to wait to recoup those losses. This is a low-volatility market, but even here there are price jumps and unfavorable periods.

Let's summarize: let's note the pros and cons of investing in commercial real estate

pros

You can make more money from renting commercial real estate than from an apartment
There is an opportunity to open your own business (for example, as a franchise)
The tenant is responsible for interior decoration. You can rent out bare walls, which means you do not bear the risk of property damage (as is the case with apartments)
During periods of economic growth, demand for commercial real estate grows faster than residential
Banks issue loans more willingly than compared to residential

Minuses

Rental prices are falling and it’s difficult to say when this trend will reverse.
Low liquidity
Expensive
The search for people willing to rent a room may take many months.

Five tips for investors

We have prepared five tips for novice investors:

Tip 1. You need to decide in advance on your financial capabilities and investment object. The subsequent strategy, investment of funds, or payback period will completely depend on this. The investor himself must understand how much money he has and what kind of real estate he can count on with it.

Choosing an investment object is the most difficult thing, because you need to understand that each type of real estate brings different income, different risks and different obligations.

Tip 2. Carefully study the real estate market and find an offer. Investments are an almost constant analysis, which is why you don’t need to rush to look for real estate for investment immediately after receiving money. You need to carefully study the offers that people make, see where the demand is, and so on.

Local and Russian ad platforms like Avito are ideal for this, where some people will help you understand what is for sale, and others what is rented. And based on this knowledge, you will need to find an object that will not have the highest price and will be in sufficient demand.

Tip 3. If possible, avoid using intermediaries. This applies more to residential property investments. Many people use the services of realtors when searching for an investment property. This is a fundamentally wrong approach. The realtor's job is to sell, your job is to buy. And here a conflict of interest arises, which should be avoided.

A complete comprehensive analysis of the real estate market can give an understanding of where to look for a good apartment.

Tip 4. It is necessary to use the services of a lawyer. It is best to entrust the drafting of contracts to a professional. After all, even a lease is best formalized legally. Yes, a decent part of the income is lost, but at the same time, if any audit occurs, you don’t have to be afraid of the unpleasant consequences that are guaranteed to arise if there is no contract and payment of taxes.

A personal lawyer will also be required when concluding an agreement with a construction company. It will help you understand the reliability of the company, point out controversial issues and vulnerabilities in the contract, and help protect your rights if such a need suddenly arises. Investment activity always requires a good lawyer who will help you understand all the legislative intricacies.

Tip 5. You need to forget about instant profit. Investments in real estate are long-term investments, and therefore they take a long time to pay off. Profit from resale can be obtained in 2-3 years, but rental income only in 6-9. This is why you should forget about making quick and easy money.

A few words about risks

Like any investment activity, investing in real estate is fraught with considerable risks. A few words about risks in Russian realities.

Mortgage risk . In Russia, the crisis of 2008-2009 was not as severe as in the rest of the world. Real estate fell in price, but not as much as in Europe and America. This is due to the fact that mortgages came to the Russian market quite late, only at the beginning of the 2000s.

The fall in prices in 2015-2016, in addition to the Russian crisis, is associated with the fact that the period for payments on 10-year mortgages has approached, and the default rate has increased noticeably. It is unknown what will happen when the 15- and 20-year terms come up, because in America, towards the repayment period, a crisis on a global scale broke out.

Housing risk . It is unknown whether the price minimum has now actually passed, or whether the cost of residential real estate has been unreasonably rising throughout the entire period of time. It is the issue with the minimum price that makes us talk about the riskiness of current investments in residential real estate.

You need to carefully monitor the situation, and as soon as it becomes clear whether real estate will continue to grow or show negative dynamics, then make decisions about investing in housing.

Risk in construction . There is no need to talk much about construction. Fake developers, double sales of apartments, and many other fraudulent schemes, which many people know firsthand.

Investing in houses under construction is really profitable, and it brings in a lot more money, but you need to weigh the risks, carefully study the companies and only then make decisions about investing in construction.