Have you ever walked through a major city and counted all the different commercial property types? There are gas stations, hotels, strip malls, apartment buildings, industrial buildings, municipal buildings, office buildings, funeral homes, churches, synagogues, cemeteries and more. Yes, cemeteries! Did you know that grave plots are sold by the inch? They are commercial real estate too. Commercial investment properties range in size from a small, single-story, 750-square-foot office building to the Sears Tower in Chicago that is 4.5 million square feet. There is no other investment that I know of that gives you four types of income over time: rental income, rental increases, appreciation and saving on your taxes with depreciation.
Which Commercial Properties Make The Best Investments?
Do you know what flex space is? It is just about the hottest, most in-demand commercial property type right now — and no, it is not space made for a yoga studio. It is a light industrial complex where each unit has a showroom on one side and an office on the other. Flex industrial spaces are some of the lowest-risk investment properties, and they stay full. Small businesses that occupy them almost always pay the rent, as it is affordable. These entrepreneurs have pride in their operations and keep their units clean and tidy.
Apartment buildings, also know has multifamily, also carry some of the lowest risk. As the U.S. population has grown and home prices have increased, renting is the only option for many young people. Likewise, seniors often do not want the responsibility of maintaining a home and are becoming more attracted to renting. Multifamily vacancy nationally today is unusually low, at about 5%. The drawback is that multifamily is one of the most difficult commercial property types to manage. Renters in high-end complexes often have unrealistic expectations for maintenance and service. If someone’s toilet breaks on a Saturday and it is not repaired until the following Monday, the apartment complex will often get a bad review online. On Class C apartment complexes in working-class neighborhoods, property owners may have headaches with rent collections, domestic disturbances, eviction and property damage. It often takes a very strict, hands-on approach to manage these effectively.
Self-storage, which performs well during good and bad economic times, is an outstanding commercial property investment. What an easy business to run: no toilets to fix, walls to paint or carpets to replace. When one tenant moves out, all you do is sweep it out to make it ready for the next one. The downside is that a new self-storage complex could be built nearby and steal your tenants or force you to lower your rents.
And let’s not forget mobile home parks. As long as most of the tenants own their homes, these make for a great investment. With no buildings to repair, most of the upkeep is landscaping and light maintenance. Because people rent space for their homes, they take care of the premises and just about always pay the rent on time.
What Commercial Properties Are Not As Desirable To Invest In?
Single-tenant, single-use buildings like an auto dealership are the highest-risk commercial property investment. If the dealership goes out, you have 100% vacancy. And what other type of tenant could you find to occupy that space? In Albuquerque, New Mexico, I know of an old car dealership that has been turned into a restaurant, but this is unusual.
On the other hand, a single-credit tenant property with an AA credit rating has virtually no risk of failure. But these commercial property types have the lowest cap rates and are the most expensive. Even a four-unit commercial building is risky. If one tenant moves out, you could be facing 25% vacancy or more. The result could be the property running at a loss after loan payments. It is best to invest in an office or retail complex that has eight or more diverse tenants with some national names mixed in. Retail malls that are based on apparel anchor tenants are on the decline nationally because of the high demand for online sales. However, strip malls that have a balanced tenant mix between popular chains like dollar stores, restaurants and service business are doing well.
New Trends In Commercial Investment Properties
Here are a few newbie commercial property types that are winners: Did you know that micro-apartments command the second-highest rent per square foot of all multifamily properties? They are 240- to 500-square-foot urban dwellings that rent from an average of $1,200 to $3,500 per month, depending on location. Millennials love them because they are luxurious, and within easy walking distance of trendy boutique shops and fabulous eateries — perfect for a population not fixated on homebuying. Only student housing rented by the bed rents for more per square foot.
Co-working space has become popular in large metros like New York City. These often offer a choice of configurations, including large rooms with tables, open spaces filled with individually assigned desks or cubicles, and sectioned-off rooms that mimic traditional offices. Many remote and freelance workers find these spaces attractive for regular or periodic work. Fees range from $75 to $400 per month. This property type garners the highest price per square foot of all office properties.
For those who are retired and want absolutely no headache, a triple net lease credit tenant property cannot be beat. They have national tenants with good credit ratings willing to pay the taxes and insurance and fix everything. Apartments are low-risk and a great way to get started, but if you are not the nagging type, this might not be the right property for you. Then think about self-storage, one of the easiest commercial property types to run with almost no maintenance. And it doesn’t get much better than investing in a flex industrial complex — that is, if you can find one for sale. So, how should a first-time commercial property investor choose a property type? Go with the option that fits you and your lifestyle.