We continue our discussion surrounding the five categories for real estate investment property, along with the advantage and disadvantage each category presents. We trust that the information will help real estate investors as well as others simply seeking to learn something about real estate investment analysis, real estate investing, and real estate investment property.
From the real estate investment categories illustrated below, this time we will discuss commercial and industrial properties.
- Land speculation
- Single-family homes
- Multifamily properties
- Commercial and industrial properties
- Retail shops and shopping centers
Commercial and Industrial Properties
Generally, if the income-producing property is a building not used for living purposes, like office buildings and warehouse complexes, it is most likely a commercial or industrial kind of property.
Commercial and industrial properties fall into two basic categories: single use and multiuse.
Not to be confused with single tenant, single use suggests that the use of the property is limited, not simply restricted to a single tenant. For example, when a tenant occupies an entire building or complex, it is clearly a single tenant but the use could be multiple to the extent that the building is flexible enough to house other types of businesses like offices, repair facilities, or a medical clinic. Whereas as in the case of a fast food restaurant, at the same time a single tenant, because the use is greatly limited without major remodeling, it is thus a single-use building.
Multiuse buildings suggest buildings that are not restricted to one single use, and are more often multi tenant buildings which spread the obligation of the rent over several or many different tenants.
The Advantages of Commercial and Industrial Investments
The tenant is often a net or triple net tenant. Meaning that the owner of the building usually passes on other expenses and cost to the tenant over and above the actual rent.
The most sought after by real estate investors is when the tenant pays rent, plus building maintenance, taxes, insurance (the common basis for triple net), plus all other costs that may be assessed against a property. The cost to the tenant is as though the tenant actually owned the property, and therefore requires very little management for the owner.
The Disadvantages of Commercial and/or Industrial Property Investments
One disadvantage has to do with the lag time that occurs in the development of this kind of property. Because the time from initial idea to finished building may be several years, it is likely that the rental market may decline. Whereas a shortage of office space or commercial buildings encourage the idea to build, later the shortage may suddenly become a glut on the market and a slow rental market the result.
In addition, if some other economic decline happens during this same period, the result can be a major decline in commercial rents in a wide area and real estate values can fall very quickly.
Finally, because commercial and industrial buildings rely heavily on the strength of the tenant, it is true that even the “best risk” tenants have seen some very hard times. As a result, investors have been hurt, and would be wise to not consider even the giants of industry as risk-free tenants.
