Posted On Nov 02, 2024
Know it in 5 – Why Commercial Properties May Make Better Rentals
Today, we’re taking five minutes to explore why investing in commercial properties could be more beneficial than residential rentals. If you’ve been considering entering the rental market but find residential options too risky, the commercial side might just be the right fit for you. Here’s why:
Cost per Square Foot vs. Rental Income
Let’s break down the numbers. A typical family home in Alberta (2024 avg $499K) rents for around $2,100 per month, plus utilities (Zumper.com, October 2024). With an average square footage of 2,000 square feet, this translates to a rental revenue of approximately $12.60 per square foot. Here’s the math:
- Monthly Rent: $2,100
- Annual Rent: $2,100 x 12 = $25,200
- Revenue per Square Foot: $25,200 / 2,000 sf = $12.60/sf
Now, consider a commercial property. If you find a decent space to buy for $600,000, also at 2,000 square feet, and assume a rental rate of $25 per square foot, the calculation for the monthly lease would look like this:
- Monthly Lease Rate: ($25/sf x 2,000 sf) / 12 months = $4,166.66 + Utils and costs.
Now, here’s where it gets interesting:
Benefits of Commercial Tenants
Unlike residential rentals, commercial tenants often provide several advantages:
- Longer Lease Commitments: Commercial tenants typically sign longer leases, which means more stability for you as the property owner.
- Responsibility for Minor Repairs: Tenants usually handle minor repairs, reducing your maintenance burden.
- Limited Occupancy Hours: Most commercial tenants only occupy the space for half a day, which can lead to less wear and tear.
- Property Maintenance: Commercial tenants tend to maintain the property to attract clients, helping preserve your investment.
- Additional Responsibilities: They often take care of tasks like snow removal and property cleanup, further relieving you of these duties.
What to Look for in a Commercial Property
When considering a commercial property investment, keep these key factors in mind:
- Location, Location, Location: Think about who will use the space and who your ideal tenant might be.
- Versatility: Is it a retail storefront? Does it have warehouse space? Can delivery trucks access it easily?
- Traffic Considerations: Do you prefer a high-traffic area or a quieter business park?
- Market Fit: Does the property make sense in its surrounding area?
- Property Type: Consider whether you want a standalone building or a condo unit. Condos often require less hands-on management, while standalone properties might need a maintenance plan.
Financing Commercial Properties
Financing a commercial property can be more complex, but it may pay off in the long run. Commercial real estate often involves cap rates, which measure the expected annual return on your investment. This is calculated by dividing the property’s net operating income by its purchase price.
- Pro-Forma Requirements: Banks may require a pro-forma, which is a financial statement forecasting future income. However, some investors may choose to unlock equity and purchase outright if the numbers look favorable.
Get Started!
If you’re curious about whether commercial real estate is right for you or if you want to dive deeper into the topic, don’t hesitate to reach out. We have commercial brokers in our network who are a wealth of information and can help you explore your options.
Investing in commercial properties might just be the opportunity you’ve been looking for!