Investing in commercial real estate can be a great way to make money over time. However, you should know of the various risks that come with this, like any other type of investment. Keep these risks in mind when investing in commercial real estate.
Credit
If you’re renting out commercial real estate to a business, you’ll have to be careful who you rent it out to. The reason for this is that you have the risk of them having credit issues on the property.
Essentially, this means finding a tenant for your building and not having them give their regular payments for a long amount of time. This can cause a period in which you aren’t making money due to them not paying their fair dues, along with you not being able to rent out the building to another tenant. Make sure that you understand the credit risk that comes with renting out commercial real estate to others.
Inflation
Since 2000, the rate of inflation in the United States has gone up 2%. Typically, this means that commercial real estate owners sign long contracts with businesses that state that they can have their rent raised 2% while residing in that building. Real estate investors need to be careful, though, that this rate of inflation may not remain.
For example, you might see inflation cause rates to go up 10% in a crazy year. This can cause issues for years to come as investors will find that they aren’t making as much money as they used to, potentially losing out on all of their money as inflation keeps increasing. Ensure that you take a look more into how inflation can affect the commercial real estate market.
Construction
Depending on how old your commercial real estate is, you might think about renovating it to potentially make more money from tenants. Construction can be a great way to make more money off commercial real estate, but it can come with many risks attached.
For example, you might be working with a construction company that isn’t known for being the best. That company might end up causing issues with part of your building, making that real estate not usable for months longer than you planned it to be. You might also find out that the construction company can’t fit your renovations inside your allotted budget, even after you’ve already started tearing stuff out. You must understand the risks of construction when becoming a commercial real estate investor.