Is commercial real estate a good investment?

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JohnH123's picture
JohnH123
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Posts: 17
Is commercial real estate a good investment?

My wife and I have a small business, and currently rent an inexpensive office space. I earn significanltly more than our expenses, and have a large cushion of savings. I have thought about buying an office space for us, though have held off figuring if the SHTF, I would not want the responsibility of paying a mortgage, and have the flexibility of not owning an office.

Here are what I have thought of for reasons to buy: we need an office for ourselves anyway, interest rates are low and will likely go up, good business expense, commercial property prices are down, prices may go up due to inflation, rents may also go up due to inflation.

Here are reasons not to buy: If the SHTF, much of our business income may evaporate (depending how bad things get), prices may go way down, not owning gives me flexibility as things unfold, I could trade gold for real estate in the future.

I live in what I believe will be a desirable area of the country as things unfold.

Any thoughts?

Jim H's picture
Jim H
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Posts: 1627
Commercial Real Estate

I had dinner with a friend last week who runs a small retail business in a wealthy NY suburb.  He was considering at one time buying the (two story) building he inhabits.  At this time though, his focus is different... business has been declining, for him in large part due to folks shifting their purchases toward the internet, and away from bricks and mortar, so he is essentially planning the endgame, shifting funds to safety, etc.  

The last thing I would want to own, given my view that an economic and monetary disaster cannot be averted, is a residential or commercial building that depends on a functioning economy for rent flow.  Although your question relates to commercial.. I would be more energetic in attempting to dissuade a friend from buying residential real estate at this time... since it is my expectation that there will come a time when you as a landlord would have to make a heartwrenching decision whether to try to evict tenants... real people, that are victim to this catastrophe due to no fault of their own.  

ao's picture
ao
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I wouldn't do it

Jim H wrote:

I had dinner with a friend last week who runs a small retail business in a wealthy NY suburb.  He was considering at one time buying the (two story) building he inhabits.  At this time though, his focus is different... business has been declining, for him in large part due to folks shifting their purchases toward the internet, and away from bricks and mortar, so he is essentially planning the endgame, shifting funds to safety, etc.  

The last thing I would want to own, given my view that an economic and monetary disaster cannot be averted, is a residential or commercial building that depends on a functioning economy for rent flow.  Although your question relates to commercial.. I would be more energetic in attempting to dissuade a friend from buying residential real estate at this time... since it is my expectation that there will come a time when you as a landlord would have to make a heartwrenching decision whether to try to evict tenants... real people, that are victim to this catastrophe due to no fault of their own.  

I second Jim's opinion about commercial real estate being a bad idea presently and I speak from first hand experience.  My commercial real estate holding is my worst investment.  While in a desireable area with an excellent location, it is not easy to find good tenants now, rents are being discounted due to a glut of available space on the market, and I sincerely doubt that I could find a buyer for my building now who would pay its appraised value.  I wouldn't do it. 

Wendy S. Delmater's picture
Wendy S. Delmater
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Posts: 1627
commercial real estate is overbuilt

I third the advice. Prices of scarce things may go up due to inflation, but commercial real estate is anything but scarce at the moment.

I come from the construction industry and our livelihood depends on the ebb and flow of real estate. It goes through up and down cycles and right now is the worst cycle I have ever seen. Things are as bad for commerical real estate: business formation is low, and--this is an essential point--commercial real estate is overbuilt. As I see it, all of those 'for rent', 'for lease', and 'for sale' signs on empty buinesses tell us that there is a huge supply, and not enough demand. Whatever your commmercial real estate is worth today it it likely to be worth less tomorrow. Expect inflation regarding food, healthcare taxes, and fuel . . .and more deflation for real estate.

Peopele in business that rent items like heavy equipment and offices can shed them when things contract. Getting rid of a burdensome property in a bad market can be a nightmare.

mutschler's picture
mutschler
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Posts: 22
Mind your OWN business

I have to disagree with the previous posts discouraging you from buying a commercial building that you intend to house your own business in.

Owning a commercial building that must house other businesses is completely different than being your own tenant.  I believe that with interest rates at ridiculously low levels and a glut of commercial buildings to drive the price down, you should find a solid, well built structure that is energy efficient and in an excellent location.  

Yes, you are always at a risk if you have a mortgage and you depend on your own efforts to make money but owning your own business balances risk and reward.  There are huge benefits to pay high rent to yourself as a landlord. Owning the building inside a Limited Liability Corporation that has members consisting of your family also provided estate planning options that are attractive.

Just remember that although the economy and environment may collapse, we do not know when and owning a well placed, energy-efficient commercial property that can be used for business, your own as well as renting to others, seems like a good business decision for both the current and future economic realities.

As always, talk this over with your CPA and attorney.

tomccoy1's picture
tomccoy1
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Joined: Nov 8 2010
Posts: 21
Interest Rates

Some good comments are posted here.  Frankly, its hard to know all the issues at work with your potential investment with just a few comments on boards such as this one.  

Let me bring in another issue - interest rates.  Real estate loans, especially loans for single family and multi-family are are unreasonably low levels currently.  The low mortage interest rates have the effect of propping up property values well above what they would be without the low rates.  I do not believe these low interest rates can last.  You should model what will happen to your investment should interest rates go from say 4% to 6%, 8%, 10%, 15%, and 20%  Certainly property values drop dramatically with signficantly higher rates.  One may also consider what happens if loans for property become completely unavailable at any price - and the market reverts to an all cash (gold?) basis, which existed a century ago.  My take is that gains you make from general inflation in rents and asset values would likely be more than offset from large interest rates increases that would accompany significant inflation.   I like your idea of investing in gold instead, and buy property at a later time.  

As an alternative business users can generally sign long term leases (or leases with options to renew) at current rents in lieu of buying property.  Most commercial property owners I deal with would be very pleased to sign say a 10-year with increases of say 3% annually or similar periodic rent steps.  This way you lock in current rents/prices similar to a current property purchase.  

From my appraisal work, there are many banks which hold large portfolios of generally smaller less attractive commercial properties, which function as shadow inventory.  When these lenders are finally willing to sell, and book the huge losses on their income statements, there will be significantly better deals to choose from.  

Good luck with your deal. 

ao's picture
ao
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Joined: Feb 4 2009
Posts: 2220
caveat emptor

mutschler wrote:

I have to disagree with the previous posts discouraging you from buying a commercial building that you intend to house your own business in.

Owning a commercial building that must house other businesses is completely different than being your own tenant.  I believe that with interest rates at ridiculously low levels and a glut of commercial buildings to drive the price down, you should find a solid, well built structure that is energy efficient and in an excellent location.  

Yes, you are always at a risk if you have a mortgage and you depend on your own efforts to make money but owning your own business balances risk and reward.  There are huge benefits to pay high rent to yourself as a landlord. Owning the building inside a Limited Liability Corporation that has members consisting of your family also provided estate planning options that are attractive.

Just remember that although the economy and environment may collapse, we do not know when and owning a well placed, energy-efficient commercial property that can be used for business, your own as well as renting to others, seems like a good business decision for both the current and future economic realities.

As always, talk this over with your CPA and attorney.

Actually, I'm in exactly the situation you describe and trust me, if I had the choice to do it over again, it is the one decision I wouldn't have made.  I'm not losing money (yet) but I expect I might (given present trends which I don't see changing in the short or medium term) and I also expect that this will not be a good investment to turn over to my children (as least compared to other investments I've made).  I have friends and acquaintances in similar situations who are mostly saying the same thing (if they're being truly honest with themselves and others and not trying to put up a false front).

The only person this situation is likely to benefit presently is the real estate person who profits off the transaction. 

P.S. My CPA and attorney are facing the same conundrum.

esadler2001's picture
esadler2001
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Joined: May 2 2013
Posts: 1
Best Types of Commercial buildings to purchase?

Are there certain types of commercial buildings that are better to purchase than others?  Are certain types of business better to have as tenants?  For example a building more designed for restaurants or retail stores versus an apartment building or one more fit to house doctors, dentist or lawyer type offices.  Does any particular type of tenant/business have a better chance of being a long term tenant with less risk of failing as a business?  Certain business/tenants like new clubs and bars may be open today and gone tomorrow versus a doctor's office. The more successful they are as a tenant and their business is, the greater chance they will remain tenants for the long term.

Kaarapal's picture
Kaarapal
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Joined: May 17 2013
Posts: 3
JohnH123 wrote: My wife and I

JohnH123 wrote:

My wife and I have a small business, and currently rent an inexpensive office space. I earn significanltly more than our expenses, and have a large cushion of savings. I have thought about buying an office space for us, though have held off figuring if the SHTF, I would not want the responsibility of paying a mortgage, and have the flexibility of not owning an office.

Here are what I have thought of for reasons to buy: we need an office for ourselves anyway, interest rates are low and will likely go up, good business expense, commercial property prices are down, prices may go up due to inflation, rents may also go up due to inflation.

Here are reasons not to buy: If the SHTF, much of our business income may evaporate (depending how bad things get), prices may go way down, not owning gives me flexibility as things unfold, I could trade gold for real estate in the future.

I live in what I believe will be a desirable area of the country as things unfold.

Any thoughts?

This is the right choice to earn money.Nowadays earning money through real estate is becoming more popular.

hydrodog's picture
hydrodog
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Joined: Apr 14 2008
Posts: 13
SHTF and Commercial R E... Depends on the R E....

A retail store or industrial building that doesn't make/sell real things that are needed will be for a time anyway a white elephant....

But a property that produces a revenue stream can be a very good thing....

Take a hydro-electric plant site .... making energy from falling water ... a very good asset to own b4 and during a SHTF senario.   \

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