If you have enjoyed success investing in residential real estate, the natural tendency is to graduate to commercial real estate investing.  A rule of thumb is to gain enough experience by buying 8 to 10 residential properties before shifting to investing in commercial real estate. The logic is simple – with success comes a bigger investment portfolio and the bigger the portfolio gets, the more difficult it becomes to manage, especially if it is comprised of numerous residential properties.

$20 million worth of residential properties, for example, translates into dealing with a lot of homeowners and tenants.  On the other hand, $20 million can purchase only a limited number of commercial properties, such as free-standing retail stores, offices, service stations, medical centers, motels, hotels, bulk retail, churches, industrial sheds, a block of stalls, and many others which are concededly easier to manage.  Likewise, commercial real estate investing requires less overhead cost.  It is important to note that each commercial property may be unique in that it has its own strengths, problems, peculiar characteristics, risks, and rewards.

In terms of yield, it is much higher in commercial properties than residential real estate.  For one, income is more stable because of the comparatively longer leases. Likewise, the income generated is the net of all outgoing expenses which are normally shouldered by the tenants.  The normal rate of return for commercial real estate investing is in the vicinity of 10%; 7 – 9% for prime properties.

For the most part, the value of a commercial property can be seen from the quality of the lease.  Normally, the value can be calculated using such factors as the amount of rent per contract, the term of the lease and the quality of the lessee.  A commercial property can have a drastic drop in value if it is vacant.  A lot of commercial real estate properties have been sold for a lot less than their perceived value simply because they are hard to lease.

In terms of management, commercial properties are much easier to handle simply because the tenants have more to gain if the property is well-maintained and they themselves will help to keep the facilities at high standards.  After all, a poorly-maintained building will reflect on them and it can adversely affect their clients’ impression of the quality of their products and services.

Real estate laws likewise tend to be more lenient and flexible on commercial leases in terms of adding clauses and provisions to lease contracts.  This helps create a better environment for commercial real estate investing.  It is not uncommon to see contracts providing for interest,  penalty charges for late rental payments, and even the right to lock the premises on the basis of default in the payment of rent for a given number of months.

Perhaps the biggest risk when investing in commercial properties, is in finding new tenants for vacancies.  This is because tenant requirements in terms of space, rent, location, and use vary widely.  It can sometimes be difficult to match a tenant with a particular vacant property.  However, with the right experience in commercial real estate investing, minor glitches such as this can easily be overcome.