real estate

Why Is Commercial Real Estate Riskier than Residential Real Estate?

Despite the fact that real estate properties have the lowest risk and higher return as compared to other investment options like the stock market.

Real estate properties have varying risks depending on the type of real estate option you undertake. For instance, commercial properties have a higher risk as compared to residential properties.

Residential properties are leased out on a short-term basis to people who want to reside there. On the other hand, commercial properties are rented to people who are leasing them for a long period to run their businesses.

Below are some of the risks associated with commercial properties as compared to residential properties:

Valuing Commercial Properties is Difficult

Real estate properties value is often arrived at through doing comparison analysis among properties within that given area.

For instance, residential property owners rent out by comparing rent of other properties similar to their properties in the neighbourhood.

Also, listed land for sale often determines its value by comparing the price of land within the area. If they have a development like value addition, they can make some slight adjustments.

On the other hand, commercial properties are very hard to even know how much to charge as renting fee or true value since there are many factors to consider. Also, it is hard to find similar properties in the area. This in turn increases the risk associated with commercial properties.

Commercial Properties are Sensitive to Economic Condition

If you are a seasonal investor, you possibly have heard that real estate is affected by the world economy. If the world economy is performing (Booming) then real estate is performing as well and vice versa.

The reason why you have this going together is that when the economy is performing, it means that companies are performing well and their occupancy on commercial properties is high. When the economy is not performing, then the business could have collapsed and you will have a high occupancy rate among commercial properties.

Besides the occupancy factor, when the economy is not performing, it means that there will be a high number of mortgage defaulters and banks foreclose on your property.

On the other hand, residential properties least depend on economic performance since, either way, you must have a roof over your head.

In addition, plots of land for sale are never affected by the local or world economy.

It is for these reasons that commercial properties have a higher risk compared to other properties.

Finding Tenants Takes Long

Commercial properties tend to enjoy long-term leases. However, when the property becomes vacant. It usually takes a long time to find another tenant.

During this period, it will be the burden of the property owner, to look for cash flow to maintain the property.

Financial Commercial Properties Are Difficult

Commercial properties tend to not only attract high interest rates on their loan but also hard to access the loan.

Few banks can extend loans for the purchase of commercial properties as compared to residential properties.

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