“So how can you make money on these commercial properties?”
The answer to the title question is simple: exactly the same as on an apartment bought for rent. It is just that instead of tenants, you deal with an operating point of sale, e.g., a grocery store. In both cases, the profit comes primarily from monthly rental fees. So why is it better to invest in commercial real estate?
Because it is, especially in recent times, a more reliable and less stressful and demanding method for the investor. And the profit is higher. Investing in commercial real estate is less burdensome for the client. Tenants running their business (e.g., a grocery store, bakery or drugstore) pay rent regularly, as set out in the agreement. It usually covers the period of 5 years with the option of another 5 years provided for in the agreement. Sometimes, there are agreements for as long as 10 and 15 years. It is extremely difficult to obtain such a guarantee in the case of apartment tenants. As recent months have shown, retail outlets that meet basic consumer needs operate without interruptions, while the short- and long-term rental market is currently experiencing a difficult moment, as it is much more difficult to find tenants. Tourist traffic is low, and study and work are done remotely, so there are fewer tenants, especially in large cities. Most importantly, however, the return on this investment, after deducting costs and possible downtime, is only 4-5% per annum.
Higher profit, an investment for the future
In the case of commercial real estate, we are talking about a profit of 6 to 8%; in addition, it is completely passive. Apart from the rental income, commercial real estate investment income can come from the difference between the purchase price of the property and its sale. When buying a facility at the design stage, with signed lease agreements, you pay less – when selling the constructed property, with operating stores, you will earn more. Someone may ask “why do I need a store if I can buy a flat for rent and in a few or a dozen or so years my child will have a place to live?”. This is reasonable thinking, only that the same can be done by investing in a commercial facility with better results. During these several years, the money will work at a higher percentage, and then, by selling the object, you can allocate the obtained funds for a flat for your child. In addition, the apartment will be built in a newer standard, in a location that may be more convenient than the one you have chosen years ago.
Another factor that will ensure higher profits is the increase in the value of land and real estate over time and the increase in rental rates resulting from agreements over the years. These agreements (if well-structured) contain provisions making the amount of rent dependent on inflation. At this point, it is worth answering another potential question: “and where will I get these tenants from, if I do not know anything about commercialisation?” This is where our company offers assistance, as it leads the investor process from start to finish: we find the land in such a location that guarantees the best possible access for customers to stores. We deal with the design and construction, at the same time, having already acquired tenants of the facility: for years these have been top brands such as Biedronka, Rossmann, Pepco, Delikatesy Centrum, Stokrotka, KIK. In the case of the retail market, there is no fear that the tenant will resign from the agreement after 6 or 12 months, and in addition, leave the premises in a condition requiring renovation. Thus, the level of security of the invested capital is much, much higher.
With a calculator in hand
However, there are mechanisms that allow you to earn approx. 15% per annum from the invested capital. The so-called “financial leverage” allows you to purchase real estate with loan support (which we also help to obtain). The difference is best shown on an example for a purchased operating park:
|Return on investment calculator – simplified
|Yearly income (after cost deduction)
|Rent rate of return per annum
|Commercial and service building
|30% / 70%
|return on capital
|profit from yearly rent (after loan deduction)
|Investment loan parameters
|Loan cost – yearly
Considering all of the above factors, commercial real estate is one of the best investment methods today. The pandemic, in particular, has shown how uncertain other solutions, such as renting apartments, can be. Trade in food or hygiene products goes on without interruption and is doing very well. Additionally, using commonly available tools such as financial leverage, you can optimise profits to above-average at the current interest rates.
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