Real Estate & Property

Disadvantages of Commercial Real Estate

More capital required to directly invest

Greater regulation

Higher renovation costs

Illiquid asset

The owner of the building then needs to adapt the space to accommodate the specialized trade of each occupant. Due to the cost of renovations for new tenants, a commercial property with a low vacancy but high tenant turnover can still lose cash.  In layers of legality, the fees, purchase mechanics, and maintenance duties for commercial properties are buried. Depending on the state, county, industry, size, zoning, and several other designations, these criteria change.

Many commercial real estate developers either have advanced experience or have a payroll of individuals who do.  With homes, one tenant’s criteria for facilities typically reflect those of previous or potential tenants. With a commercial property, however, each occupant can have very different needs that require expensive refurbishing.

For most individuals seeking to directly invest in commercial real estate, laws and regulations are the main deterrents.  Another challenge is the increased risk presented by tenant turnover, which is particularly significant in an economy where abrupt retail closures leave properties empty with little warning. For those wanting to invest directly, it is a much more expensive proposition to purchase a commercial property than a residential property. Also, while real estate is typically among the more illiquid asset groups, commercial building transactions appear to move particularly slowly. 

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