Is Commercial Real Estate a Good Investment in Las Vegas?
Are you considering purchasing an investment property and evaluating whether or not commercial property versus residential is right for you? You might be worrying that it’s not the best time to make such a venture in Las Vegas. However, with the proper strategy, commercial real estate can be a good investment. While this article isn’t meant to give actual investment advice, it may help you make the best decision for your property portfolio.
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Is Commercial Real Estate a Good Investment?
So, how can you determine if buying commercial real estate is the right move for you? First, you should understand the difference between buying as an investor who is managing a portfolio versus someone who’s buying the building for their business.
Related: What Should I Look for In a Commercial Property?
Buying Commercial Real Estate as an Investor
A new commercial property can prove beneficial if you’re an investor who simply wants to build your portfolio. You know you’re in this group if you’re not planning on occupying the building yourself. Instead, you intend to lease the property out for a small business owner to use. Here are some pros and cons of taking this approach that you should factor into your decision.
- Increased earning potential: Commercial properties tend to garner a higher rate of return over residential properties. Investors might expect to earn anywhere from 6% to 12% off the purchase price each year.
- More flexible leases: Commercial leases don’t have to abide by all the same laws and regulations as residential leases, allowing property owners to be more flexible in their lease terms.
- Positive public perception: A clean store is key to retaining customers. Your tenant won’t want to lose business, so they’ll be willing to work with you to keep the property cleaned and maintained, both inside the building as well as the immediate area outside the store.
- Professional business relationships: As an investor, your property is your business. By renting out to other business owners, you’ll be able to develop those relationships that are important in professional settings.
- Exclusive triple net leases: These leases are only available on commercial properties. While terms can vary, an investor usually isn’t responsible for the expenses incurred by the commercial property and is only responsible for the mortgage payment. The tenant will manage the other costs, like property taxes.
- Big up-front investment: You’ll need significantly more capital to invest in a commercial property versus a residential one. However, the income potential of renting out the building can mitigate these initial costs.
- Time-consuming responsibilities: If you have multiple tenants in a building, you’ll spend more time managing the property than you would with a single-family home. The more tenants you have, the more leases you’ll have to keep up with and the more maintenance you’ll need to ensure is done.
- Increased risk: Owning a commercial property has some inherent risks. After all, a successful business will have a lot of people coming and going each day, increasing the chance that someone might get injured on the property. This can present some legal concerns, but you can minimize liability by ensuring a clean and safe environment.
- Added maintenance and repair costs: Your commercial property should be regularly maintained by a professional. Depending on your lease, you or your tenant may be responsible for these expenses. Whether it’s landscaping, an electrical issue, or a plumbing problem, factor these costs in when making your purchasing decision.
Related: What Is the Current Cap Rate in Las Vegas?
Buying Commercial Real Estate as a Buyer
On the flip side, you might be planning to buy a commercial property for your own use. Maybe you want to grow your company and even make some profit off the purchase price. Here are some pros and cons to help you decide if this is the right move for your business.
- Valuable tax deductions: You may be able to deduct expenses like property taxes, mortgage interest payments, and other costs associated with operating a business.
- Complete control of the property: Running your business in the building you own means you’re in the driver’s seat. You won’t have to worry about getting landlord approval for any changes you want to make to your business or the building itself.
- Fixed-rate loans: Whereas rent can go up or down as the market changes, you can enjoy the same payment every month if you decide to purchase a commercial property with a fixed-rate loan.
- Building property equity: All the money you put into your commercial property will help build its equity. Equity is the difference between the property’s market value and the amount you might owe on a loan if you were to sell.
- Big initial expense: You should be prepared to put down anywhere from 10% to 40% of the purchase price of the property. Depending on the building, the nature of your business, the economic outlook, and your own creditworthiness, qualifying for financing might be difficult. Ideally, you’ll want an interest rate of less than 5%.
- Strict business hours: As a buyer, you’ll need to set certain business hours and stick to them, or you’ll risk losing customers. You should be prepared to work every day or have employees available who can manage the property in your place.
- Decreased liquidity: Tying up your money into a property means you’ll have less funds to work with at the outset, especially if you’re not getting a rental income. However, you’ll be able to recover your investment as you reach profitability.
- Penalties for prepaying the loan: While paying off your loan balance early may be tempting, you should be aware that some loans do come with significant prepayment penalties or other fees. You should review the terms of your loan before making the decision to pay it off.
Investing in Las Vegas Commercial Real Estate 2019
The Las Vegas commercial real estate market has come a long way since the 2008 recession. The market has grown for the past several years, with old stock moving off of the market and new projects coming to the Valley. Office vacancy rates have dropped steadily over the past 5 years and were just under 12% in the second quarter of 2019. There’s plenty of opportunity here to improve the market by adding more businesses and new products to spark the attention of residents and tourists alike.
Las Vegas Commercial Real Estate Trends
2018 and 2019 experienced lower vacancy levels than we’ve seen in years. This is likely because Las Vegas is struggling to keep up with demand. However, trends show that the industrial sector will improve significantly with the new construction planned in the city. Sales volume for the office and retail areas has also increased steadily since 2015 and is only expected to grow more going into 2020. As more and more buyers purchase commercial properties, an investment in commercial real estate may pay off sooner rather than later.