Investing in rental properties can be lucrative, especially if you do so at the right place and time. Out of all the locations you can buy properties from, does California offer the right opportunities for a business? You should consider a couple of factors to determine that, and here are a few of them.
Pros of California Commercial Real Estate
High Demand
The state has a high demand for office space, warehouses, retail stores, and other commercial spaces. Business in California is booming, and you can expect that someone will need to rent a commercial real estate property for various operations wherever you are. This also means steady rental income for you in the long run as the property owner.
Long-Term Lease
Clients are usually in it for the long term with commercial real estate, especially if the business is doing well in the area. For a largely populated state, commercial tenants will have plenty of opportunities to grow their businesses, which is why the commercial real estate industry continues to thrive in California.
Steady Cash Flow
It has been established that California is one of the many places in the US where a business has a better chance of succeeding. That bodes well for property owners in many ways. For one, this means that a commercial tenant will have a steady cash flow and can pay monthly rent without any issues. It also won't be hard to find renters when the business decides to end the lease.
More Investors for Financing
Experienced investors will see the current market conditions in California and quickly realize the income potential for financing a commercial real estate investment. This can help you find financial backing when investing in commercial real estate, especially since commercial properties tend to cost more than residential properties.
Tax Benefits
Several tax benefits come with owning commercial and other asset classes. For instance, commercial real estate investors can include losses as tax deductions, depending on the circumstances. Another tax advantage is the deduction of costs for real estate taxes, mortgage interest expenses, as well as maintenance issues, repairs, property management expenses, and other operating expenses from income taxes.
Property Appreciation
Commercial real estate opportunities in places like California continue to grow, and so does the value of the commercial property. Similar to residential properties, you'll more than likely get more than your purchase price when you decide to exit the business, which is why many real estate investors hold on to commercial properties for capital gains.
Cons of California Commercial Real Estate
High Initial Costs
As mentioned before, investing in commercial real estate can be lucrative, but you'll have to deal with a larger initial investment compared to single-family homes. They are physically larger, have a more complex design, and are usually built in prime locations, adding to the price. While investing in commercial real estate can help you generate income streams that are higher than the average, you need a sizable down payment first.
More Maintenance
A commercial property might need more maintenance than residential real estate. Especially for commercial retail buildings, you need to ensure that the rental is in top shape to avoid public safety concerns. Such a scenario can affect the business of your renters, as well as the potential of renting out your commercial property to other tenants.
Complex Property Management
Commercial real estate comes with different management needs than a residential rental. Tenant needs can be more complex, especially when it comes to maintenance issues and adhering to local and state regulations. You might need professional help to ensure that you meet all these needs, especially since it requires a bigger time commitment from you. It's not ideal if you're looking for a low-maintenance income stream.
Economic Vulnerability
The profitability of your commercial real estate investment relies heavily on the current economic state of your renter's business industry, whereas a residential property is more in demand since people will always need places to live. While this isn't that common in California, it doesn't mean that it can't happen.
Strict Regulations
Residential properties often have fewer requirements for operations such as habitability and safety standards. With commercial properties, there are more regulations to follow such as zoning restrictions, building codes, particular lease terms, permits, and inspections. This is where professional property management can be beneficial to you as a landlord since they will be more knowledgeable about the rules and regulations to follow.
More Expenses
While you won't have to pay for all the property expenses directly since the lessee handles some of them, there are still a couple that are your responsibility. Since commercial properties are typically larger than other property types, it could mean that you have more operational expenses to worry about.
Final Thoughts
Yes, it can be worth investing in a commercial property in California, provided that you have what you need to purchase and run a commercial rental property. The advantages are more probable than the disadvantages, and a few of the latter can be solved with professional help and business planning to keep operations running smoothly.
California's economy continues to grow and is home to many Fortune 500 companies. It saw the creation of about 14,700 more jobs in 2024 alone. This will drive more businesses from several industries to set up shop in the state, creating more demand for rental commercial buildings.
Should You Hire a Property Manager?
It's more advisable to hire a property manager for commercial properties than other property types, given that it comes with more laws and regulations to follow, and the management needs of such an investment can be more demanding. Maintenance alone can already be a lot to handle for one person.
Hiring a company like Blue Line Property Management allows you to passively earn rental income while you focus on other matters like portfolio diversification. Furthermore, you won't have to worry about missing key responsibilities that might significantly affect your business and cause legal troubles.
Contact us today for a FREE consultation, and learn more about the specific ways we can tailor our services to serve your investment property.
