Unlike other investments, real estate is dramatically affected by its surroundings and immediate geographic area; hence the well-known real estate maxim, “location, location, location.” With the exception of a severe national recession or depression, the value of residential real estate is affected primarily by local factors, such as the area’s employment rate, economy, crime rates, transportation facilities, quality of schools, other municipal services, and property taxes.
There are key differences in residential and commercial real estate investments. On the one hand, residential real estate is usually less expensive and smaller than commercial real estate and so it is more affordable for the small investor.
On the other hand, commercial real estate is often more valuable per square foot and its leases are longer, which theoretically ensures a more predictable income stream. With greater revenue comes greater responsibility, however; commercial rental real estate is more heavily regulated than residential real estate and these regulations can differ not only from city to city and state by state, but also vary in each country of the world. Even within cities, zoning regulations add a layer of unwanted complexity to commercial real estate investments.
There is also increased risk of tenant turnover in commercial rental agreements. If the lessee’s business model is bad, their product is unattractive, or they are simply poor managers, they might declare bankruptcy, which can abruptly stop expensive real estate from generating revenue. Moreover, just as land can appreciate in value, it can also depreciate. Once hot retail locations have been known to decay into rotten dumping site.
The goal for the real estate agent is to keep their real estate portfolio desirable at all times. On the other hand, the investor has to be on the look-out for real estate in desirable locations. This is the only way to keep your investments not only appreciative but liquid as well.