What To Know Before Investing in Commercial Real Estate

October 29, 2018

Real estate investment illustration

It’s safe to say the thought of investing in commercial real estate (CRE) has crossed your mind since you’re here. If you’ve already dipped into the residential real estate pool and like what you see, it may be the right time to discover the special perks commercial properties have to offer.

Why Go Commercial?

Commercial properties equate to business. Businesses that require overhead range from retail to warehouse to factory to storage to medical and more. They properties are divided into classes: A being new and easily accessed, B requiring minor upgrades and pose potential, C needing major capital investments and difficult to fill. Any commercial building can have multiple units, meaning multiple tenants and more than one stream of income. Commercial leases are longer than residential, so companies can become established. These longer leases also lower the vacancy rate.

The fact that commercial property owners deal with businesses instead of residential tenants makes matters very cut and dried. Because commercial property investments are rarely short-term, there’s real potential for growth, and that’s where the magic happens.

Buying Options

There a few different ways to land a commercial property:

• Co-investing: Buying a share of a property is a brilliant way to begin. Each buyer is responsible for his or her share, and that’s it. If the property returns $100,000 in one year, and there are four co-investors, then each investor sees $25,000 in the bottom line. Each investor is responsible for a quarter of the building’s needs and tenant lease agreements.

• A real estate investment trust (REIT): This is essentially a ticket to the show. When you purchase a REIT, you pick up a small portion of the property, like a share. The property is owned and managed by a specialized company, and whenever profit is made, you get your chunk. It’s a very hands-off investment that doesn’t give the shareholder’s control one way or another. You’re really just along for the ride.

• Private money lending: This is a way of investing in commercial real estate where you act as the bank. (Full disclosure: My company is a private money lending firm.) Your funds provide the means for developers to build projects of all sizes, just like a bank lender might do. Private money lending is a truly passive way of investing.

Other Types Of Commercial Buildings To Consider

As mentioned before, there are so many ways to slice commercial properties. The opportunities are vast and also so niche. Here are a few other building types to think about:

• Coin-operated buildings: Car washes and laundromats are viable investments for those with strong connections to mechanical companies or a mechanical background.

• Storage unit buildings: These carry minimal operating and maintenance costs and are available in a wide range of sizes. This type of investment is ideal for modern, turnkey storage units.

• Flex warehouse buildings: A large, open space can be easily altered from tenant to tenant. Tenants may include businesses such as gyms, technology startups, microbreweries, gaming centers and so forth.

Commercial Real Estate Investment Success

Not only are commercial investment sales up going into 2018, according to the NAR, but commercial property leases are easily fulfilled. Employment growth in key markets, like Dallas-Fort Worth, Houston, St. Louis and Kansas City, adds to the demand for commercial space.

Commercial real estate is big ­­— bigger than residential property investments in that it can tolerate market fluctuations more easily. The sum of higher rents from multiple tenants creates a comfortable cushion that softens the blow when the market takes a hard turn. Commercial real estate is a tangible, physical property that acts as collateral and provides stability.

Passive investments in real estate also come with a sense of ownership. You can act as the landlord or be truly passive and hand it off to a management company. Either way, you can still have a say in how you want your investment to grow. As with all investments, due diligence is necessary to ensure that you get into commercial real estate investing in a way that suits your financial goals and lifestyle.

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Investing in the commercial real estate space is a great way to enjoy passive income while watching your investments grow. In an uncertain market like today, CRE investment can bring stability to your portfolio.