Commercial real estate investing can be a very lucrative investment strategy if you know how to find the right deals, structure and fund the deals– and take them to their highest & best use. You can buy, fix and flip properties, or you can buy them for long-term appreciation. The money is in the follow up and the strategy to take the asset to its highest & best use. That’s a FACT.
Commercial real estate is a very broad term that includes everything from office buildings to apartment complexes. It’s important that you understand what your goals are before you start investing in commercial property because it will dictate the type of property you buy and how much money you need to invest. There are many different types of commercial real estate investments, including industrial buildings, apartment buildings, retail space and even mobile home parks..
Things to consider before starting Commercial Real Estate Investing
Commercial real estate investing is a smart way to build wealth and increase your net worth over time. But before you jump into this type of investment, there are some things you must consider first:
How much money do you have available for investment? The minimum investment amount varies from property type and region, and the strategy you are using to get the property under contract , but it’s important to have enough money available so that you can afford at least one property for starters. Once you have one property under your belt, just like in residential, and begin receiving monthly rent checks, you can use those proceeds as an emergency fund/reserve or save up for additional investments down the road.
What kind of properties are most attractive to investors? There are many different types of properties out there that could appeal to investors based on their individual needs and preferences — from a duplex all the way up to multi-family residential properties such as apartments or condos. Many people start with duplexes, as it seems safer, like a residential fix & flip. However, vacant stand-alone buildings can be much easier to start with coming out of the pandemic AND with the right knowledge to work with tenants. Newer investors may have an opportunity to get financing based on a NNN lease. The Monet is in the follow up. This is a FACT.
Are you willing to take on debt? If so, then commercial real estate is a great option for you because it allows you to leverage your assets and borrow money against them in order to control more property than you could afford outright. However, borrowing money means that there are more costs involved in owning property (such as interest payments)
What Is Commercial Real Estate Investing?
Commercial real estate (CRE) is property that is used exclusively for business-related purposes or to provide a workspace rather than as a living space, which would instead constitute residential real estate. Most often, commercial real estate is leased to tenants to conduct income-generating activities. This broad category of real estate can include everything from a single storefront to a huge shopping center.
Commercial real estate investing involves buying and selling property used for business purposes rather than residential use. You may have heard of these properties referred to as “commercial” or “multifamily” properties but they’re not necessarily any different from what we normally think of as an office building or shopping center.
The most common types of commercial real estate include office buildings, retail malls, apartment complexes and industrial warehouses. However, there are many other types of properties that may be suitable for investment purposes depending on local conditions, such as motels or hotels. The key to successful commercial real estate investing is finding properties that are located in areas where demand will support high rents or sales prices over time.
The goal of commercial real estate investing is usually to make money through appreciation or cash flow (rent). With appreciation, you hope that the value of the property will increase over time because of demand or other economic factors within the market where it’s located. With cash flow, you receive income from tenants who pay rent on a regular basis each month until they vacate or move out of the building altogether. Investors typically look for properties with at least five years of positive cash flow and low vacancy rates. They also like to buy property in strong markets where rents are rising faster than inflation. FACT, there are strategies to take vacant CRE, lease it up and immediately increase the value of the building. This makes it easier to finance and a solid investment to leverage and increase your portfolio. This is why your strategy is important.
Commercial Real Estate Investing Strategies
There are many ways to invest in commercial real estate, and it’s important to understand the differences between them. Here’s what you need to know about the different types of commercial real estate investing strategies:
Buy & Hold: This is the most common type of investment strategy. With buy & hold investments, you purchase a property and then rent it out as-is or fix it up and lease it out until you sell at a later date. This can be a great way to build wealth over time because of the power of leverage — if done right, your initial investment can grow in value by 20% or more each year.
Fix & Flip: With fix & flip investing, you purchase an older property that needs work and then renovates it before putting it back on the market for sale at a higher price than what you paid. Fix & flips can be very profitable if done correctly but they’re also risky since they require significant upfront costs in addition to rehabbing expenses before selling.
Lease-Option Strategy: This strategy involves buying a property, leasing it out to tenants, then offering them an option to purchase the property at a later date for a predetermined price. There are many ways that this strategy can be used, but it’s most commonly used with residential properties rather than commercial ones because there aren’t as many legal issues involved with residential properties. It’s also more difficult to find tenants who will qualify for these types of leases because they tend to require more stringent qualifications than standard leases do.
The Difference Between Commercial and Residential Real Estate
When you think about real estate, you probably consider your home or an apartment. Commercial real estate may seem like a different world altogether. However, there are many similarities between residential and commercial real estate. In fact, most of the same principles used in residential investing apply to commercial investing as well. Investors just need some education and understanding, and a system, to get into this bigger game and scale their business.
Commercial real estate is any property that’s used for business purposes rather than as a residence. It includes buildings such as office buildings, factories, retail stores, and even warehouses. But it can also refer to something far more basic: the land on which these properties are built. CRE real estate can also be considered as a residential property with five or more units, like a multiplex.
Commercial real estate differs from residential real estate in several ways. For instance, residential property owners don’t typically have access to income-producing assets like parking garages or conference rooms. These are variables/strategies to take a property to its highest & best use. However, we do want to point out that with Airbnb models residential investors now have assets that they can get more creative with on the nightly stays.
The main difference between commercial and residential property is that commercial properties usually have multiple tenants who pay rent on a monthly basis while residential properties only have one tenant per unit (usually the owner).
How to Get Started in Commercial Real Estate Investing
When you’re first getting started with commercial real estate investing, it can seem a bit intimidating. There are so many options to choose from. But don’t worry — it’s not as complicated as it seems! Find a System that works for you and your goals.
There are three basic steps to get started:
Step 1: Understand the basics of commercial real estate investing. And have a system, like the FACTS System.
Step 2: Decide what type of property to invest in, in a specific area.
Step 3: Calculate your investment budget and financing options.
The key elements of commercial real estate investing are:
Location: Choose a location that has good access to transportation systems and is located in a neighborhood with positive economic growth. Choose a property in a tourism area. Choose a property that has demand for that type of business.
Type of property: You can choose from various types of properties such as office buildings, warehouses, single tenant retail and apartment complexes
Rental rates: Rents should be stable, increasing at a moderate rate over time. Find an expert with a formula you can model your business after.
Management: You need a good management firm who will manage your property for you so you don’t have to worry about it day-to-day. AND you can consider NNN leases, as this lease takes pressure off the building owner and the tenant takes on responsibility. Win, win.
Financing: Financing options vary depending on the type of property you are purchasing but can include loans from banks or private lenders as well as equity financing (using your own money).
Type of property: Commercial properties can be divided into four categories: office buildings, retail stores, industrial warehouses, and multifamily housing complexes. The type of investment you make depends on your financial goals and what type of returns you want to achieve.
Office Buildings
Office buildings are a common type of investment property. They can be either new construction or existing buildings that have been converted into offices. Office building investors typically look for buildings with a high occupancy rate, low vacancy rate and high average rents. Office buildings are also an ideal investment if you want to build passive income streams by leasing space in your building at market rates. Consider medical office suites- now that is taking a property to its highest & best use! There are a ton of ways to monetize medical suites and condos!
Retail Stores
Retail is another commercial property type that can be divided into two categories: shopping centers and stand-alone retail locations (often referred to as out parcels). Shopping centers are usually anchored by a larger tenant such as Target or Walmart and contain smaller tenants such as clothing stores, restaurants, and banks inside the mall complex. Out parcels are stand-alone stores that are often found in strip malls or power centers near residential areas where there is plenty of parking space available for customers who visit these outlets regularly. Retail stores offer higher returns than other types of commercial properties but also come with higher risk because they require more hands-on management. The vacant stand alone building, like a quick service restaurant (QSR), has the most potential in today’s market.
Industrial warehouses
Industrial warehouses are used for manufacturing or distribution centers and can be located in any city or town across the country. They often require large amounts of space — tens of thousands of square feet or more — so they aren’t ideal for individual investors looking for a small investment property. These types of properties tend to have high vacancy rates during economic downturns when fewer companies need warehouse space for their products or supplies.
Multifamily housing complexes
Multifamily housing complexes include apartments, condos, townhouses, and other residential properties that are rented out to tenants by landlords or management companies who manage the properties for them. Multifamily housing complexes may be located near business districts or other areas where people work during the day so they can walk to work from their homes each morning.
Final Thought
Commercial real estate investing can be profitable, fun and exciting. Before starting down this path, however, it’s important to educate yourself on the topics of commercial real estate investing. This investor guide can be a good place to start so you understand the (DCBA) Definitions, Concepts, Business Models and how to Apply.
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