How to begin investing in commercial real estate
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Special Purpose 1. Office The most common commercial real estate type is office space. These buildings, which can range from single-tenant offices to skyscrapers, are defined by one of three categories: Class A, Class B, or Class C. Class A commercial real estate properties are typically newly built or extensively renovated buildings in excellent areas with easy access to major amenities. Professional real estate management companies typically manage them. Class B commercial real estate properties are often older buildings requiring capital investment.
Although they are well-maintained and managed, these properties require minor repairs and upgrades—making them a popular target for investors. Class C commercial real estate properties are typically used for redevelopment opportunities. They are generally poorly located, require major capital investments to improve out-of-date infrastructure, and their high vacancy rates are much higher than higher-classed buildings. Retail Another popular commercial real estate type is retail buildings.
These properties, ranging from strip malls and community retail centers to banks and restaurants, are often located in urban areas. The size of these real estate properties can extend anywhere from 5, square feet to , square feet. Industrial From warehouses to large manufacturing sites, industrial buildings are typically geared towards manufacturing industries, as they offer spaces with height specifications and docking availability.
Also, these commercial properties generally lend themselves more to investment opportunities. Multifamily Multifamily properties are comprised of apartment complexes, high-rise condominium units, and smaller multifamily units. Property is qualified as multifamily real estate any time it has more than one unit, but can also be considered a commercial property if it has more than four units. Many residential investors get their start in commercial properties by expanding into larger multifamily properties.
Residential tenants tend to have shorter lease terms than office and retail tenants, so tenant turnover is a factor that should be considered. Special Purpose In general, special purpose properties are designed for a specific use, so much so that it would be difficult to repurpose the property for another use.
Car washes, self-storage facilities, and schools are all examples of special-purpose properties. The leisure and tourism industries represent a large proportion of special purpose real estate as well. Common examples within the industry include hotels, airports and sports stadiums, and amusement parks.
Mixed-use development properties are also prevalent in the commercial real estate sector and continue to grow in demand. These properties represent different uses, such as residential, retail, and even the public sector. A mixed-use building could have shopping and services on the first floor with apartment units on the upper floors.
Read our guide to mixed-use developments to find out why they have become so popular in recent years. Owner-occupied commercial real estate OOCRE is when investors purchase commercial real estate to utilize the building for their own purposes. This strategy can be applied to any of the five commercial real estate types discussed above. The option to occupy the commercial real estate you invest in is just one of the many benefits of commercial investing. Keep reading to find out some of the other benefits that may pique your interest.
For many, the objective of investing in commercial real estate is for future wealth and security; others utilize it for tax benefits and investment portfolio diversification. A commercial redeveloper can also take advantage of the following benefits: Higher Income: The hallmark benefit of investing in commercial real estate is a higher potential income.
Generally speaking, commercial properties have a better return on investment, an average of six to twelve percent, while single-family properties fetch between one and four percent. Secondly, commercial real estate provides a lower vacancy risk, as properties tend to have more available units. Also, commercial leases are generally longer than those you will find in residential real estate.
This means that commercial real estate owners have to deal with far less tenant turnover. Cash Flow: Commercial real estate has one very distinct advantage: a relatively consistent stream of income due to longer lease periods. In addition, commercial properties often have more units than residential properties, which means you can achieve economies of scale and multiply your income streams much more quickly. Less Competition: Another advantage associated with commercial real estate is relatively less competition.
Because of the perceived difficulty of commercial investing, the commercial space tends to be less saturated with other investors. Longer Leases: Perhaps one of the biggest perks of commercial real estate is the attractive leasing contracts. Commercial buildings generally have longer lease agreements with tenants compared to residential properties, which, as previously stated, offer investors impressive returns and significant monthly cash flow.
In many cases, lease agreements for commercial properties are signed for multiple years. Business Relationships: The world of commercial real estate offers investors the unique opportunity to participate in business-to-business relationships. This can lead to more professional, neighborly interactions with your tenants when compared to residential real estate.
In some cases, you may even be able to build relationships with the business owners renting in your building. This can be great for expanding your network and getting involved in the community you are investing in. Limited Operational Hours: One of the lesser-known perks of operating commercial real estate is that, for the most part, you share working hours with your tenants. Many commercial investors who choose to manage their own properties enjoy this benefit, as it helps allow for a sense of separation between property ownership and regular life.
Commercial real estate investing offers investors an array of opportunities and advantages that other investment strategies do not. Once the benefits of commercial real estate investing are recognized, the next step is to dive in. Read the following to receive tips on how to get started in commercial real estate.
Learn how to get started in real estate investing by attending our FREE online real estate class. Flipping properties is a great way to earn a short-term lump sum of cash for your work. Essentially, you buy a property that needs some work, you fix it up, and you resell it for a profit.
Turnkey rental properties are where you buy commercial real estate that already has tenants occupying the property. These tend to be more expensive up front, but you can start earning immediately. BRRRR is an acronym for buy, rehab, rent, refinance, repeat.
Essentially, you buy a flippable property, you put in the work, and rent it out yourself. Once you have tenants, you can try a cash-out refinance on your mortgage to give you the money you need to buy your next property. In theory, this is the fastest way to build a real estate portfolio, but only when done correctly. Then, you need to factor in other expenses. You may need to pay for an inspection, realtor fees , and any unexpected expense that comes after purchase.
Either way, set a savings goal, take a look at your personal finances, and draft a budget that can help you save for your down payment on time. Look at commercial properties in your area to get an idea of what to expect. Do Your Diligence There are a few factors that can make or break your real estate investments, and you only have control over two of the biggest ones before you buy the property. The neighborhood and the building itself are critical to the security of your investment.
From there, you will need to find the right location. They come and go. However, properties located near downtown areas, busy public transportation stops, schools, and significant and permanent landmarks will help secure your investment. Remember, if the neighborhood goes downhill, so does your investment.
Waiting a little longer will also give you more time to save for emergencies. Find the Right Tenants The third factor that can harm your investment is the tenants. One bad tenant can cause a lot of damage to your investment by physically damaging a unit or common area, refusing to pay rent, driving out other tenants, or more.
For this reason, developing a proper tenant screening routine is essential for the success of your business. This includes credit checks, criminal background checks, and rental history checks. You want to find the best people for each unit. Just make sure your lease agreement reflects your vision of the property. Be Communicative and Prepared A proper tenant-landlord relationship involves healthy communication both ways. Remember, you want them to reciprocate that same courtesy.
Also, try your best to always be proactive with maintenance, maintain an open line of communication with tenants, and do your diligence. These small habits will save you a small fortune throughout your time as a landlord. Maximize Your Income Set your rent prices relative to the current market in your town or city and raise them when necessary.
Real estate is a great way to protect yourself from inflation and other concerns, so adjust accordingly.
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