Investing in commercial real estate is an exciting and worthwhile venture for both smaller investors looking for their next step and real estate investors moving into commercial property investing. No matter if you're new to investing in real estate or have only invested in residential real estate, the guide below will help you learn how to invest in commercial real estate with confidence.
What is Commercial Real Estate?
Before learning how to invest in commercial real estate, it's best to know what kind of properties fall under the large category. A rule of thumb to remember regarding commercial real estate properties is that if they're used for business purposes, then they are commercial spaces. Specifically, there are five main categories:
- Multifamily properties, such as apartment complexes
- Retail properties, such as strip malls
- Office spaces
- Industrial properties, such as data centers or self-storage
- Special purposes, such as a place of worship, hotel, or health care
The commercial properties above can be bought for owner-occupied businesses or as an investment to increase cash flow or to grow a portfolio. Each type of property has to be dealt with as its own category, as each space is designed for specific purposes. When looking to invest in commercial real estate, you cannot treat each property as the same thing because they're all for a business of one sort or another.
Why Commercial Real Estate Investing: The Benefits
There is a myriad of benefits that comes with how to invest in commercial real estate vs. residential properties. Chief among the reasons why commercial real estate is an appealing asset is because you can invest in properties with multiple streams of income. This isn't the case with residential property for if the tenant stops paying, you lose your income and residential tenant rights make eviction very difficult.
Another benefit of learning how to invest in commercial real estate is that it's a key to potentially earning a higher steady income. Of course, this depends on numerous factors such as the lease agreement, the size of the property, and what kind of property it is, as well as how many commercial properties you own or invest in. Though it isn't far-fetched to say that depending on the factors above, you could generate hundreds of thousands of dollars in cash flow annually.
Speaking of leases, residential properties are significantly different than commercial real estate properties. One example is that commercial property leases sometimes put the responsibility of paying property taxes, maintenance, and insurance on the tenants, saving the owner/investor more money. Another perk to commercial real estate leases is that they tend to be significantly longer than residential, often 24 to 36 months long with notice to vacate typically more than 30 days.
The personal benefits to investing in commercial real estate are unique to you and your situation, but the advantages discussed above apply to anyone wanting to learn how to invest in commercial real estate.
How to Invest in Commercial Property
No matter your investing background, the best way to begin investing in commercial real estate properties is by doing your due diligence and research. Beyond making sure you know the "ins and outs" of commercial property investing, you'll want to understand the market. Below you'll find general steps to take for how to invest in commercial property:
1) Understand the difference between residential and commercial properties
As mentioned before, leases are much longer and square footage is much more important with commercial real estate than residential. The reason the square footage is more important is that income from the commercial property is typically related to the usable square footage. Another difference is the tenant type, whereas residential tenants usually boil down to whether they can afford the space or not, with commercial space it's what kind of tenant are you trying to attract? You wouldn't be looking for office space if you're wanting to lease to a retail store.
2) Analyze Comparables
This will help you determine the current market value of a property. What you do to analyze comparables is look at the assets or prices paid for recently sold properties similar in location, size, and style. A good rule of thumb when analyzing comparables is to not go beyond 10% higher or lower than the property you're evaluating.
3) The Success Metric
there are three primary ways to determine whether the success or positive cash flow of the commercial property:
- Net Operating Income: The result of all revenue and costs of a particular property, before taxes
- Capitalization Rate: The value of income-producing properties, giving an estimate of future profits.
- Cash on Cash: The rate of return on your commercial real estate transactions.
4) Commercial Real Estate Loans
If you're in need of financing to invest in commercial real estate, there are many commercial investment loan types. Each one should be researched to see if it's the best fit for your needs as each one is unique in eligibility, loan term, interest, and the loan-to-value ratio. Below you'll find several types of commercial real estate loans:
- Small Business Administration Loan
- Certified Development Company Loan
- Conventional Loan
- Commercial Bridge Loan
- Hard Money Loan
- Conduit Loan
As you can see, there are several ways and steps to invest in commercial properties but each requires in-depth research and planning to be successful.
Investing in the Right Properties
A challenge many investors face is finding the right property and that is key to having a return on your investment. As one of the largest developers, property managers, and a leading commercial real estate firm, we understand what to look for and the nuances for commercial real estate investing. Since 1937 we've handled properties of all sorts and currently over 4 million square feet of commercial property. Discover more about working with experienced experts in commercial leases by following the link below and happy negotiating!