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Commercial Real Estate Investing: How to Get Started Investing
Property and physical assets are generally considered great investments because they appreciate over time and offer consistent returns.
Commercial real estate (CRE) as an investment option is becoming more popular among investors due to the high return rates. As compared to residential properties, commercial real estate properties can offer investors more financial rewards but the risks involved are also higher.
When getting into commercial real estate investing, it is important that you understand how to invest and also what assets to invest in for maximum returns.
- Commercial real estate refers to properties that are primarily used for business purposes
- Some important things to consider before investing in commercial property investments include location of the property and available financing options
- There are different types of commercial real estate such as office space buildings and retail properties
- Some pros of investing in commercial real estate include potential for higher returns and property appreciation
- Some cons include potential vacancies and limited liquidity
- Before getting into commercial real estate investing, be sure to do extensive research, do your due diligence and build proper networks
The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning, financial management, and real estate here. More on disclaimers here.
What is Commercial Real Estate?
Commercial real estate refers to properties that are primarily used for business rather than residential purposes. This can include properties such as office buildings, retail stores, warehouses, industrial parks, and apartment buildings.
Commercial real estate can be owned or leased by businesses, individuals or investors, and is typically used to generate income through rent or capital appreciation. Commercial real estate transactions often require larger amounts of money and involve more complex legal and financial arrangements than residential real estate transactions.
Things to Consider Before Investing in Commercial Real Estate
Before investing in commercial real estate, it is important to consider the following factors:
Location of the property
The location of the property is critical to the success of the investment. For investors and commercial property owners, it is important to look for properties in areas with a high demand for commercial real estate and good economic growth prospects.
The type of commercial property that you want to invest in
Commercial real estate comes in different types such as office, retail, industrial, and multifamily properties. Choose a property type that suits your investment goals and risk tolerance. If you are interested in investing in real estate without having to own any physical property, you can choose to buy REITs (real estate investment trusts) shares instead.
Do a thorough market analysis
Conduct a thorough market analysis to determine the supply and demand for commercial real estate in the area. This will help you to understand the potential for rental income and capital appreciation.
Conduct a comprehensive financial analysis
Analyze the financials of the property to determine the potential return on investment (ROI). Consider the costs associated with owning and managing the property, including taxes, maintenance and insurance.
Consider the ideal tenant quality
The quality of the tenants in the property can significantly impact its performance. Look for tenants with a good credit rating and track record of paying rent on time.
Determine the best financing options for you
Consider your financing options and determine the most suitable option for your investment strategy. This may include traditional bank loans, private financing, or partnerships.
Have an exit strategy in place
Plan your exit strategy in advance. Determine the time horizon for the investment and how you will dispose of the property when the time comes.
Types of Commercial Real Estate
There are several types of commercial real estate, including:
These are properties designed for conducting business activities such as administrative work, professional services and meetings. They may be located in urban or suburban areas, and can range from small single-story structures to high-rise towers.
These are commercial buildings that are designed for retail businesses such as shops, stores, restaurants and cafes. They can be standalone properties, part of a shopping center or located in high-traffic areas such as downtowns.
These are buildings designed for industrial purposes, such as manufacturing, storage and distribution. They may include factories, warehouses and distribution centers.
These are buildings that contain multiple residential units, such as apartments or condominiums.
These are commercial properties designed to provide temporary accommodation and other services to travelers, such as hotels, motels and resorts.
These are commercial properties that provide healthcare services, such as hospitals, clinics, and medical offices.
Special purpose properties
These are properties that are designed for a specific use, such as theaters, amusement parks, sports facilities and educational institutions.
Pros of Commercial Real Estate investing
There are several potential benefits of investing in commercial real estate, including:
- Commercial properties generally generate more rental income as compared to residential properties. That means they have the potential to generate higher cash flows and returns on investment.
- Tenants who occupy commercial buildings typically sign longer leases than residential tenants, which means less turnover and more stable cash flows.
- Investing in commercial real estate can be a way to diversify an investment portfolio beyond traditional stocks and bonds.
- The value of commercial real estate can appreciate over time, especially if it is located in a desirable location with strong economic fundamentals.
- Commercial real estate investors may be able to take advantage of tax benefits such as depreciation deductions, which can reduce their taxable income.
- Many commercial real estate investors hire professional management companies or property managers to handle day-to-day operations and maintenance, which can free up time and resources for other activities.
- Rents on commercial properties tend to rise with inflation, which can help protect against the erosion of purchasing power over time.
Cons of Commercial Real Estate investing
While there are several potential benefits of investing in commercial real estate, there are also potential drawbacks and risks to consider, including:
- Commercial real estate can require a significant amount of upfront capital to acquire and operate, such as down payments, financing costs and ongoing maintenance expenses.
- Commercial properties may be subject to longer vacancies than residential properties, especially during economic downturns or changes in industry trends.
- The value of commercial real estate can be affected by broader economic and market factors, such as changes in interest rates, shifts in consumer behavior and regulatory changes.
- Successfully investing in commercial real estate often requires specialized knowledge and expertise, such as understanding market trends, evaluating lease agreements and managing property operations.
- Commercial real estate investments can be less liquid than other types of investments, meaning it may be more difficult to sell quickly and convert to cash.
- Commercial real estate investors may be responsible for managing the property and tenants, which can require a significant amount of time and effort.
- Commercial properties may be subject to environmental risks and liabilities, such as contamination from hazardous materials or pollutants.
Steps to Getting Started in Commercial Real Estate Investing
Getting into commercial real estate investing can be a lucrative and rewarding venture, but it also requires careful planning and execution. Here are some steps that you should take as you get started.
Start by educating yourself. Before investing in commercial real estate, you need to educate yourself about the industry. You can start by reading books, attending seminars and taking courses in commercial real estate investing. You should also familiarize yourself with the market and its trends.
Take time to build a network. Networking is crucial in commercial real estate investing. You need to build relationships with other investors, brokers, lenders and property managers. Attend real estate events and join local real estate associations to build your network.
Find suitable financing options as commercial real estate investments typically require a significant amount of capital. You can finance your investment through traditional banks, private lenders or crowdfunding platforms.
Be sure to conduct due diligence once you identify a property that you're interested in. This includes analyzing the property's financials, market trends, and physical condition. You can also hire a professional real estate agent to help you with this process. To engage a certified and qualified real estate agent, get in touch with Ila here.
Next, make an offer after completing due diligence on the property. You should negotiate the terms of the sale, including the purchase price, closing costs and contingencies.
Go ahead and close the deal. Once you and the seller agree on the terms, you need to close the deal. This involves signing a purchase agreement and transferring funds.
Get started on managing the property. After acquiring the property, you need to manage it effectively. This includes collecting rent, maintaining the property and addressing tenant concerns. You may choose to manage the property yourself or hire a property management company.
Other Great Alternatives for Investors
If you would like to invest in commercial real estate without having to directly purchase and manage a property, here are two great options that you can explore.
REITs (Real Estate Investment trusts)
A REIT is a company that owns and operates income-generating real estate properties. By investing in a REIT, you are essentially buying shares of the company in the stock market, which gives you a portion of the income and the potential for appreciation in the value of the properties.
REITs can invest in a variety of real estate assets, including office buildings, apartment complexes, shopping centers and hotels. REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends, thus making them an attractive investment option for those seeking regular income.
REIGs (Real Estate Investment Groups)
A REIG is a group of investors who pool their money to purchase and manage real estate properties. REIGs can be structured as a partnership or LLC, and each investor owns a percentage of the property. REIGs can invest in a variety of real estate assets, and the group is typically managed by a professional real estate company. REIGs can be a good option for those who want to invest in commercial real estate but don't want to manage the property themselves.
When investing in REITs or REIGs, it's important to do your research and choose a reputable company or group. Look for companies with a track record of success and a diversified portfolio of properties. You should also consider the fees associated with investing in REITs or REIGs, as they can vary significantly.
It is important that you keep in mind that just like any other type of investment, there are risks associated with investing in commercial real estate, so it's important to have a long-term investment strategy and diversify your portfolio.
Is Commercial Real Estate a Good Investment for you?
Commercial real estate can be a good investment for individuals or entities who have the financial resources and expertise to manage such properties. Commercial properties, such as office buildings, retail centers, and industrial warehouses, can generate regular rental income and appreciate in value over time.
However, investing in the commercial real estate sector also comes with risks, such as market fluctuations, tenant turnover, and unexpected property expenses. It is important to conduct thorough research and due diligence before investing in any real estate property.
As a real estate investor, it is very important that you consult with a qualified financial advisor or real estate professional before making any investment decisions. They can help assess your financial situation and provide guidance on whether commercial real estate is a suitable investment for you.
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Bay Street Capital Holdings is a Black-owned, independent financial planning, wealth management, and investment advisory firm located in Palo Alto, CA. The firm's primary focus is on managing total risk and volatility, with the aim of preserving and increasing total assets and income, rather than solely maximizing returns like many other advisors.
Founder William Huston has over 13 years of experience in supporting the largest retirement plan in the United States, the Thrift Savings Plan with assets worth $650B, and has been recognized by Investopedia as one of the Top 100 Financial Advisors for 2022. Bay Street is the only Black-owned firm among the twenty recognized firms in California.
Bay Street was established to support diverse and emerging fund managers and entrepreneurs, with a goal of advocating for their needs. Ekenna Anya-Gafu CFP, AAMS, based in Scottsdale, Arizona, is a recognized member of Bay Street for his excellent communication, helpfulness, attention to detail, and responsiveness.
Bay Street Capital Holdings was also a finalist in the Asset Manager for Corporate Social Responsibility category among more than 900 firms throughout the United States in 2021. As of now, Bay Street manages $480 million in assets.