Commercial real estate is highly-favored among investors because of consistent returns, long leases, and growth potentials. Its popularity grew a lot in the past couple of years because this alternative investment gives a chance for high profit in the long term. However, getting involved in commercial real estate is nothing like investing in residential properties. With the opportunity to achieve a better profit come higher risks and demands for more personal efforts.
This investment class requires not only hard work but thorough research and planning. Those who strive to become prospective commercial investors need to be well-educated on the topic and engage in the investment with full awareness about all the positives and negatives regarding the business. Commercial real estate is a competitive arena that requires a lot of effort for success and allows little space for mistakes.
Therefore, if you’re thinking about investing in the sector, you will first want to find out everything there is to the topic and fully prepare yourself for the purchase and future work. To help you make an informed decision, we list ten things every prospective commercial real estate investor needs to know.
The answer to the question of how to succeed in commercial real estate is not simple. The overall success depends on many factors and requires a deep understanding of the investment class. For that reason, we will quickly cover the basics of commercial real estate. Even if you already know what commercial real estate is, it’s good to start from the beginning and get a full grasp of how this sector works.
Commercial real estate stands for the property that is leased out for business purposes. While residential tenants pay rent for living in a particular place, commercial tenants do it for running their business in the property. Basically, investors purchase spaces suitable for business purposes and lease them out to different companies. Those spaces can be divided into five general categories, depending on the property type.
It’s crucial for you to decide in what property type you want to invest in the first place. Here are your options depending on the property type:
Now that you’re familiar with basic types of commercial real estate properties, you can think about which one seems most appealing to you. However, it’s essential to think about the pros and cons of each of these types. For example, the office market is highly competitive and might require lowering the lease costs, while residential properties come with high constructional costs.
There are more than a few things that make commercial real estate a smart investment. Here are some of them that might interest you:
Commercial properties offer much better-earning potential than residential rentals. They are known to provide higher returns on investments.
Commercial tenants run their business and offer a professional relationship that is highly beneficial for your commercial real estate portfolio.
Commercial tenants also invest in property maintenance, so you can both improve its quality and raise its value.
You’ll also reduce your expenses because most commercial tenants will handle all of them. Companies like to invest into their own working space, which means you won’t need to maintain the property.
Commercial properties are also rented out for longer periods than residential ones. Therefore, you’ll have more flexibility in lease terms and fewer things to worry about.
However, there are also some risks you might want to keep in mind before rushing into commercial real estate:
Commercial real estate investment is not a one-time thing. You’ll probably have more than one tenant and deal with many responsibilities. That will demand personal presence, involvement, and a lot of work.
You’ll probably need to ask for help when handling commercial properties. If you want to avoid dealing with emergencies yourself, you’ll have to hire someone to do general maintenance and repairs.
Although commercial properties bring more profit in the long term, they also require a bigger initial investment. Expect to pay quite some money upfront for starting with commercial real estate.
Properties for commercial use have more visitors and are, therefore, more prone to damage. Someone might even get hurt on industrial sites. Consider whether you can deal with this stress or not before making an investment.
Now that you went over different property types and all the pros and cons of commercial real estate investment, it’s time to think about what type of investor you want to be. Yes, you can choose to have an active role in your investment and handle all the landlord duties on your own. If you’re great at management and want to be personally involved, this is an excellent option for you. It will also save you some extra money.
On the other hand, those who take these responsibilities as time-consuming might want to avoid the headache and hire experts. Sponsors can handle all the workaround tenants and the property, and you can enjoy passive real estate investing.
No matter what property you choose or what type of investor you are, thorough planning is a must. Before you place your money on a commercial property, you want to calculate all the potential costs. We recommend putting costs of risks on the list as well. Prospective investors research and plan their business thoroughly to avoid errors along the way.
Here are some things you should pay attention to when calculating your expenses:
One of the crucial things to consider before investing in commercial real estate is supply and demand on the market. You’ll want to know all the market factors that rule in a particular area before purchasing a property there. Because you’ll be investing in a specific geographic area you should get to know the neighborhood and find out its unique supply and demand.
Current trends such as spending habits, employment rates, and population growth will tell you all about the conditions and potentials for investing in commercial properties. You’ll be able to predict future changes and decide whether an investment is the right choice for you. Keeping track of market supply and demand is a first step every prosperity commercial real estate investor makes toward creating a secure and profitable business.
For those who are wondering how to invest in commercial real estate, the answer is simple. You only need a commercial real estate broker and a loan. You’ll have equity until you pay off the entire loan, and then, the property becomes yours. However, there are other things you might want to invest in for better results and higher incomes.
When it comes to the financial aspect, we recommend hiring a reliable accountant and other people you might need to help you run your business and maintain your property. On the opposite side, we also recommend spending some time and effort on developing relationships with other commercial investors nearby. It might not seem so, but these connections will help you grow, expand, and keep your business running.
You probably have a good grasp of your finances and know exactly how much you can spend. Still, we recommend you to carefully consider how much you’re about to borrow for investing in a commercial property. We talked about potential extra expenses above, but it doesn’t hurt repeating how important it is to calculate everything ahead.
If you’re not sure about the investment for whatever reason, ask professionals for help and go over all the potential expenses and risks of commercial real estate loans together. You might also want to consider having a partner in your business so you can split the costs and necessary efforts.
Last but not least, think about the potential tenants both before and after the purchase. Residential properties allow for more flexibility in this matter, because of the shorter leases and fewer expenses. With commercial ones, on the other hand, you want to make sure your tenants will stay for a long period.
Sometimes a property already comes with a tenant, and other times it doesn’t. Either way, pick your tenants wisely. Corporate or government entities are some of the most reliable tenants when it comes to paying rent, but they are not the only ones. No matter which company or business you choose, just make sure to pick according to the financial situation and their overall reliability.