Investing in real estate is quite lucrative. Commercial real estate investments are a double treasure box for investors. This is because money is generated from real estate investments. But then, there are key factors to consider before choosing a commercial real estate investment or a residential real estate investment. While residential real estate refers to properties set aside for occupancy, commercial real estate refers to properties used exclusively for business purposes, such as offices, industries, stores, and so on. Investing in commercial real estate is profitable and yields great passive returns. You need to understand the various types of commercial real estate investments to get the most out of your portfolio. If you’re wondering how to get on board, this guide covers every detail you need to know about commercial real estate investment.
Commercial Real Estate Investing
The term “commercial real estate” (CRE) refers to any land or building that is used only for business-related purposes or as a workspace but is not being used as a residence or would be considered residential real estate. Investing in commercial real estate involves buying or spending money to develop a commercial property with the expectation of a return or profit in the near or long term. Investment in commercial real estate is only profitable if you keep the holdings for a long period of time.
How to Get into Commercial Real Estate Investing
Before you dive into commercial real estate investing, there are certain terms you need to understand. Knowledge of these terms will help you get the most out of investing in commercial real estate. Some of these are as follows;
#1. Direct and Indirect Investing
It is important to understand the two primary options in commercial real estate investment, which are direct investing and indirect investing.
Ownership of a building by an individual or a business, such as a partnership or real estate, is referred to as a direct investment. You can become a landlord through the ownership of a physical property. However, it is best to go for direct investment in commercial real estate. Especially when you have good knowledge about the industry or can employ firms to do it for you. Commercial properties are a high-risk, high-reward real estate investment. Anyone going for direct investment in commercial real estate should have a good net worth.
Meanwhile, investing in various market securities, such as real estate investment trusts (REITs) or exchange-traded funds (ETFs) that invest in stocks related to commercial real estate, or by making investments in businesses that serve the commercial real estate market, like banks and realtors, is an indirect investment in commercial real estate. The indirect approach doesn’t necessarily require a large amount of money to invest.
#2. Determine the investment approach
Here you will have to find out if you prefer a crowdfunded investment approach or a single property investment approach. Crowdfunding enables you to invest in commercial properties as a group, and shares return amongst the member groups. If you choose to participate in crowdfunding, be sure to research the company’s track record. This will enable you to learn about the development of the group and the rights and obligations regarding the option to withdraw cash from the investment at any moment.
However, if you choose the single property investment approach, Then you need to determine distinctive qualities that advance or diminish the value of the property. These distinctive trends exist in the neighborhood of a property and can be troublesome in the near future. Many expert investors in the commercial real estate industry began their investing careers through single-family rentals. Therefore, do not neglect the fact that the returns from commercial real estate investments are dependent on the types. Meanwhile, a good percentage of investors in commercial real estate begin with single-family rentals as a way to gain experience, build money, and eventually progress to investing in other properties.
#3. Real Estate Online Application Process
There are various types of commercial real estate investment platforms online through which investors now have access to commercial projects that are frequently only available on the private market. Thanks to various technological applications like streitwise, CrowdStreet, and others. Many of these websites provide access to educational materials, networking opportunities, and ways to get in touch with other real estate investment experts.
Read Also: How To Start a Real Estate Business: Step-by-step Beginners Guide
Commercial Real Estate Investing for Beginners
As a beginner wanting to venture into commercial real estate investing, it is best to choose a property that suits your investment strategy. Therefore, a beginner should check out
#1. Cash Flow
Every property investment needs to have a unique cash flow plan. Some have higher or lower monthly cash flow. Therefore, investing in anyone should still maintain the flow that meets your expectations. Finally, the goal of cash flow properties is to create a passive investment strategy, requiring a less hands-on approach.
#2. Value add
Before a commercial property can generate more cash flow and returns, the extra value must often be created and implemented. It is wise to start off with lower returns, but as you increase the property’s value, the returns also rise. Project sponsors or investors add this value through renovation, exterior landscaping, or maintenance.
However, it is an active strategy, which implies that you will need to rely on your local team in order to effectively complete every stage.
#3. Holding time
Every investment is evaluated based on how long it will take for profits to increase. The rents and sales prices of many commercial properties are rising gradually. It may take months or years for the rent or sale price to rise, and because there is a greater chance of rising market rents, investors hold commercial properties in high-appreciation areas for a long time.
#4. Appreciation
The capital grows both during the ownership and sale of commercial real estate. Both the sale price and the returns are included in the appreciation. However, a beginner is to look out for commercial properties with their potential appreciation. By doing so, it will be easier to decide how long to hold an investment and when to sell it. Different types of commercial real estate investments come with different levels of appreciation. Meanwhile, there are some considerations you should make to increase the appreciation of an investment. These considerations are the number of residents moving in each year as rental costs rise and whether businesses are relocating there. By taking these factors into account, you will be able to both hold an investment and estimate its prospective return.
Residential vs Commercial Real Estate Investing
Residential and commercial real estate investing share similar risks and strategies, but there are major differences between the two investments. The major difference between residential and commercial real estate investing is that
- Residential real estate investing is an investment in properties for residential purposes, like single-family homes and one-to-four-unit rental residences. Commercial real estate investing is an investment in properties for business purposes like offices, industries, hotels, and stores.
- Residential real estate loans often come with 30-year terms and fixed interest rates. While commercial real estate loans could have variable interest rates and 5-year maximum loan durations. If a lender stays missing after five years, the investor must sell the property or refinance the debt.
- Commercial real estate investing requires more capital than residential real estate.
- The kind of tenant each building draws is another glaring distinction between commercial and residential properties. Families and individuals often rent residential properties, whereas corporations rent commercial buildings.
- Property taxes for commercial real estate are typically higher than those for both owner-occupied homes and residential rental properties.
- In general, due to the steadfast lease terms in place for tenants, commercial real estate almost always has a constant revenue flow, making it less risky. Purchasing a residential property, on the other hand, might be highly risky due to its erratic cash flow and the possibility of significant swings in market demand.
- Lastly, there are different options for different property types. A far greater variety of prospective investments are typically available to investors in commercial real estate. Commercial property investment funds, for instance, are more prevalent than residential ones. Residential real estate investing, on the other hand, usually gives investors a more active involvement in the property.
How to Invest in Commercial Real Estate with Little Money
Commercial real estate investment requires its investors to come with a good amount of capital. There is, however, a way to invest in real estate even if you have very little money. The route is via crowdfunding. Crowdfunding in commercial real estate is a process that enables a group of investors to finance a commercial project. Every real estate crowdfunding deal has a guarantor, a crowdfunding platform, and investors.
This enables investors to invest in real estate without owning, financing, or managing properties. These guarantors can be the individuals or companies responsible for the systems. The crowdfunding platform connects the guarantor to interested investors.
The guarantor acquires, manages, and sells the investment, while the public can come in as credible investors to fund the design with little or big cash. Also, the crowdfunding platform handles nonsupervisory issues, informs investors about deals, and collects funds from investors on behalf of the guarantor. The investor contributes to the design’s backing in exchange for a share of the gains and also collects their periodic returns, ranging from 2 to nearly 20.
Furthermore, crowdfunding platforms in marketable real estate give individual investors access to marketable real estate systems, such as hospices, apartment complexes, medical complexes, etc. It might be considered a parlous investment at times because there’s no guaranteed return and investors’ plutocracy can be held for a long time depending on the type of investment.
Examples of these crowdfunding platforms are
- Fundrise-which is best for beginners.
- Crowdstreet-best for all
- Streitwise-for REIT
See Also: COMMERCIAL REAL ESTATE LOANS: Types, Rates and Requirements
Types of Commercial Real Estate Investments
The following are the various types of commercial real estate investments.
#1. Office Building Investment
This investment will be used to construct, operate, or finance the development of offices. These offices may be utilized for legal, consulting, medical, or other business-related functions. Every metropolis has a high demand for offices in central locations. The benefit of purchasing office space is that tenants may agree to long leases, which makes forecasting future profits simpler.
#2. Land Investment
There are various investments in land for agricultural purposes. Land in agricultural areas can yield a great profit if it is issued to farmers to produce rich food items, raise livestock, and the trees in it can be logged and sold to timber companies.
#3. Retail Space Investment
Every city has a market area or space for product sales and distribution. This investment implies funding or financing the development and maintenance of space for retail purposes. For example, investing in a mall can yield great returns as there are streams of people ready to rent a space to sell their products.
#4. Storage Unit Investment
This is an investment in storage units or facilities. Although the idea of renting out storage space may not exactly sound glamorous, there is money to be made in this kind of real estate investment. Investing in a big market isn’t necessary either. Numerous storage facilities are possible in even small towns. Once more, location, in addition to local competition, is the key to predicting profitability.
#5. Industrial Property Investment
There is a space designated for industrial facilities in every city plan. People in this area buy or rent buildings or positions to create or operate their desired products. Many different things can be referred to as industrial property, including factories, warehouses, research facilities, and so forth. You might need to look at the larger market to get a sense of how simple it will be to find tenants if you own these kinds of properties because it can be harder to predict demand.
Passive Commercial Real Estate Investing
Will I get passive returns from investing in commercial real estate? Sure, you will. If you are looking for a passive income stream, investing in commercial real estate is one of the best passive vehicles available, based on the opportunities. However, it is best to understand what passive commercial real estate investing entails as well as the various types of investments before focusing on maximizing returns.
In other words, passive commercial real estate investing is a type of investment in real estate where you put money into a commercial project that you won’t be directly in charge of managing. There are many ways to invest passively in commercial real estate, including buying stock in publicly traded companies with a real estate focus. These companies can be construction companies, real estate development companies, or real estate brokers.
You can also put money into Real Estate Investment Trusts (REITs), which are companies that pool investor funds to make sizable real estate investments. Real estate investing is one of the best ways to make your money work for you because it enables you to generate income without actively managing the investment.
What Are the Steps for Real Estate Investing as a Beginner ?
- Know your financial stage
- Choose a real estate investment strategy
- Pick a target market
- Decide on criteria for investment property
- Build your team
- Find deals
- Schedule time
Types of Real Estate Investments
- Residential real estate
- Commercial real estate
- Raw land
- Real Estate Trust Investments (REITs)
- Real estate crowdfunding
What Are the Benefits of Commercial Real Estate Investing?
- It builds relationships. Commercial real estate investing offers investors the opportunity to partake in business-to-business relationships. This is great for expanding your network.
- Longer leases. Commercial buildings have longer leases than residential buildings.
- Less Competition. The perceived difficulties of commercial investing makes it possible for the commercial space to be less filled with other investors.
- Higher income. Commercial properties have a higher return on investment, and also have longer leases compared to residential real estate. Therefore, has a higher income as a result of less tenant turnover.
What Are the Types of Commercial Real Estate Investing?
- Office
- Retail
- Industrial
- Multifamily
- Special purposes
Owner Occupied Commercial Real Estate?
This occurs when an investor purchases a commercial real estate to use the buildings for personal reasons.
Ways To generate income in Passive Commercial Real Estate Investing?
- Crowdfunding. This is the pooling of small amount of money from a large number of individuals.
- Real Estate Investment Trust
- Investing in Real estate company
- Mutual funds
- Remote ownership
What Are the Benefits of Passive Commercial Real Estate Investing?
- Through crowdfunding or REITs, you can invest in commercial real estate with little amount of capital.
- You don’t need extensive knowledge to passively invest in commercial real estate.
- There is no physical labor involved in passive commercial real estate. All you have to do is invest your money and watch it grow.
- Since you dont have to physically manage the property, passive investing offers more liquidity when compared to active investing.
What Is the Difference Between Active Investing and Passive Investing?
- Active investing, the investor typically owns and manages the property. While passive investing, the investors don’t manage the property. He only invests his money
- There is a greater sense of responsibility in active investing, unlike the passive investing, where there is little sense of responsibility.
Conclusion
Commercial real estate might not be the right investment for everybody. The advantages of investing in CRE cannot be overstated because they include inflation insurance and non-correlated, predictable returns over the long term. This places it among the best investments that can yield higher investment returns.
Commercial Real Estate Investing FAQs
What type of commercial real estate makes the most money?
Currently, RV parks, mobile home parks, self-storage facilities, and billboards offer the highest returns on commercial real estate. These asset classes deliver yearly returns of over 25%.
What is passive investing in real estate?
Passive real estate investing is a type of real estate investment in which you invest money in a real estate project that you will not be directly responsible for managing.
Is office building a good investment?
The office demand rate hit 45 percent as of 2023, rising 7 percent year over year, despite widespread anxiety about empty offices. In spite of the fact that occupancy has undoubtedly decreased, the office sector is not only a sure thing but also a good place to put your money.
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