The Four Benefits: Commercial Real Estate Investing & You

As a commercial real estate investor, not only do you have the ability to raise capital by properties (like single-family homes) is typically only between %.
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Generally speaking, when inflation occurs, the price of real estate, particularly multi-tenant assets that have a high ratio of labor and replacement costs, will also rise. Commercial Real Estate is one of the few investment classes that is a hard asset that has meaningful intrinsic value. By choosing the location and asset quality wisely, investors can benefit from the security of knowing that they own an asset that has the potential to earn income regardless of what happens to the existing tenant s.

Commercial Real Estate Investing: The Definitive Guide to Investing in Commercial Properties

For this reason, commercial real estate investments do not fluctuate with the same volatility as the stock market. The US Tax code benefits real estate owners in a number of ways. Mortgage interest and depreciation deductions can shield a large portion of your income stream. Commercial Real Estate has a pride of ownership factor that is nearly impossible to value, but is one of the highest among all asset classes. There is great joy and pleasure in knowing you own an income producing property…a piece of the commerce and business activity that drives the economic engine of the nation.

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Do You Have the Right Mindset to Own Commercial Real Estate?

Enroll in RealCrowd University. Here are seven unique reasons why investing in commercial real estate is an excellent choice for growing your wealth: Because commercial real estate properties are often centrally located, property values can increase faster over time. Once property values rise sufficiently, a commercial property owner can make millions in one sale. The landlord and the tenant have more of a business-to-business B2B customer relationship in commercial property, so dealing with commercial tenants is often much easier than dealing with residential tenants.

The commercial tenant will usually have clear requirements and goals, which allows for efficient and professional interactions. Retail tenants have a settled interest in store maintenance because if they do not, it will affect their businesses. As a result, commercial real estate tenant and property owner interests are aligned, which helps the landlord maintain and maybe improve the quality of the property and eventually, the value of their investment.

Businesses typically go home at night. In other words, you sleep when they sleep. It is also recommended that commercial real estate utilizes an alarm system so that if something does happen during the night, the alarm service company will notify the proper authorities immediately. It is easier to estimate the property prices of commercial real estate properties. There are different types of net leases. The most common among the various types of leases is the Triple Net Lease where you as a landlord do not have to pay for any expenses on the property. The lessee handles all the property expenses, including real estate taxes.

The only cost you will have to pay is your mortgage. Businesses like WalGreens, CVS, and Starbucks usually sign these types of leases, because they want to maintain a look at their brand. They manage those expenses, and you, as an investor, have low maintenance expenses. Triple-net leases are not typically common to smaller businesses, but these types of leases are optimal and you cannot get them with residential properties. Commercial real estate tenants typically lease properties for longer periods, and this provides the property landlords better cash flow stability. Relocating is expensive, and businesses do not want to be continually moving.

Their goal is often to find a great location where they can stay for the long-term. Typically commercial real estate properties have longer lease terms which last from a minimum of 5 to 20 years significantly longer than most residential leases and usually have options to renew, with increased rents approximately every 5 years.

Five key benefits of commercial real estate investing - The Saskatchewan Edge

Commercial properties are sometimes low-priced compared to residential properties. Therefore, you need a lower capital outlay. Investing in a commercial real estate property could be an excellent way to enter the market sooner compared to saving big money for a residential property investment. Expert property appraisers set the value of the commercial real estate. Historically, commercial property prices have lower levels of fluctuation compared to some other investment types. If you own a commercial retail property with multiple tenants, you may have more management issues than with a residential property.

With commercial real estate, you are probably dealing with multiple leases, annual Common Area Maintenance adjustments costs that the tenants are responsible for , public safety concerns, and maintenance issues. In a nutshell, you have more stakeholders to manage; you have to worry about the public eye, just as your tenants have to. While this added cost may not be ideal, you will have to add it to your expenses if you want to care for your property properly.

Remember to factor in property management costs when estimating the price to pay for a commercial property. Determine beforehand if you want to manage the relationships and the lease yourself, or alternatively, if you want to distribute those responsibilities to property management services.

Tenant turnover represents one of the biggest risks in commercial real estate investing. If your commercial tenant vacates, and you must find a new one, you may see that extensive restorations are necessary before the new tenant moves in. Each business offers different services and requires the space to fulfill various purposes.

What can I do to prevent this in the future?

Plus, vacancy is expensive for you. Zoning issues can also cause headaches for the owners of commercial properties. The land and buildings that make up a commercial site are usually zoned for a particular use such as retail or manufacturing. If the landlord wants to use the site differently, then it is necessary to apply for a zoning variance.

This can be a pricey and complicated process that does not guarantee a positive outcome for the property owner. Another potential negative regarding commercial real estate investing is potential property tax hikes. As the property values rise, so do the taxes that the landlord must pay. These tax hikes could be passed along to tenants, but this can also result in tenant turnover. While significant infrastructure changes may attract commercial investments in the area, it can also lure the tenants away from the existing areas and from older commercial buildings.

What Is a “Commercial Property?”

This could lead to a vacancy. Values can drop significantly. The value of a commercial real estate property closely correlates with the lease on that property. So if the lease is about to expire or if the property becomes vacant, its value will fall. In contrast, any price-falls linked with residential properties are usually less dramatic and typically happen progressively over a more extended period. Even though the cost of the upgrades will depend on the type of the property, renovating a commercial building, such as a retail or office, may be relatively costly compared to renovating a home.

In comparison, upgrades to a home can include inexpensive tasks like painting or installing some new appliances. Whether you will or will not be investing in commercial real estate property will depend on your budget, the time commitment you are willing to make, and your risk tolerance. Due diligence is a crucial exercise to ensure success in real estate investment. Learning the ins and outs of this type of investment is essential, but actively conducting market research is more important. In principle, the function of due diligence is to confirm that the commercial property is a feasible investment option.


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As an investor, your first step is to understand that commercial real estate is valued differently than residential. Unlike with residential properties, income from commercials is directly related to the usable square footage. Therefore, investors will usually earn more income on retail and industrial buildings.

Hence, commercial leases are longer than residential ones and will pave the path for more significant cash flow. The location of the property is another critical feature that investors need to consider. If the location is not in demand, finding tenants will be hard and this difficulty can result in vacancies. By going to open buildings and talking to landlords in the neighborhood, investors will gain a better understanding of that property as a long-term investment.

Your next step is to analyze comparables in that area, including research for future development. Analyzing comparables will help the investors ascertain the current market value of the property.


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Your third step is to understand the common key metrics used to evaluate real estate. Believe it or not, commercial real estate investing involves a wide array of math and an understanding of real estate finance. If you want to be a good player in a commercial real estate, you should know the following formulas. Configured before taxes, this calculation provides the investors with an idea of how much they will make from an investment minus all the necessary operating expenses, which are necessary costs to run and maintain one commercial building.

Expenses usually consist of insurance, utilities, property management fees, repairs and janitorial fees, and property tax. The capitalization CAP rate will provide the investors with an estimate of future proceeds or cash flow. In principle, that is the ratio of net operating income to the property asset value. Investors who rely on financing to buy their property are the ones who mostly use it.

Market research is the key to commercial real estate investing success.

How To Invest In Commercial Real Estate Properties

Even though learning these formulas may be confusing at times, investors who overcome these real estate numbers will increase their odds of success significantly. For those looking toward investing in a commercial real estate, the formulas mentioned above will ensure that you get off to the right start. If you have decided to invest in commercial real estate property, please take note of the several types of commercial real estate investments. Retail Buildings These buildings can be anything from a single, stand-alone building to a large strip or shopping mall.

Anyone can invest in a retail space. These types of buildings include stores, bars, restaurants, insurance offices, fitness or dance studios and so on. These types of buildings can be an excellent investment opportunity because you get to branch out your portfolio and gather more rent per square foot by possessing a multi-purpose space. Office Buildings Office buildings can be an excellent commercial investment because corporate tenants typically stay in their location for a longer time and are expected to pay on time. The classification of these buildings is by their construction and location.

Some buildings have a layout that can support multiple businesses while others are less flexible when it comes to the floor plan. All of these factors impact how easy or hard it may be for tenants to rent out space in a commercial office building. Therefore, make sure to estimate all aspects of your purchase carefully before you buy. Industrial Buildings These types of commercial buildings can include anything from substantial manufacturing plants to small warehouses.

Industrial buildings often contain a vast amount of storage or workspace in addition to one or a couple of minor offices. One of the more significant benefits of possessing a large industrial building is that it is multifunctional and you can usually charge a quite high rent. The negative side is that it can be quite challenging to rent out a building. Commercial leases are rental agreements that allow a business to rent a commercial space from a property owner.

They are divided into three forms: Your first step when leasing is to set your commercial real estate parameters. These parameters help you limit your search to only commercial spaces that meet your needs. Specifically, you need to understand the following:. As we mentioned above, all commercial properties are zoned for a particular use. A warehouse is a great example of a commercial real estate property zoned for industrial use. Other commercial real estate zoning includes office, retail, restaurant, and leisure. The type of zoning commands the kind of business that can work out of the commercial building.

Make sure you understand your local zoning laws and the type of zoning your business requires. Determining your maximum monthly budget will help you limit your searches to only areas that you can afford. The amount per square foot is usually derived from the annual lease price divided by the entire rentable square feet of the space. Once you discover the average price per square foot, take it and multiply it by the square footage that your business needs. This should give you the expected annual budget for your commercial lease.

To find your expected monthly lease payment, divide the annual by Anything higher can put your business in financial distress. Understanding your ideal customer is the most crucial parameter if you are a business looking to attract visitors to your location. Retail, restaurants, and similar types of businesses are great examples.

Also, these companies should know the location of their ideal customers. For instance, a fast-casual restaurant will want to lease a commercial space in an area inhabited by people who like fast-casual dining. Alternatively, a Michelin Star restaurant may want to pick another location in a more distinguished area. However, if you are looking for office space, this is not as important.

Rather, you will want to find a commercial space that is convenient for your employees. You can carry out a similar analysis and find an area that is highly desired by your ideal customers such as is the case with the technology industry and Silicon Valley. Accessibility is also a critical parameter for restaurant and retail businesses.

For instance, these businesses will want to have an adequate parking lot for their customers. Determining the size of your parking lot is easy. A wise rule to follow is to have a parking spot for each third customer. The available commercial lease options largely depend on the size and the layout of the space that you need. To determine the size, you will need to calculate the number of your customers or the size of your workforce to get the necessary square footage.

For instance, retail and restaurant locations on average require 15 square feet per customer. On the other hand, offices usually need between and square feet of usable workspace per one employee. And if you are looking for an office space, you will want to predict the desired size of your workforce and then multiply it by to This will give you the needed size of the commercial space.

Agents facilitate most commercial real estate leases. There are usually two types of commercial real estate agents involved:. You will want to find a Commercial Real Estate Agent who has a variety of experience and attention. As we mentioned above, signing an agreement with a commercial real estate agent is not mandatory. There are usually 3 types of commercial leases. The difference between them is the way fees and costs are estimated. The three types are:. A full-service lease is the most common type of commercial real estate lease for office buildings.

That means that the property owner is responsible for paying the costs linked to the property, including maintenance and repairs, property taxes and insurance, and utilities and janitorial services.