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Jul 29, 2024 · Commercial real estate is property used for business or investing purposes. Many different property types, including offices buildings, warehouses, retail stores and even laboratories, fit...
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What should I know before investing in commercial real estate?
Should you invest in commercial real estate?
What is commercial real estate investing?
Is commercial real estate a profitable investment?
- Not all property types are the same. Commercial real estate has a wide variety of asset types. While CRE is typically classified into five main sectors; industrial, office, retail, multifamily, and special purpose, there are many other property types such as self-storage, medical, elder care, land, or hotel.
- Know the market area and supply and demand. One of the most important things to know before investing in commercial real estate is that every market is different.
- Understand market cycles. Nothing lasts forever. The health of the economy, unemployment rate, and GDP all directly correlate to the profitability of commercial real estate.
- Do thorough due diligence. The due diligence period is the time in which a prospective buyer can conduct thorough research on the investment opportunity.
- Overview
- Types of Commercial Real Estate Investments
- Special-Purpose Commercial Real Estate
- Factors to Consider in Commercial Real Estate Investments
- Most Profitable Types of Real Estate Investment
- Benefits and Risks of Commercial Real Estate Investing
- Tips for Successful Commercial Real Estate Investing
- What Should I Consider When Evaluating Commercial Real Estate Investments?
- What Are the Tax Implications of Commercial Real Estate Investing?
- What Is a Good Return on Investment for Commercial Real Estate?
typically comes to mind when many hear “real estate investing,” commercial real estate is where many can find unique investment prospects. But which one is the best for your circumstances?
Below, we demystify this landscape, explaining the types of properties available, their potential
factors. Whether you’re a seasoned
or new to the game, understanding the dynamics of commercial real estate is crucial to making informed decisions that align with your
Commercial real estate generally includes all properties used primarily for business activities. This includes residential properties with five or more units.
There are four main categories of commercial real estate: offices, industrial, multifamily rentals, and retail.
Before investing in commercial real estate, it’s important to understand the different types of commercial real estate. Typically,
is broken down into four categories:
You can break down each category further. For example, retail includes stand-alone stores, strip malls, restaurants, big-box stores, fitness facilities, family entertainment centers, regional malls, and large shopping complexes.
Commercial real estate, especially with offices or residential units, can be assigned a class, which describes its age, location, and condition. There’s no governing body overseeing the classification of properties, so it’s more loosely done through a consensus among developers, brokers, agents, appraisers, and analysts in a local real estate market.
This sector includes hotels, motels, extended-stay hospitality, and resorts. The focus is on short-term stays, with amenities varying from basic in motels to luxurious in high-end hotels. The value of investments in hospitality real estate depends on location, tourism trends, brand affiliation, and operational management. The sector can be highly cyclical, with revenues fluctuating according to the season and macroeconomic factors. An October 2023 report by the NAR says that the average daily rate for rooms is 17% above pre-pandemic figures, and revenues are up 13% over the same period.
This heading captures very diverse forms of housing, from multi-unit residential complexes for communities of older adults, to assisted living and independent living communities designed with special amenities and services for older adult residents with disabilities and other needs, to skilled nursing facilities run more like hospitals than residences.
Investing in commercial real estate requires careful
and a meticulous analysis of factors determining success or failure. A primary consideration in all commercial real estate is the property location, a quality that greatly impacts its value and utility.
For example, a plot in the middle of a major city might be well-suited for an apartment building or retail space but wouldn’t work well for industrial use. A property in an industrial neighborhood might be a good location for a warehouse.
Equally crucial is understanding the
laws, which dictate acceptable property uses and may place constraints on how many units can be put in an apartment complex or how many parking spaces per unit you must have.
An important undertaking would be a market
As an investor, you aim to find the most profitable investment opportunities and take advantage of them. While there’s no single answer in each market for each person regarding which real estate investment will perform the best, there are some things that you can watch for.
Generally, the more tenants you can have, the more profit you can expect. Losing one tenant won’t impact your bottom line as significantly as having fewer tenants. You may also see greater profits from properties that require less investment and infrastructure. For example, residential vehicle parks and storage facilities offer high returns. Both allow many tenants but lack the infrastructure and maintenance requirements of a large apartment building.
Some types of retail and industrial real estate can also produce great returns. If you can find tenants who sign
, meaning that the tenant handles rent, real estate taxes, and property maintenance, then you can avoid much of the cost of owning the property while still earning an income.
Before you invest in commercial real estate, you should consider the pros and cons. Commercial real estate can offer consistent income and growth prospects but is subject to the whims of the real estate market and the economy.
Commercial real estate investors receive regular rent payments, meaning they can see consistent returns.
Commercial real estate investments can be passive, especially if you are relying on an investment fund or property management company.
In addition to consistent rent payments, commercial properties can increase in value, offering two forms of return.
Many investors rely on loans to help fund their real estate investments. That use of leverage can increase return potential but can also increase risk.
Commercial real estate can be costly. Many investors may need to pool funds with others or rely on debt to purchase a property.
Tips for success in commercial real estate investing would include, first, seeking out
If you only own a single property with a single tenant, you are relying entirely on that property and tenant for success. You could face financial setbacks if the building loses value or the tenant stops paying.
Diversifying, by either investing in several properties or buying one with multiple tenants, would reduce risk. You can also diversify by looking at other kinds of real estate investments, such as commercial
real estate investment trusts (REITs)
, which are traded like stocks but must provide 90% of their taxable income in dividends annually.
Getting to know real estate investors and professionals in your area is also a good idea. You can leverage your network for knowledge of local opportunities and connections to contractors and others who can help with building upgrades and maintenance.
When assessing a potential investment in commercial real estate, you should consider the best- and worst-case scenarios for the property. Is it likely to increase or decrease in price? Where is it located, and how will that location contribute to the success of the tenant? Could you repurpose the property if needed? Finally, make sure to consider t...
There are many tax implications associated with commercial real estate investments. In the United States, commercial properties typically undergo
over a longer span (39 years) than residential properties (27.5 years). This results in smaller annual tax deductions for commercial than residential properties. Selling commercial property would likely mean paying capital gains tax in the year when the property is sold.
A good return on investment (ROI) depends on your investment alternatives, overall financial objectives, tax situation, and risk tolerance. The more risk you’re willing to take, the higher ROI you might expect. Alternatively, less adventurous investors may be happy with lower ROIs in exchange for more certainty.
Generally, most investors set out to meet or exceed returns on a major stock index like the
Apr 13, 2021 · Commercial real estate investing involves putting money toward purchasing commercial real estate property, including office buildings, multifamily apartment buildings, hotels, malls,...
- Paulina Likos
- Staff Writer
Nov 29, 2021 · Here are the top factors that you should bear in mind before investing in commercial real estate: 1. Location. Location plays a big role in deciding how your asset performs.
Jul 23, 2023 · The best reason to invest in commercial over residential rentals is the earning potential. Commercial properties typically have an annual return off the purchase price between 6% and 12%, depending on the area, current economy, and external factors (such as a pandemic).
Jul 22, 2023 · Learn how to start investing in commercial real estate as a beginner. This comprehensive CRE investing guide covers property types, financing, returns, risks, finding deals, and tips for new investors.
