Commercial real estate is a little different from residential real estate most of us think of first when we think about real estate. The types of properties, what they need, the upkeep, and even the market forces affecting the price of commercial real estate are all a little different.
That can mean that commercial real estate is a challenge for investors, but also means that there are real opportunities in commercial real estate investing.
Here are some of the commercial real estate basics you need to know if you’re considering investing in commercial real estate, either as a primary investment type or to help diversify an existing investment portfolio.
Remember, this is meant as a primer, not the be-all end-all of commercial real estate investing. It takes time, experience, and research to learn how to be a good commercial real estate investor. This article is more to help you learn what you need to learn.
Why Choose Commercial Real Estate Investing?
There are a lot of reasons to consider investing in commercial real estate. The primary reason that man investors start getting into commercial real estate is because commercial properties have a higher earning potential than most residential real estate.
Remember that multi-family buildings are usually considered commercial real estate, not residential real estate.
Commercial real estate is also almost always in demand, and there is a lot of variety in the kinds of properties that are considered commercial. That means that a savvy investor can diversify the types of properties they own even within their commercial real estate investments, in order to protect their earning potential overall, even if one type of property has a temporary downturn.
The other big reason to choose commercial real estate is that the leases are typically longer, and most tenants need less maintenance work done and are less likely to have an after-hours emergency that you need to be involved in compared with residential real estate.
Problems, when they happen, are often bigger, but much less frequent.
What Do You Need To Know About Commercial Real Estate Before You Start Investing?
Before you start in commercial real estate investing you need to have at least some idea what kind of properties you are interested in owning, the process for getting started, and what kind of management style each property needs.
Let’s take a look at some of the most common examples of commercial real estate properties.
What Kinds Of Properties Are Available?
There are a lot of different kinds of commercial properties available, so this is just a sampler to see what kinds of things are available and how different the strategies are to make these properties effective.
Hotels are a popular kind of commercial real estate, but you do have to cross a few hurdles in order to get one. For one thing, most hotels are franchises under existing brands, so you have to be an approved franchisee before you can own one. There are also usually specific management requirements, and building code requirements that you need to make sure your property meets those requirements.
Hotels are also often more expensive buildings to own, in part because of their size, and in part because of the cost of operating a hotel if you are both the owner and the operator.
Office spaces are another very popular option, and there are a lot of different kinds of office spaces, which means that there are opportunities for commercial real estate investors of all types and budgets.
Small office spaces are a good option if you’re just getting into commercial real estate, or don’t have the budget for the larger spaces that most large companies will prefer to rent. These buildings often get rented to small business owners, LLCs, doctor’s offices, and similar kinds of businesses that need some dedicated space, but don’t necessarily need a lot of space.
How much you allow these spaces to be customized or specialized can effect the potential tenant pool you’re working with, and more specialized spaces often let you charge higher rent. However, the number of businesses in your area interested in a specialized space may be more limited than the number of businesses looking for a basic office.
Retail is one of the most important kinds of commercial real estate, and can also be a good way to get long-term clients since most retail stores and retail businesses don’t want to change location unless they absolutely have to.
However, there can be some added risk to these kinds of properties because new retail stores, restaurants, and similar businesses often have a high failure rate when they open new locations. The most financially secure stores and businesses will often buy the building they want to use instead of renting, so you are taking the risk that the business you’re renting to will go bankrupt while they are renting from you.
A lot of commercial real estate investors specialize in this kind of property. There is almost always demand for housing in multifamily properties, which means that there are usually plenty of tenants to go around.
Airbnb and similar services also make it possible for multifamily properties to rent out residences between tenants if you do ever have occupancy problems.
These properties can take a lot of management, but they can also be extremely lucrative, and it can be significantly easier to find tenants compared with other kinds of properties.
However, at the same time, there can be other challenges associated with this kind of property, from disruptive tenants to disasters that can affect more than one of the residential spaces in your property, to accidents and emergencies that cause a lot of damage.
It’s also important to make sure you’re meeting the requirements of your state for how often the units need carpets replaced and other maintenance tasks, which can add to the cost of operating this kind of property.
Special purpose commercial properties are properties that are designed to specifically do a certain kind of business, but that don’t necessarily convert easily to other kinds of business. For example, a store can pretty much occupy any retail space big enough for their inventory, they don’t usually need special equipment or design. A car wash, on the other hand, can only really function as a car wash, which makes it a special-purpose property.
Technically hotels are also special-purpose properties, as are theaters, stadiums, amusement parks, and many other commercial properties.
These properties typically have a smaller pool of potential tenants if you’re planning to rent them instead of operating a business yourself, but that also means that some of them can be lucrative once you find the right tenant.
What Are The Advantages Of Investing In Commercial Properties Over Other Kinds Of Real Estate?
Now that you know a little more about the kinds of properties that are available to commercial real estate investors, lets talk about the reasons that people choose to invest in commercial properties in the first place.
We’ve already mentioned that commercial properties come with higher income, and that’s one of the biggest incentives for investors. You can typically make more money, faster, with commercial real estate compared with residential real estate.
Of course, this kind of investing also comes with higher startup costs.
Consistent Cash Flow
Another important benefit is that almost all commercial properties offer extremely consistent cash flow, even when you do need to replace your tenants in the property. Many of these properties can also be used in more than one way, or by more than one tenant, which can also help improve consistency of income as well as boosting your overall earnings potential.
Longer Lease Terms
Residential properties typically operate on month-by-month, 6-month, or 12-month leases, which are all relatively short in the grand scheme of things, especially when you might have to list a property for a couple months before finding a new tenant if your current tenants move out.
Commercial properties, on the other hand, often have much longer leases, depending on the kind of property and the intended use of the tenant. That means that you have greater financial security knowing that you will have your property occupied and earning money for at least the term of the lease.
Commercial tenants also typically don’t ask for 24/7 availability from either the landlord or the property manager. Residential properties can have emergencies that need to be addressed immediately at any time, but that’s very rare with commercial properties. So, being a commercial property investor can also give you much greater control over your schedule and time, even if you are managing your properties personally.
Ready To Start Investing In Commercial Real Estate?
If you’re thinking about investing in commercial real estate, or think that commercial real estate investment might be the best next move for your portfolio, the investment experts at Teifke Real Estate can help.
- Esajian, J. D. (2022, October 6). Commercial real estate investing – how to get started. FortuneBuilders. Retrieved December 20, 2022, from https://www.fortunebuilders.com/how-to-invest-in-commercial-real-estate-getting-started/
- Larson, M. (2021, March 31). Pros and cons of investing in commercial real estate. www.nolo.com. Retrieved December 20, 2022, from https://www.nolo.com/legal-encyclopedia/pros-cons-investing-commercial-real-estate.html
- Throupe, R., Throupe, E., & Dong, J. (F. (2022, July 27). What’s “still” special about special purpose property. Counselors of Real Estate. Retrieved December 20, 2022, from https://cre.org/real-estate-issues/whats-still-special-about-special-purpose-property/#:~:text=%E2%80%9CA%20special%2Dpurpose%20property%20is,refinery%2C%20or%20a%20specialized%20manufacturer