Real estate is one of the best ways to build wealth. Research has shown that real estate accounts for 60% of the world’s mainstream assets, as well as a sizable portion of national, corporate, and personal wealth.
However, commercial real estate, one of the branches of real estate, has the highest annual returns of any type of real estate. Therefore, if you intend to invest in real estate, your best move might be to invest in commercial real estate.
When venturing into something new, like investing in commercial real estate, you must have a guide. Thus, this article will serve as a guide and will detail everything you need to know to begin investing.
What is Commercial Real Estate?
Commercial real estate simply refers to non-residential property that is mainly used for income-generating reasons.
It is also referred to as commercial property, income property, or investment property. Income or profit from commercial real estate is either generated from its capital gains or rental income.
Commercial real estate investments typically necessitate greater suaveness and larger sums of capital from investors unlike investing in residential real estate.
This is due to the fact that while constructing a commercial property, the owner or constructor must adhere to particular requirements.
Types of Commercial Real Estate
Mostly, commercial real estate is divided into five different types. These types are highlighted below:
These types of properties are office buildings leased or rented to various businesses to operate out of. In urban and suburban cities like New York, Los Angeles, and Texas, office properties are mostly high-rise buildings.
Typical office properties include:
- Small professional office buildings
- Skyscraper buildings
- Office parks
- Office campuses
These types of properties are built to carry out heavy manufacturing and light assembling. More so, they can serve as large warehouses and distribution centers.
Industrial properties are usually built to accommodate heavy machinery, hazardous chemicals and are all grouped away from residential buildings because of potential noise or hazard issues.
Retail properties are the types of commercial properties used for retail purposes. Additionally, retail properties are some of the commonest commercial properties.
- Strip malls
- Community centers
- Regional shopping malls
- Outlet malls
- Large anchor stores such as Best Buy, PetSmart, and OfficeMax.
Hotels are considered commercial property, irrespective of their size or type.
They can be categorized into:
- Extended stay hotels: offer large rooms which are similar to those offered at serviced hotels
- Full-service hotels: offer services like concierge, 24 hours desk services, restaurants, and bar
- Limited-service hotels: are small, few-room hotels and they do not have restaurants or bars
Hotels are the most popular type of commercial property, and they can help you grow your real estate finance by providing quick turnover and high rate of risks with returns.
A multi-use property is a commercial property with a wide range of tenants. These tenants could be:
- Health care facilities,
- Self-storage facilities
- Theme parks
Multi-use buildings, according to the average real estate accountant, can be a smart investment for investors since they are not dependent on a single type of business which in turn provides some security.
How to Invest in Commercial Real Estate
Commercial real estate is a profitable investment and also serves as a stronger hedge against stock market volatility relative to stocks.
This is owing to the fact that investors can profit from property appreciation when they sell, as well as receive high-quality rental payments.
There are two major ways in which you can invest in commercial real estate:
The direct investment allows an investor to be a landlord by making you the direct owner of the commercial property.
Direct investment is most appropriate for investors with a good amount of knowledge about the real estate industry or those who can afford to employ the services of firms that do.
Therefore, an investor in commercial real estate must be a high-net-worth individual because it requires a huge amount of capital. This is because investing in commercial real estate is a high-risk, high-return investment.
Ideally, you should invest in commercial properties in areas with low commercial property supply and high demand. By doing so, it will be easy for you to earn high-quality rates from tenants. The value of a commercial property is also affected by the local economy of the area.
As another option, investors may also indirectly invest in commercial properties by purchasing market securities, such as real estate investment funds and exchange traded funds, that invest in investment property-related stocks.
Additionally, you can indirectly invest in commercial real estate by investing in firms such as banks and realtors that cater to the commercial real estate market.
Benefits of Investing in Commercial Real Estate
Irrespective of whether you are currently a stakeholder or an investor in real estate, commercial real estate is a solid place to invest. Below are a few reasons why this is true:
High Potential Income
The biggest benefit of investing in commercial real estate is the earning potential. Commercial properties have a higher rental income, higher selling price, and therefore a higher potential for high returns.
Commercial real estate investments potentially offer regular income that can be higher than typical incomes on residential real estate.
Commercial real estate also enjoys certain tax benefits. First, there is depreciation, which lets you deduct a percentage of the value of your property from your taxed income each year. For many investors, this immensely reduces their total tax burden.
Also, if you consult with a tax expert, you can avoid capital gain taxes when you eventually sell your commercial property.
Various Investment Options
Commercial real estate investments offer a wide range of options. You can either invest in a large mall or a high-rise office building.
Also, you can keep it simple by investing in a single storage facility, an industrial warehouse, or a single condo complex.
You have a lot of options when it comes to what you can invest in and where you can do it.
Fewer Difficult Tenants
With commercial real estate, you deal with fewer tenants who refuse to pay their rent or leave your property in shambles after their lease is done. Moreover, the commercial leases are contracted for a longer duration with less tenant turnover.
Since you are dealing with business owners, who have a reputation to uphold and money on the line, they are usually more cautious when it comes to working with landlords and obeying the rules.
This saves you a lot of time and effort.
CRE can be a good investment to diversify your portfolio if you’re already heavily engaged in residential real estate.
Besides, there is the factor of unexpected occurrences with respect to the economy. Therefore, diversification of your portfolio can be a smart move in the long run.
A successful commercial real estate investor can expect to make a lot of money throughout their career. This article provides you with the preliminary knowledge you need to begin.