Commercial real estate is a great investment opportunity for those who are looking to generate long-term passive income. However, not everyone knows that they can invest in this type of property. In this blog post, we will discuss the question: ‘Can Anyone Invest In Commercial Real Estate’?
One of the best things about investing in real estate is that anyone can do it. You can start building wealth through commercial real estate whether you have a couple thousand or one hundred thousand dollars to invest and whether you are an experienced investor or not. Here is the information you need to get started.
Key Takeaways
- Commercial real estate is a great way to generate long-term passive income.
- Anyone can invest in commercial real estate, but it does require some knowledge of the industry and an understanding of the risks involved.
- It’s important to do your own research and consult with professionals when investing in any type of real estate.
Table of Contents
Commercial Real Estate investing, defined as the purchase, management, and sale of properties ranging from retail stores to office buildings, is an attractive option for those looking to diversify their portfolios. Aside from its constant demand and steady returns, investments in commercial real estate come with a host of benefits such as tax incentives, flexibility when it comes to leasing agreements, and reduced fluctuation risk compared to the stock market.
The most successful investors are the ones armed with knowledge about any associated challenges and risks such as tenant turnover cycles or managing expenses related to maintenance and repairs. But with proper research and advice from professionals, investors can benefit greatly from investing carefully in a sector whose potential rewards far outweigh its risks.
Who can invest in commercial real estate?
Individuals
When it comes to investing in commercial real estate, many people mistakenly assume that only large companies and organizations can take part.
However, individuals also have the potential to succeed in such investments. With proper guidance, a well-thought-out marketing strategy, and some guidance from professionals, someone with a smaller budget can reap the same benefits as larger competitors – not to mention added satisfaction of having taken on a project of remarkable scale. A real estate is an exciting option for any investor looking to make a lasting impact on their financial trajectory.
Real estate investment trusts (REITs)
Real estate investment trusts, or REITs, are businesses that own and manage properties in order to make money. Companies that manage portfolios of high-value real estate properties and mortgages are known as real estate investment trust companies. For instance, they rent out properties and get paid for them. The stockholders are then given income and dividends from the rent that was thusly collected.
Private equity funds
Investments in private equity real estate funds can be made by affluent people and organizations such as endowments and pension funds in exchange for equity and debt in real estate. Private equity real estate uses a diversified portfolio of properties actively managed by a group of investors. General partners make investments in a wide range of real estate, in a number of various markets. There is a wide variety of options for property owners to pursue, from building on undeveloped ground to completely renovating older properties to injecting cash flow into failing businesses.
Crowdfunding platforms
One of the most exciting and innovative new strategies available today to diversify your financial portfolio is to participate in the real estate crowdfunding market.
It appeals to investors of many ages and focuses, making it very popular. Crowdfunding gives you the opportunity to pool your money online with the money of other people in order to purchase real estate (or a part of real estate) as a group.
This presents a tempting opportunity to diversify your assets by investing in real estate. Real estate crowdfunding, in its most basic form, makes it possible to increase or expand your wealth and get started in the world of property ownership and rental with a small initial investment. Both of these goals may be accomplished with minimal risk.
Here is also a list of some of the greatest crowdfunding websites on the Internet that you can visit.
How to invest in commercial real estate
Here are some tips on how to invest in CRE:
Research and due diligence
Investing in commercial real estate can be a great way to diversify your investment portfolio. However, it is not without considerable risk and requires expert guidance. Before diving into the multitude of commercial real estate opportunities available, it is essential to do your research and perform due diligence.
This includes researching the local market, understanding key economic factors that could influence the success of an investment, comparing financing options, and judging whether sufficient capital is available to cover operating costs.
Additionally, analyzing the lease agreement from both a tenant’s and landlord’s perspective is paramount as well as understanding any risks associated with environmental issues or property title disputes. Taking the time to carefully consider these and other potential factors prior to investing in commercial real estate will go a long way in helping you avoid costly pitfalls or compromises down the road.
Financing options
You’ve decided that you want to buy some commercial property, huh? Because it is likely that you do not have the funds available up front, you will need to apply for a loan.
Then, what exactly is meant by the term “traditional” or “conventional” funding? According to Investopedia, any loan that comes from a traditional institution is considered to be a traditional loan. Traditional institutions include “banks, credit unions, savings and thrift institutions, life insurance companies, hedge funds, pension funds, private financial institutions,” and the list continues on.
When most people think about funding a commercial real estate acquisition, the first thing that comes to mind is traditional loans. When it comes to approving loans, every financial organization, whether it be a traditional bank, a credit union, or a private financial institution, has its own individual standards. The following are examples of some of these criteria:
- Minimum credit scores
- Maximum loan amounts
- sufficient amount of previous credit history
Every one of these prerequisites is different from one educational establishment to the other. Having said all of this, receiving approval for a loan through traditional financial sources can be extremely challenging.
According to research published by Forbes in 2019, commercial banks approved only 27.3% of the loan applications that were submitted to them.
The fact of problem is that certain company proprietors and/or investors in commercial real estate properties might not meet the requirements for a conventional bank loan. When this happens, it’s time to consider alternative forms of finance.
Finding the right property
Investing in commercial real estate is an attractive option for many savvy investors. However, investing in the wrong property can result in a significant loss of time, energy, and capital. When looking for the right investment opportunity, it is important to consider factors such as population growth, real estate demand, and expected ROI to yield maximum returns. It is also essential to factor in any forthcoming infrastructure improvements or zoning changes that could have an impact on future property values. By researching these elements thoroughly before making a purchase decision, investors can optimize their chances for success.
Building a team of professionals
Investing in commercial real estate can be an intimidating process, but it is worth the effort by equipping you with a steady source of income and often protection against inflation. One of the crucial steps to ensure success is to assemble a strong team that understands the complexities and challenges of the different types of investments.
This should include knowledgeable and experienced professionals such as an accountant, attorney, or loan originator for dealing with legal issues; a real estate broker for market knowledge; and an investment advisor for tax advice. A trustworthy team with relevant expertise will help take your investments to heights you didn’t believe were possible!
Types of commercial real estate investments
Office buildings
In most cases, office buildings are divided into one of two categories: either urban or suburban. Skyscrapers and other types of high-rise structures make up the urban office buildings that may be found in cities; the size of some of these buildings can reach up to a few million square feet in total. Office buildings in the suburbs are typical of lower stature and are frequently clustered together in office parks.
Retail properties
Retail refers to the buildings that are home to businesses, such as shops and restaurants, that customers frequently visit. They can be multi-tenant (typically with an anchor tenant or lead tenant that serves to generate attention to the property), or they can be single-use buildings that stand on their own.
The retail industry is a complex one because the sort of shopping center that can be built is determined by a number of different variables, such as the size, idea, categories of tenants, and a number of tenants, as well as the trade area.
Big-box shopping centers (which often house a national chain like Target, Walmart, Best Buy, or Dick’s Sporting Goods) and pad sites are examples of single-tenant structures (single-tenant buildings within a shopping center, often a bank, restaurant, or drug store).
Industrial properties
The majority of industrial buildings are situated outside of metropolitan areas, particularly along key transportation corridors. These buildings are rented out to a wide variety of tenants that run various types of industrial operations.
The low-rise structures have another potential use: they can be placed together to form industrial parks. The properties can be broken down into one of four categories:
Heavy industry: These buildings have extensive customization done to them, and they hold the machinery that heavy manufacturers require in order to function and generate goods and services.
These don’t have the same level of customization as the others, and instead can be used for product assembly or storage.
These kinds of assets are typically rather large and are utilized as distribution centers. They are known as bulk warehouses.
Flex industrial is a term that refers to properties that have a combination of office and industrial space.
Multifamily properties
Apartments, condominiums, cooperative housing, and townhomes are all examples of multifamily housing, which is a subset of the multifamily sector of the residential real estate market. Class A, Class B, and Class C have often used classifications for multifamily structures, much as they are for business buildings.
Special purpose properties
Investors in commercial real estate might be the owners of special-purpose real estate, although this type of property does not belong to any of the aforementioned categories. Examples of places that qualify as special-purpose facilities are bowling alleys, amusement parks, churches, and self-storage units.
If you’re having a difficult time choosing which business building is right for you, this article that I wrote will help you determine the best option. It focuses on factors like location, size, and amenities that you should consider when picking your commercial space.
Strategies for successful commercial real estate investing
Long-term vs. short-term investing
Strategies for investments with a long-term horizon can be of assistance in financing significant purchases or life events that are still several years or even decades away. It is in your best interest to plan your investment strategy as far in advance as you possibly can. This is because long-term savings goals, such as retirement or college, frequently call for significant quantities of money.
Investing strategies with a short-term horizon are those that are often developed for objectives with a time horizon of a few months to a few years. As a result of the more constrained time period, the kinds of investments that are suitable for short-term goals are often different from the kinds of investments that are employed for long-term goals.
Furthermore, both long-term investment strategies and short-term investment strategies can be established in part by addressing some of the same concerns, despite the fact that long-term investment plans often have longer time horizons and distinct related methodologies.
Before deciding on a course of action for your investments, consider the following questions:
How much money do you anticipate needing? It’s possible that in order to answer this question, you’ll need to make a few assumptions about related topics. If you’re planning to save money for retirement, for instance, you should think about a number of aspects, including your life expectancy, the kind of retirement lifestyle you want, and any potential medical expenses.
What role do you see taxes playing in your overall investment strategy? A significant influence on your investment plan can be exerted by both inflation and taxation. For instance, you might wish to examine accounts that come with particular tax characteristics, such as 529 college savings plans, which allow you to grow your investment without incurring additional tax liability.
When will the withdrawal process start? This is a different way of asking how long your strategy for investing will be in effect. For instance, if you are putting money away for your child’s education, you could anticipate that you will have to start taking money out when they are in their first year of college.
How long will it take to get over the withdrawals? It is possible that you will find it more convenient not to close out a long-term investment strategy with a single lump sum withdrawal. For instance, if you plan to retire at the age of 65 and believe you will live for another 85 years, you might want your withdrawals to last for a total of 20 years. On the other hand, you might take out a single lump sum to use toward more immediate objectives, such as a vacation.
Do you plan to make one large investment or several smaller ones on a regular basis?
You will need to make an assumption regarding the frequency of payments or investment purchases in order to calculate the maximum amount that it is possible for you to accumulate by the time you have completed your savings goal.
For instance, are you planning to make a one-time investment of a lump sum? Will you make a contribution of a specific amount at the beginning of each year, or will you invest a predetermined amount on a regular basis?
What kinds of investments do you plan to make? Your desired rate of return on your investments and the amount of risk you are willing to take should guide your decision over the types of investments to utilize. The amount of time you have available to invest is another factor that might be helpful in deciding which kind of investment to go with.
Active vs. passive investing
Active investment is a more intensive sort of financial strategy that tries to beat, or outperform, the annual performance of market indexes. In its most basic form, active investing can be described as follows: On the other side, passive investing is a method that involves less active participation and has the sole objective of replicating the performance of the market.
Active investing
An active investment strategy entails a great deal of action, as one could guess from the name of the approach. A portion of this manifests itself in the form of frequent trades, each of which is motivated by high levels of study and analysis in the pursuit of the most favorable value and opportunity.
Even while it is possible to run your own active investing strategy, doing so involves a significant amount of labor and calls for constant attention along with a comprehensive knowledge of the global financial market. The majority of the time, investors will contract the services of a knowledgeable individual to actively manage their capital.
There is no assurance that an actively-managed strategy will surpass the performance of its benchmark index in any given year, even if the strategy is attended to by an experienced investment advisor. In point of fact, the majority of the time they do not. When actively managed assets are successful in outperforming their respective indexes, it is essential for investors to ensure that this outperformance is accomplished by a sufficient margin to prevent the annual fees charged by the manager from canceling over any gains.
Passive investing
When engaging in passive investing, most purchasing decisions are made with the long term in mind. Investors aim to achieve their goal of mimicking the performance of market indexes by making frequent and consistent purchases of a broad basket of companies. They do this by ignoring the day-to-day fluctuations in the value of the stock market. In general, the longer you keep a passive investment, the higher the likelihood that it will perform better for you over time.
Because there is less effort put into both transactions and analysis, the fees associated with the majority of passive investing strategies are noticeably lower than those associated with active investing strategies. This allows individual investors to keep a greater portion of their own money in their own pockets.
However, just like with active strategies, there are no guarantees with passive ones. Generally speaking, passive investment techniques are able to equal the performance of the market, but they are unable to overcome market downturns. If the value of an index goes down, the value of your passive assets will go down as well. However, in most cases, passive investment is a strategy that entails significantly less risk than active investing does.
Value-add vs. core properties
Value-add necessitates a larger initial commitment of capital to perform property upgrades, in contrast to core plus, which includes some form of property enhancement. This strategy places less emphasis on income-generating buildings and places greater emphasis on appreciation through the renovation and redesign of Class B and Class C properties.
Value add
Value-Add properties, typically deliver the best profits but at the expense of greater risk connected with the cost of renovations in the home or business.
Oftentimes, these are structures that are in need of additional renovations; however, once these improvements have been made, it is anticipated that these properties will be leased at higher rents, and their valuations are likely to increase, both of which will be passed on to investors when the properties are sold. Yieldstreet uses conservative underwriting assumptions to evaluate the quality of each offering.
This is because Value-Add properties are associated with a higher level of risk; however, the company only seeks to acquire Value-Add properties in regions that have robust economic and employment fundamentals and are supportive of property valuation increases.
Core properties
Core properties are generally considered safer investments than core-plus, value-add, or opportunistic investments since they carry the lowest risk and the lowest possible returns among the four basic risk profiles for commercial real estate.
Core assets are those that, in general, have features such as stabilized occupancy, investment grade tenants, extended lease periods, high-quality construction with little to no imminent capital needs, and positions in very desirable neighborhoods (compared to property type) in key markets.
The “main” property types, such as multifamily housing, offices, factories, or retail establishments, are the only ones allowed to be included in this risk profile.
Core properties typically have longer-term expected holding periods, a high degree of income stability, and little chance to improve yields in the near term. It also typically has a higher degree of income security than other types of properties.
Diversification
In a portfolio of CRE investments, diversification is one of the most essential risk management measures that can be utilized.
The right kind of diversity can assist in increasing overall returns and reducing downside risk. Transaction sponsor, property/asset type, property class, and location are the four basic ways that investors can diversify their real estate portfolios. Investors who are interested in diversifying their real estate portfolios can do so in one of these four primary ways.
Investors can have the peace of mind that comes with knowing they have lowered the overall risk of their investment if they give careful consideration to each of the factors of commercial real estate investment portfolio diversification discussed above.
Can Anyone Invest In Commercial Real Estate FAQs
Is it a good time to invest in commercial real estate?
There may be chances in commercial real estate in 2021 and beyond, but these prospects will depend on the risk tolerance of the investor. “The pandemic accelerated trends such as the hybrid work paradigm and the rise of ecommerce,” said Dunn from CNB, who predicted that both of these trends would likely continue to experience significant growth in the future.
How to invest in commercial real estate with little money?
You can invest through crowdfunding businesses or REITS and take advantage of this potentially lucrative industry for a lot less money and a lot fewer time thanks to these investment vehicles. And if you are interested in commercial real estate but lack the financial means to make an investment, you might want to think about using a service such as Hometap.
What type of commercial property is most profitable?
Properties that have a larger than an average number of occupants are often in a better position to generate a higher return on investment for their owners. Multifamily developments, student housing, office space, self-storage facilities, and mixed-use structures are some examples of the types of commercial real estate properties that may fall under this category.
Can you become a millionaire from commercial real estate?
If you’re looking to become a millionaire, investing in commercial real estate may be the way to go. With the right knowledge and an emphasis on smart decision-making, it is possible to maximize financial growth and potentially find success in this particular industry.
Before taking the plunge into investing in commercial real estate, researching local markets and trends is essential. Once you have these bases covered, you can begin to explore investment options as well as ways to best manage your assets.
Remember that consistent hard work is key but when done correctly, commercial real estate can offer an opportunity like no other to become a millionaire.
Is it more profitable to invest in commercial or residential real estate?
When it comes to investment properties, commercial real estate tends to provide higher returns than residential due to the longer rental periods and higher tenant occupancy. Commercial agents must have excellent customer service skills as well as knowledge of local zoning laws and tax regulations in order to successfully sell these types of property.
It may take more time to get a commercial property off the market, but buyers can often get more bang for their buck in terms of rental income. For savvy investors looking to turn a profit, a commercial real estate is an attractive option that can potentially offer substantial returns and higher commissions for agents.
Conclusion
Investing in commercial real estate can be a great way to maximize your financial return. However, it’s important to do the necessary research and find experienced professionals who will help you weigh all factors – from tenant profiles, finances and regulations – before making any decisions.
With tailored strategies that consider both active involvement and passive management based on individual circumstances, understanding current industry trends is essential for success. So make sure you are continuously educating yourself about this ever-evolving field.
If you’re interested in learning more about how to get started, give me a call or schedule a free consultation. I would love to help you start your journey into commercial real estate investing!
