Jumping into the world of commercial real estate investing can be both exciting and a little intimidating at the same time. As with all forms of investing, you want to do your homework to make sure your choices align with your financial goals. With proper due diligence and an understanding of the big picture, you’ll be well on your way to feeling confident about your investments. For new investors, here are some commercial real estate investing tips to get started.
Types of Commercial Real Estate
Commercial real estate properties are used for business purposes. The property types include retail, office, industrial, multi-family, raw land, and special purpose. Unlike residential properties, a commercial real estate investor leases and collects rent directly from the businesses that occupy each space. Typically lease terms are longer than residential and can range from 3-10 years or more.
Retail properties range from community shopping centers to large malls, as well as restaurants, banks, and gas stations. The size of retail spaces can range dramatically, from just a few hundred square feet to several hundred thousand square feet. Location, visibility, and parking can play a huge role in the overall success of these spaces.
Office space can range from single tenant office buildings, to large multi-tenant properties. They are categorized by Class A, Class B, or Class C based on the age of the property and its current condition. Office space is utilized by the service sector.
Industrial spaces range from warehouses to large manufacturing sites. Loading docks, height specifications, power supply, and outdoor ‘yard’ space should be taken into consideration when looking at this type of investment opportunity.
Multi-family properties include apartment complexes and smaller multi-family units. If the property has more than four units, it is considered a multi-family property and treated similar to commercial property for investment and depreciation purposes. It is common for residential investors to get started in commercial real estate investments by expanding to larger multi-family properties.
Special Purpose sites are built for a specific use in mind, such as a stadium, hospital, car wash, airport, amusement park, or storage facility. These properties would be hard - or nearly impossible - to repurpose beyond what they were originally built for.
The Benefits of CRE Investing
There are countless benefits to consider when it comes to commercial real estate investing. You can start investing for financial reasons to build wealth and security, or you can use it for tax benefits and diversifying your investment portfolio. Some of the key benefits that commercial real estate properties provide include consistent cash flow, higher income, longer leases, and less competition.
The return on investment (ROI) of a commercial property averages between six to twelve percent but does not come without risks. With longer lease terms, you will likely have less tenant turnover compared to residential properties however it can be significantly more challenging to re-tenant a commercial property when a space becomes vacant. With multiple tenants, you will also have the benefit of consistent income, as well as tenants who pay their portion of the property taxes, insurance, and maintenance costs (in a triple net lease).
How To Get Started With Commercial Real Estate Investing
It’s important to do your homework and due diligence. Take the time to research the different types of commercial properties mentioned above, and understand what makes commercial real estate different from other investment opportunities. Income usually correlates with square footage, and typical leases are for several years with annual increases in the payment.
Once you’ve decided on the property type, do your research on the city and exact location that you’re most interested in. Look at recent comps (properties that have sold or leased in the area that are similar in size and features) and determine the current market value of the property. Work with a commercial real estate broker who specializes in your desired property type and has the experience and knowledge of the local market. A CRE broker can help you negotiate the best deal and has your best interest in mind.
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Fortress Equities is a commercial real estate private equity firm founded in 2007 right before the Financial Crisis. We have prospered throughout economic expansions and downturns and created wealth for many investors. We seek well located opportunities and targeted, risk adjusted returns. As we roll out new fund opportunities, they will be available on this page to Accredited Investors only. To be notified of new investment opportunities as they become available or to determine if you qualify as an Accredited Investor, please contact us.