Investors have been making real estate part of their investment portfolios for a long time, and who can blame them? The benefits of investing in real estate are numerous. From predictable cash flow, excellent returns, tax advantages, to diversification, it gives investors the opportunity to build a resilient and strong portfolio of assets that will work for them for years to come.
The strange thing is, when investors think about real estate investing, they naturally gravitate towards residential real estate without researching the smartest assets to buy and invest in. By doing so, they miss out on excellent real estate opportunities elsewhere.
Here, we plan to show you one such opportunity that’s not only an excellent investment, but often overshadows residential property investment when it comes to returns and passive income.
But what is this opportunity?
Commercial Real Estate
An often-forgotten vehicle that can be exceptionally lucrative when it comes to real estate investment, is investing in commercial real estate (CRE). This can be mistake. By considering commercial real estate, investors can access potentially huge opportunities.
Like its residential counterpart, it offers all its benefits, and can, in some cases, offer higher returns than residential properties. Take Southern Nevada, for instance. With places like Las Vegas and Reno growing, commercial real estate saw growth across all sectors in 2019.
But what are the ins and outs of commercial real estate investing? What are the benefits? What are some things to consider? Let’s take a look.
Reasons to Invest in Commercial Real Estate
There are many reasons to invest in commercial real estate. For some, it’s wealth creation and security while for others it’s tax benefits and investment diversification. But for many, one of the main reasons of investing in real estate is the passive income potential it offers. Who doesn’t want income you don’t have to work for, right?
No matter what the reasons are, investors can take advantage of some of these benefits:
Higher return on investment (ROI). Generally, commercial real estate properties have a
higher rate of return than their residential real estate counterparts. They also have a far lower vacancy risk. If you invest in multi-tenant properties, you could enjoy the diversification from the many tenants. So, although some units may be empty from time to time, most of the units will be occupied. You could also invest in single tenant properties for longer terms to stronger tenants that are less likely to close their businesses.Longer leases. In most cases, leases for commercial property span over multiple years which typically range from at least 3 years and in some cases as long as 20 years or more. This is longer than leases for residential properties which are typically year to year. The benefit of longer-term leases is the security of knowing your tenant won’t be moving for several years and the predictability of return on your investment.
Cash flow. The generally longer leases mean more consistent income streams. With more units compared to residential property, commercial real estate also allows investors to scale their income quicker and, with many commercial tenants also paying the expenses such as taxes and insurance, increases the rate of return.
Business relationships. Investing in commercial real estate gives investors the opportunity to take part in business-to-business relationships. Not only are these relationships more professional, but it also gives them the opportunity to expand their network and get involved in the community they are investing in.
Limited operational hours. With tenants only working at certain hours, there’s no more late- night calls to sort out maintenance issues. Although business hours can vary slightly, this reduces around the clock maintenance calls.
Types of Commercial Real Estate
Unlike residential properties, commercial real estate can take many forms. All have their perks and their drawbacks that should be considered when planning to invest in commercial real estate.
Some of the options are:
Offices. The most common type of commercial real estate is office space. These can range from small office complexes to skyscrapers. They are also defined by by three categories depending on age of the properties and how much maintenance is needed.
ï Retail. These properties are often found in urban areas and can range from malls, to community retail centers, banks, and restaurants. Retail properties are popular amongst investors due to low tenant turnover and good rental income.
Industrial. Properties in this sector are aimed at manufacturing industries like warehouses and manufacturing sites. Generally, these properties present excellent investment opportunities.
Multifamily. Apartment complexes, high-rise condominium complexes, and other residential units make up multifamily commercial real estate. Although many commercial real estate investors find their start in multifamily units, the shorter lease terms and higher tenant turnover is something to be considered when deciding which commercial real estate to invest in.
Special purpose. These properties are constructed for a specific purpose. It may, for instance, be schools, storage facilities, hotels, and even amusement parks. The drawback is that these properties are difficult to repurpose for another use. This limits investment properties.
Mixed-use. Properties in this sector combine some of the uses already menBoned on one property. As such, they are excellent investment vehicle and are growing in demand.
Development. Development properties are like a blank canvas. Depending on zoning and needs, these properties can be bought and developed into one of the categories menBoned above.
Factors to Consider
In addition to the type of commercial real estate, investors should also consider several other factors when planning such an investment. Some of these things are obvious, but others may not immediately come to mind.
Some things to consider can, for instance, include the area demographics and trends. Here think of things like foot traffic to a business or proximity to mass transit points. Likewise, market trends also play a role in deciding whether a specific property is a sound investment or not.
Lastly, risk assessments are important, more so than with residential property. Without a proper risk assessment, investors can lose when, for instance, tenants move out or a building needs a lot of maintenance without it being planned for.
In future posts, we’ll deal more with the things you should consider when planning a commercial real estate investment.
Final Thoughts
As you can see, there are a myriad of factors that affect a commercial real estate investment opportunity. In our next article we’ll be examining ROI and how to evaluate a property based on it. ROI (or return on investment) is a measurement of your assets less your liabilities. We hope you look forward to the next installment of our CRE 101 series. If you’d like to learn more now, we encourage you to reach out to one of our experts for personalized help. To learn more about specific funds and how to get involved, check out our Real Estate Value Plan page.