Commercial Real Estate Investing Basics, It’s common knowledge that real estate has become one of the best ways to build wealth in today’s world.
With commercial property investment opportunities you can partake in and generate income both actively and passively, real estate has become a highly profitable venture for most people.
This article will give you a grounding in the commercial real estate investing basics and help you become a successful property investor. Firstly, what does commercial property investing entail?
What Is Commercial Real Estate Investing?
Commercial real estate is property used solely for business purposes. Often, commercial real estate is leased to tenants to generate income. Thus, becoming an investment.
In other words, commercial real estate investing entails putting money into properties such as hotels, office buildings, multifamily apartment buildings, hotels, malls, warehouses, shopping centers, etcetera.
If you’re interested in committing to this type of investment, you must be prepared to keep your commercial real estate holdings invested for the long haul. Given that this type of investment involves an illiquid asset, your capital may be tied up for a long time.
Furthermore, some of these opportunities may include high start-up costs and several regulatory obstacles, which are often problems for newcomers.
Notwithstanding, illiquid assets are splendid for investment because they yield higher long-term returns and aren’t affected by frequent price fluctuations.
Real Estate Investing Categories
As an investor, your investment falls within either of two categories: passive investment or active investment. Let’s look into both.
Active Real Estate Investing
Active real estate investing involves buying a rental property and taking over the management of the asset and its occupants. It can also entail catering for the purchased property to sell it to generate profit.
Here, you take on the role of the landlord and handle several responsibilities, including initiating repairs and renovations of the building, attending to the tenants whenever necessary, handling property tax payments, etcetera.
Also, if you’re actively running a residential community as part of your active commercial real estate investment, you’ll also be responsible for a lot of tasks, including the enforcement of rules for the properties and residents involved.
But, given the number of duties and responsibilities you have, you may ask the residents to help you run the community. This is where the creation of a homeowners’ association comes into play. It refers to an organization composed of the resident-members who are responsible for managing the entire residential community.
However, having an HOA in the community isn’t also easy. There are many things to do to ensure everything runs smoothly. For example, the HOA may have to create documents and spreadsheets to organize essential pieces of information.
In that case, investing in HOA management software would make a lot of sense. It’s an important tool for homeowners’ associations that don’t have any professional assistance from a management company. It can help an HOA board to run the community with ease.
Passive Real Estate Investing
As the name suggests, passive real estate investment involves purchasing real estate without actively managing the properties.
For example, an individual holding share in a real estate investment trust (REIT), which buys real estate and manages it on behalf of the REIT’s owners, is a passive investor because the individual doesn’t handle the property management. The investor’s only task was to buy the company’s shares.
Apart from REITs, there are also several passive commercial real estate investments, including crowdfunding, syndication, etcetera.
Now that you know the category of property investment you can belong in, let’s dive into how to buy commercial real estate.
How To Buy Commercial Real Estate
For successful commercial real estate investing, it’s important to know how to buy properties to begin an investment.
Here are several guidelines to help you buy real estate:
- Examine Your Investment Plan
This step is one of the commercial real estate investing basics that requires your attention. Reviewing your investment strategy is critical because you have a choice to make. You have to decide whether you’re buying real estate for investment purposes or personal use.
Buying a Commercial Property for Personal Use
In the owner-occupied real estate (OOCRE) investment strategy, the property is bought by the individual (investor) to conduct business operations.
OOCRE offers several tax benefits to investors. For example, you can deduct and depreciate annual loan interest. Also, as a homeowner, you build equity, which enables you to sell the property for more in the future.
You can also benefit by renting a portion of the building. Thus, generating passive income while you’re running your business activities on the same property.
Buying Commercial Property for Investment Purposes
Investing in commercial property has lots of benefits. As stated by the Bank of America, returns from commercial property vary from six to 12 percent yearly, which is greater than the typical return on single-family residential properties (about one to four percent).
Depending on factors such as financial goals and timelines, investors adopt several strategies when using commercial real estate for investment. Here are a few of the most prevalent real estate investment strategies:
This strategy involves buying and contracting a real estate property at a price below market value, then sending the contract to an interested buyer.
- Land Banking
This factor entails purchasing and holding land until you plan on selling it when its value increases or developing it.
An investor purchases raw land to construct on after waiting for it to appreciate.
- Fix and Flip
Here, the investor buys a property, renovates it, and resells it for a higher price. This strategy often involves physically depreciated or poorly maintained buildings.
- Choose A Property Type
If you’re looking to invest in commercial real estate, you may consider different forms of commercial property, including:
Multifamily estates might be anything from a two-unit duplex to hundreds of Pine Hills apartments distributed throughout a garden-style apartment complex.
Office buildings vary in size. They could be skyscrapers or home-sized complexes.
Retail real estate comprises shopping plazas, malls, restaurants, etcetera.
Industrial real estate properties include warehouses and distribution centers.
Hotels and motels fall under the category of hospitality real estate. Short-term rentals are sometimes included as well.
Obtain Finance From A Lender
After reviewing your investment plans and the property you’re looking to invest in, it’s time to secure your capital to begin investing.
Since real estate investments are sometimes capital intensive, unless you’re financially capable, it’s advisable that you seek loans, especially those that fit into your credit score range and with an affordable interest rate.
Some of the most common lending options you might consider are permanent loans, SBA loans, and bridge loans.
Before you can obtain financing for your commercial real estate investments, you need to find the right lender for your financial needs. However, with several lenders available in the market, choosing the reputable one can be challenging.
Luckily, there are ways that can help you narrow down your options. For example, you can use some referrals and online search to find potential lenders. Once you have your prospects, it’s time to conduct thorough research on their interest rates, fees, loan repayment terms, and frequency of payments.
Once you have all the information you need, you can now decide which lender to go to for your loan.
Pay Attention To The Real Estate Market
It’s critical to pay attention to the real estate market and determine its ups and downs before making a move to purchase a property.
Paying attention to the market’s flows might help you position yourself to take advantage of a fantastic deal in a down market.
Build A Team Of Trusted Professionals
As a new investor, you must surround yourself with a team of knowledgeable and experienced personnel. This move can guarantee a successful investment.
Professionals, you should be looking to hire include:
- A commercial real estate attorney
- Property manager
- Mortgage broker
You can even allow commercial real estate investing companies to handle property management for you.
- Begin Making Offers
At this point, you’re ready to begin making offers on real estate you’re looking to purchase and invest in. It’s recommended that you make these offers frequently to increase your chances of bagging one.
However, before making an offer, you should consult your team first, for good measure.
The goal of investing is to generate income, and this can only happen if done properly. You must know commercial real estate investing basics to ensure you’re a successful investor.
As aforementioned, there are a few guidelines to follow when investing in commercial real estate. These recommendations are meant to guide you and ensure you achieve your goals in property investment.