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Here’s the thing: If you're not a patient person or you can’t afford not to see your money for a while, investing in commercial real estate is not for you.
If you can afford it, have the ability to watch things grow and don’t mind a bit of risk then this is what you need to know:
Types of Commercial Real Estate Investment:
- Office space
- Apartment complexes
- Strip malls, malls, or single retail spaces
- Warehouses, data centers, manufacturing buildings, or self-storage
- Churches, bowling alleys, daycares, hotel lodging, health care
How money is made from investing in commercial real estate:
Through income or appreciation. Profit is made through the running of the building by tenants making rental payments. Money is also made by the increase in the property's value over time and then sold for a higher price. If you’re looking for capital for an investment read our recommendations: Commercial Real Estate Loans
How are you going to know what is and what is not a viable commercial real estate investment ?
You could do all the necessary research yourself in finding investment properties or you could invest in an opportunity where all the leg work is done for you.
8 Commercial Real Estate Investment Portals That Mitigate Risk:
1. Real Estate Investment Trust (REIT)
A REIT is an investment company that can operate, finance, and own commercial real estate (CRE). Individuals can invest by buying REIT shares. Such shares will grant them a proportional part of the profits and income incurred by portfolio properties. Individual investors are widely drawn to REITs because IRA rules specify that REITs need to give shareholders a sizable percentage of their income as dividends.
There are various REITs, each accompanied by its investment approach. For instance, one REIT could specialize in multifamily properties, while another in industrial assets.
2. Real Estate Investment Group (REIG)
An REIG is a group created by individual investors. The investors combine their money to crowdfund their real estate investment. It is akin to a mutual fund, as commercial real estate investors can buy units in the operating company. The operating company then owns the property. The investor is then entitled to a proportionate part of the profits and cash flow produced by the property, based on the number of units they own.
3. Private Equity Firms
Private equity firms are privately owned companies that invest in the equity of different companies, for example, companies that hold real estate. Generally speaking, a private equity firm identifies a property they wish to buy and creates a separate legal entity (an LLC) to carry out the transaction. To raise money for the purchase, they sell shares in the LLC and arrange debt with a lender to gather the equity required to cover the debt and purchase price discrepancy.
4. Real Estate Crowdfunding Platforms
Online real estate crowdfunding platforms offer investors the opportunity to purchase a property with minimal work and risks via real estate crowdfunding platforms. For some crowdfunding platforms, minimum investments can be as little as $1,000. You can buy a part of a real estate loan or mortgage with such sites. However, often you must be an accredited investor.
5. Commercial Property Real Estate (ETFs)
An exchange-traded fund (ETF) is where different stocks or bonds (or a combination of both) are combined into a single fund. ETFs are similar to mutual funds and indexes in two aspects. Firstly, they offer a wide diversification of bonds and stocks, and secondly, they are relatively speaking, low-cost vehicles for investment.
6. Commercial Property Real Estate Mutual Funds
A different way to invest is by placing your funds in a commercial property real estate mutual fund. They are often highly liquid and are accompanied by minimal management costs. Certain real estate mutual funds specialize in commercial property investments.
7. Commercial Property Real Estate Company Shares
Certain companies specialize in managing and buying commercial properties and take-on individual investors as part of their projects. According to an investor’s requirements, it could be more logical to invest in one or more companies individually rather than into a joined money structure of a REIT or mutual fund.
8. Commercial Property Construction Company Shares
If an investor would rather invest their money in brand new construction projects purchasing shares in commercial construction companies could be the way to go. Commercial construction has undergone steady growth from 2010 onwards. Because of this, there is the potential to invest in large-scale commercial construction plans.
Pros And Cons Of Investing In Commercial Real Estate
- Higher-income - the major benefit of investing in commercial real estate is greater earning potential. Many commercial properties offer a higher rent for each square foot of the property. Also, you may have several spaces producing rental income all in one place.
- Many cash flow streams - commercial leases offer a relatively reliable and consistent flow of rental income.
- Less competition - a plus of commercial real estate is minimal competition. Buying a commercial property is uncomfortable for many investors, so it is less competitive.
- Extended leases reduce risk - commercial properties tend to have extended lease agreements typically between 24-36 months. Also, notice to vacate is generally more than 30 days.
- Risk diversification - if, for example, you have an apartment building and lose two of your 20 tenants, you lose just two-tenths of that building’s income. If you lose two tenants in two single-family houses, you have lost all of your income from those houses.
- High ticket size - the minimum investment needed for CRE is generally very high and out of reach of many real investors.
- Asset management - which involves managing tenants and more. WIth CRE tenants are corporates and not simply individuals, making managing commercial assets more challenging than retail investments.
- Difficult entry - investing in CRE may be difficult for solo investors because of the limited market possibilities and involved legalities.
- Selecting the right property - selecting the right property and location demands a lot of market knowledge and research and an understanding of how to find investment properties.
What Factors To Consider Before Investing In Commercial Real Estate?
- All property types are different - commercial real estate has a broad range of asset types and types of real estate investment. Generally, CRE is classified into five sectors; office, industrial, multifamily, retail, and special purpose. Additional types include eldercare, self-storage, land, medical, or hotel. The profitability of every sector is different, as is the supply and demand.
- Supply and demand can vary greatly - every market is distinct. When you decide to invest, you invest in a particular geographic area with its supply and demand. Some types of property could be performing well on a miro leave, but there could be an undersupply in your city, or vice-versa.
- Market cycles can influence real estate - the unemployment rate, the health of the economy, and the GDP all relate to the profitability of commercial real estate. When you know how real estate market cycles function, you can steer clear of purchasing when the market is high and being pushed to sell when the market is down.
- Thorough due diligence must be undertaken - due diligence is when prospective buyers can undertake in-depth research on potential investments. This process can include looking at documents, profit and loss statements, financials, and tax returns from the previous owner. You can also undertake surveys, a feasibility study, or a property inspection.
- A contingency and capital reserve fund is essential - uncertainty comes with all investments. No matter how much time you research, prepare and verify, there are always unknown factors.
- Setbacks and extended timelines should be taken into account - there may be uncertainties with the timeline and costs. Often investors establish unrealistic timelines to renovate, lease, build, or more for their CRE investment. Work to identify possible obstacles in your due diligence time and prepare for them as part of your contingency costs.
To Sum Up
The key competencies and skills needed:
The first step for most potential residential real estate or commercial real estate investors is to find the most suitable loan. Lendio business financing platform is the perfect place to start looking for the loan you require to finance your first (or next) commercial real estate investment.