Every now and then you can hear people talking about investing in real estate. And mostly, what you hear is that it’s a great way to earn a steady income. However, there are certain things that you need to know. Especially if you’re thinking about commercial real estate investing. This guide will give you basic information that can help you see if this is the right kind of real estate for your portfolio.
Commercial real estate investing – beginner’s guide
Some of the richest people in the world own invest in commercial real estate. Also, they do it by knowing the best countries to invest in real estate oversees. But it’s really not that easy as just buying your first commercial real estate. You need to own and manage it properly. However, the terminology can be quite confusing to beginners. For example, value add, or holding time, or multi-family investing might sound self-explanatory, but there’s more to it. So, let’s get to it and cover the basics.
What is a commercial real estate
A property that is usually used for the purposes of business or retail is called a real estate property. So, with commercial real estate investing, you are developing or purchasing the property that is going to be used for commercial purposes. For example, let’s say you buy a land and build a warehouse on it. And then, you find reliable commercial tenants like Gibraltar Van Lines moving company, and lease the property to them. The warehouse, then, would be a kind of industrial commercial real estate. And there are several different kinds of these real estates:
- Retail buildings
- Special purposes
They can be anything from manufacturing facilities, distribution facilities, so they warehouses or industrial buildings. They are usually located out of town and they are not close to desirable amenities. Instead, the height of facilities is important, as well as the availability of docking. The lengths of the lease go from five years and longer.
This might be the most common type of these real estates, and they can be of a different class, depending on their location and the amount of remodeling and upgrades needed. Also, it depends on how much you need to invest in them to make them a more quality asset. Logically, the desirable location is downtown. The tenants can be an IT company or another kind of start-up company. The lease length is usually from five to ten years.
It’s an apartment building with families or individuals as tenants. The size can go from huge apartment complex to a smaller unit. Lease length can vary, but it’s usually not longer than a year. Multi-family apartment building typically has individuals or families as tenants. If this is your investment of choice, pay attention that it involves multiple leases, multiple tenants and multiple payments on a monthly bases. As tenant turnover is an important aspect, it might be harder managing this kind of real estate. For example, if your estate is in Florida, you might need to move there in order to manage your property. And in that case, you might even need a find professional relocation assistance in FL.
The same as with offices, the location of the retail building can be an important factor. From strip malls to restaurants, their size can vary from 4.000 feet to 3.000 feet and more. It is a facility with the purpose of selling a product, rather than manufacturing purposes.
This is a property designed for a special purpose, so it can be quite hard to change the purpose of the property. For example, special purpose real estate can go from stadiums to hotels, kindergartens or even airports. Here, the kind of tenants tends to be quite specific and it requires further research on your part.
There is a great opportunity for an investor to get the potential return through appreciation. For example, if you decide to buy a real estate in Miami, and the demand increases for the properties in this area, the tenants would pay a higher price in order to get it. However there is another side, and that’s if your property loses its price. So, there’s always a certain amount of risk.
There’s always a risk when investing. Whether we’re talking about the risks of investing in New Jersey real estate, or anywhere else, the risk is higher with commercial real estate investing. Aside from the time commitment and bigger initial investments, there are other downsides. With more people involved who are going to be visiting the property, there’s a higher risk of damaging it, and the higher cost of amortization.
Value add property
This is a kind of property that requires additional investment, as it needs to be remodeled or improved. Only then it can get you a higher income or even be rented out in the first place. Also, money invested in the property, enables it to be sold in the future at a higher price. Needles to say, this kind of property requires a more active approach from investors.
Cash flow property
This kind of property, on the other side, can provide you a steady income. But, as the cash flow can be higher or lower, each option requires a different strategy. These kinds of properties can be great if you want to use this income to invest in other properties.
Information is power
Investing can be a risky business so it’s always good to have more information in order to mitigate the risks. Here you found out about the basic of commercial real estate investing, but the information is power. So always do more research if you are serious about investing.