As a real estate investor, it’s a good idea to keep a diversified portfolio of properties. If you’ve delved into residential properties for a while now, trying your hand at commercial real estate investment may be a great next step.
Why Go Commercial?
Investing in commercial real estate gives you an opportunity to have multiple streams of revenue as many of the properties have multiple units. Multiple tenants means numerous revenue streams. Commercial real estate, similar to residential, typically comes in one of three conditions:
- Newly built and easy to aquire
- In need of minor upgrades or renovations
- Needing major renovations and potentially difficult to fill
A benefit that separates commercial from residential property is that commercial leases tend to be for multiple years as the tenant will want to establish himself in a particular area. The vacancy rate drops with longer leases so you’re not remarketing and negotiating with new clients every year.
How To Invest In Commercial Property
If you’re tempted to make your debut investment in commercial property, but don’t want to make the complete purchase on your own, there are a few ways to begin:
- Co-investing: Sharing the costs and responsibilities can help ease you into commercial real estate investing. Each buyer is responsible for an equal percentage and all separate the revenue from that property. So, if you are entering an agreement with two other investors and the property returns $90,000, each investor profits $30,000 per year.
- REIT, or Real Estate Investment Trust: Purchasing a REIT actually only gives you a small share of the property, which is owned and managed by a different company. Some commercial real estate investors like this approach as it is very hands off and when a profit is made, you receive your share.
- Private lending: Established investors can offer builders the money to build or renovate the project. You act as the bank in this scenario. This investment is another more hands-off approach to commercial real estate investing.
Popular Commercial Investment Buildings
Buying a vacant storefront or building an outdoor urban shopping experience aren’t the only ways to get into commercial real estate investment. There are several types of buildings that can work well for cash flow based on the building’s versatility and the demand for the business.
- Warehouse: Spaces that can be easily altered to meet a tenant’s demands will stay occupied. Large, empty spaces are often sought after by microbreweries, gaming centers, and gyms.
- Storage units: Modern storage units are a valuable commodity in towns where there is a transient population: college towns, big cities, and heavy new construction areas.
- Multi-level office buildings: Temporary work spaces are in demand as more people begin to work remotely and launch startups.
Commercial Real Estate Investment Growth
The National Association of Realtors reports in 2018 Q2 that prices for commercial real estate grew 5.1 percent year-over-year and leasing activity picked up. Markets with growing employment opportunities are a good place to start with investments:
San Jose, Dallas-Fort Worth, Reno, and Las Angeles.
Commercial real estate investment allows you to invest and profit without ever owning the property or you can venture into being a landlord to increase your profit margins. As with any investment, doing your homework on the property and the surrounding area will give you insight into whether the property needs to be a part of your portfolio.