Investing in Commercial Real Estate
Buying commercial real estate is a superb way to earn income. Unlike residential property, commercial property is an investment that you can take as a no lose situation. Although, it comes with its risks, but it will be worth when the profit comes in.
Commercial properties may refer to:
- Retail buildings
- Office buildings
- Industrial buildings
- Apartment buildings
- “Mixed use” buildings, where the property may have a mix, such as retail, office, and apartments.
If you are buying as a way to make a steady income, then commercial real estate investment is a great option. There are many reasons why commercial real estate is the best type of real estate investment, some of them include;
- Income potential
The best reason to purchase commercial over home real estate is the earning potential. Commercial properties produce a total annual return off the purchase price between 6% and 12%, depending on the area, which is a higher range compares to the estimated returns for single house properties (1% to 4% at best).
- Commercial property is less competitive
Most investors are more inclined to target residential homeowners, making residential real estate the more competitive niche compared to commercial real estate market. There aren’t any hard figures that support this view but consider it. You almost certainly see a lot more “We Buy homes” signs than “We Buy Office Property” signposts. It is because most commercial properties under the $5 million draw are too big for residential investors and too small for institutional investors.
- You can adjust the value of your Property any way you want
Commercial real estate has a valuation system that is very different from residential real estate. Residential real estate is normally valued in comparison to other properties with similar features in the same area. It does not matter what extra features your home has, the property will still be valued in relation to other similar properties.
For commercial real estate property, it is different. The value of a property is determined by the earnings that your environment is generating. Although, the pricing is still subject to comparison with other properties, however; the amount of income it produces is a lot more important. So to be able to “adjust” the value of your property, to increase your income, you have to look for new ways to increase rent. Even a tiny increase can have a major effect on the price of your property.
- Higher Income potential and low cost of maintenance
The income potential of a commercial property is greater than that of a residential property. Except for warehouses and single office buildings, most commercial properties have multiple units; and sometimes the entire structure uses the same size of land that a residential property uses. This means that the investor can collect rent from more than one tenant at a time. Operational costs are also significantly less for commercial properties as a huge portion of the operational cost, such as; duty fees, property insurance, and maintenance charges are borne by the tenants.
- Steady cash flow
Another benefit is the fact that the cash stream is constant. When you have a multi-family apartment building or a store complex in a busy district, you have income from many tenants through rent. Even when one unit is vacant, there is certainly money coming from the other residents or tenants. That is not the situation with sole family homes. Once it is vacant, your earning is discontinued, and you will need to find another renter for you to earn money again.
The benefits listed above are based on the past performance of real estate, even though the information is positive, however; the current overview of the economy will be a better source of information to determine your activity in the commercial real estate market.
Overview of the commercial real estate
On market trends, Resource Portfolio Manager for real estate Diversified Income fund John Snowden stated that the marketplace is showing indicators of maturing. This may cause average rent growth to moderate in 2018 on the back of many years of record-strong gains, he said. Snowden noted that most of the growth would come from the Sun Belt region because the high employment rate currently being experienced by the region will create a high demand for housing, retail outlets, health care centers, office and warehouse space. Also, the fact that Sun Belt areas have historically had lower property prices than the coastal states means there is more room for rent increase as well as the prospect of higher cap rates.
INCREASE IN DEMAND FOR RETIREMENT HOMES
According to the CBRE reports for 2018, “The seniors housing market improved modestly in 2017 and is set to improve further in 2018, largely due to lower construction levels. For the most part, the traditional segments of seniors housing — independent living, assisted living, memory care and nursing care — are not yet benefiting from baby boomer demand. However, the active adult segment will play an increasing and exciting role in the seniors housing industry in the coming years, as seniors housing continues to evolve.”
INDUSTRIAL REAL ESTATE TO BURST WITH GROWTH
In 2017, the industrial real estate was the outstanding performer of the real estate industry, and experts predict the red-hot sector will have a sustained growth because e-commerce businesses need warehouse and distribution centers close to urban metros and densely populated markets.
“The seismic shifts in the economy continue to push the demand for goods (particularly commodity-type goods) online. Construction will start to catch up to absorption in this sector, but record low vacancy will remain the norm for this sector and rents will continue to climb,” McCarthy said. “We expect 2018 to be yet another strong year for the industrial market. Demand from e-commerce and third-party logistics users continues to drive demand, which according to Collier’s research has pushed vacancy down to 5.2%,” Colliers International President of U.S. Brokerage Marty Pupil said. “And developers are doubling down on the hot sector with more than 220M SF currently under construction in Q3. That’s the second-greatest quarterly value on record.”
MULTI-FAMILY UNIT BOOM
In an interview with Forbes AppFolio founder Nathaniel Kunes stated that “Tiny apartments and mobile living will be a solution to the increasing housing density in overpopulated areas. This will become more of a norm in big cities and will drive up operating income on existing apartment stock. This likely won’t have a huge effect on 2018, but it will over the next decade.” “Rental rates have been increasing across urban areas for the last several years, and the most impacted cities have seen a rise in micro-units,” RealtyShares founder Nav Athwal told Forbes. “These well-designed rooms, as small as 200 SF, maximize every square inch available. Places like The Panoramic in San Francisco and Yotel in New York have been the first to embrace the model, and we see this trend expanding over the next year.”
Since more people will need rented apartments, purchasing a multi-unit apartment building appears to be the smartest choice an investor can make. A demand that outweighs the supply will keep the price of rent on the steady increase it has been year on year, consequently; the income potential from commercial real estate investment will increase.
BEFORE YOU INVEST IN COMMERCIAL REAL ESTATE
If you are looking to invest in commercial real estate property, you must first do your research with utmost diligence and care because you are dealing with more substantial property. To begin with, understand your priorities. Measure the size of your ideal property based on what you can handle. If you feel that you do not possess the skills to manage a large property at the beginning, look for a smaller property. As you get more experience and benefit from your first investment, you can purchase large properties and even appoint a property management service to take care of the day-to-day affairs of the property.
Another thing to consider before purchasing commercial property is whether you want to build, refurbish or repair the property. That decision will be made appropriately if you know the amount of resources available. Your financial capability determines what you can invest in and how well you can maintain the property.
If you are a starter in this field, it may be beneficial to hire the help of an expert commercial real estate property broker or agent. They have the expertise required to guide you through the procedure and help you select the best property that can provide a good ROI within a reasonable timeframe.