We all dream of making investments that generate income, produce steady cash flow, and appreciate over time, right? When executed well and with due diligence, real estate investments can offer significant returns in the long run.
While both residential and commercial properties can present great investment opportunities, this article will focus on commercial real estate investment. We’ll explore strategies you can use to build a diversified portfolio in the commercial real estate market.
Why Choose Commercial Real Estate Over Residential?
If you’re wondering why commercial real estate might be a better option than residential, let’s explore some key advantages.
1. High Income Potential
Investing in commercial real estate often yields higher income potential than residential properties. Annual returns on commercial properties typically range between 6% and 12%, compared to residential returns, which are usually between 1% and 4%. That’s potentially three times the return!
2. Triple Net Leases
In a triple net lease, you, as the property owner, only need to cover the mortgage. The lessee handles all other property expenses, including real estate taxes. This setup allows you to enjoy low-maintenance income while maximizing your returns.
3. Stability and Safety
Every investment carries some risk, but commercial real estate offers more stability compared to other investment options like stocks and bonds, which fluctuate in the market. Commercial properties are tangible assets, providing a level of security and safety that many investors seek.
Tips for Becoming a Successful Commercial Real Estate Investor
While it’s tempting to jump into commercial real estate right away, remember that successful investments take time. No investor builds a diversified portfolio overnight. By learning the basics and practicing consistently, you can become an expert in this field.
Here are some essential tips to help you on your way:
1. Educate Yourself
Gain knowledge through multiple sources:
- Read commercial real estate books and articles.
- Stay updated on industry trends online.
- Watch educational videos on platforms like YouTube.
- Network with other investors to share insights.
- Join real estate investment groups.
2. Choose Your Property Type Before Strategy
It’s helpful to decide which type of commercial property you want to invest in before settling on an investment strategy. Commercial properties are classified into five major categories:
- Multi-family (apartment buildings)
- Office Space
- Retail (malls, strip plazas, grocery stores)
- Industrial (warehouses, pharmaceutical facilities)
- Hospitality (hotels, medical centers)
3. Assess Your Risk vs. Reward Tolerance
Determine how much risk you are willing to take in exchange for potential rewards. As they say, “The bigger the risk, the bigger the reward.”
4 Key Strategies in Commercial Real Estate Investing
Investors use various strategies to purchase commercial properties, depending on their risk tolerance and financial goals. Here are four major strategies:
1. Core Assets
Core assets are the most conservative and stable investments. These class-A, institutional-quality properties are well-located and occupied by high-credit tenants. Because core assets are low-risk, their returns are also lower, typically ranging from 6% to 8%.
2. Core-Plus
Core-plus investments carry slightly more risk than core assets. These properties are fundamentally strong but may require some improvements, such as lease expirations or minor renovations. As a result, core-plus investments generate slightly higher returns, usually between 9% and 12%.
3. Value-Added Assets
Value-added investments involve properties that need larger renovations or operational improvements. For example, an apartment building built in the 1990s might require major interior updates. While this strategy carries more risk, the potential returns are higher, typically between 13% and 16%.
4. Opportunistic Investments
Opportunistic investments are the riskiest strategy in commercial real estate. These properties often require significant renovations and may have high vacancy rates. Opportunistic investments include ground-up developments or land purchases. Although they come with a higher level of risk, they offer the potential for the highest returns, with the possibility of generating 15% or more.
Key Takeaways
Investing in commercial real estate can generate income through rental revenue or appreciation over time. Commercial properties are classified into five categories: multi-family, office space, retail, industrial, and hospitality.
Different strategies offer varying levels of risk and return. To build a diversified portfolio and succeed in the real estate industry, it’s essential to gain knowledge, select the right property type, and understand your risk tolerance.
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Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!