For sure, all of us are dreaming to have an investment that generates income, producing a steady cash flow while appreciating its value over time, right? As long as it was executed well and with due diligence, it can potentially give us big returns in the long run, and that includes Real Estate Investment.
Any type of property, may it be residential or commercial, can be a good investment opportunity. Moreover, this article will focus on commercial real estate investment and the strategies you could use in order for you to create a diversified portfolio in the commercial real estate business.
Now, the question in your mind would be, ‘Why commercial real estate and not residential real estate?’ ‘What are the advantages and benefits I could get from it?’ Let me go ahead and give you some key takeaways that could help you decide to go for commercial real estate Investment.
- High Income Potential. Investing in commercial real estate over residential gives you higher income potential. Typically, the annual return of commercial properties depending on a lot of factors ranges between 6% and 12% compared to residential that is only 1 to 4%. That’s thrice you’re getting!
- Triple Net Leases. A brief explanation would be, you as the property owner will only have to pay for the mortgage. All other property expenses, including real estate taxes will be handled by the lessee. In short, you get to enjoy the benefit of having the lowest maintenance income producers for your money.
- Stable and Safe. We can’t deny that there are risks imposed in every business purchase. However, investing in commercial real estate business among other investments is a safer option. Stocks and bonds are liquid assets and ever-fluctuating in the market, while the tangibility of assets in the form of commercial property demonstrates stability making it a safer option.
These are just a few of the many reasons why investing in commercial real estate is a good decision that could potentially reap big rewards over time.
While it sounds tempting to get involved in the commercial real estate business right away, “investment”, in general, is not guaranteed to have big returns. Any investor understands that there are risks involved that could lead to big losses of money, and any successful investor did not achieve a diversified portfolio overnight. It takes time to learn the basics and fundamentals in the real estate industry. Having said that, investors practice, practice, and practice until they’re good in this type of field. Here are some tips to become the next successful real estate investor:
1. Educating yourself on commercial real estate investment by:
- reading commercial real estate books and articles
- getting the latest updates online about the commercial real estate industry
- watching videos on YouTube
- having conversations with other investors to gain more knowledge
- joining real estate investing groups
2. Choose your property type before finding an investment strategy is a good approach to CRE investing
Commercial properties are classified into 5 major categories:
- Multi-family (multi-residential or
apartment buildings)
- Office Space
- Retail (malls, strip plazas, grocery stores)
- Industrial (warehouses, pharmaceutical
facilities)
- Hospitality (hotels, medical centres)
3. Determine your risk vs. reward tolerance
- This is the part where you gauge yourself on how far are you willing to go in buying that commercial property. At the end of the day, the bigger the risk, the bigger the reward.
4 Strategies in Commercial Real Estate Investing
Over the past years, investors have been using different types of strategies in purchasing a commercial property. Since there are a lot of factors to consider in a CRE investment, investors want to make sure that they are putting their time, effort, and money into something that could grow in the near future. These are the 4 major strategies in commercial real estate investment:
- Core Assets
The most conservative, consistent, and “safest” among all. These assets are class-A, institutional, usually super-well-located buildings that are occupied by very high-credit tenants. This is a strategy where investors value dividends in their portfolios. Since core assets have a low-risk profile, hence the returns are also small, usually from 6% to 8%.
- Core-plus
This is quite similar to core but with a little bit of risk involved and is the least common among the four. This type of real estate is fundamentally strong, stabilized, but can still be improved to enhance returns. Since there’s the element of risk, such as lease expirations and age of the building resulting to mild renovations, core-plus assets generate leveraged returns ranging from 9% to 12%, depending on a variety of factors.
- Value-added Assets
These investments include properties that have larger renovation or operational improvement to add necessary value that could ultimately drive enhanced returns. An example would be an apartment building built in the 90’s with units in original condition that require a major interior renovation.
Since there’s a significant risk in this type of investment, it also has significant upside if things go well as planned and the returns will be higher on the deal, typically ranging from 13% to 16%.
- Opportunistic
The most risky investment strategy in commercial real estate investing. These are distressed buildings that require a lot of renovation and have a high vacancy rate. Opportunistic investment includes ground-up development and purchases of land.
This strategy entails a greater level of risk but has the potential for the most return as well. These assets, when executed properly, can generate 15%+ internal rate of return (IRR).
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Takeaways
Commercial real estate properties are assets that can generate money through rental income or appreciation of its value over time. There are 5 major categories in commercial real estate: multi-family, office space, retail, industrial, and hospitality.
Different strategies have different approach when it comes to commercial real estate investing. Having sufficient knowledge in commercial real estate investment, deciding on what property type you want to invest in, and determining your risk vs. return tolerance, are key factors in creating a diversified portfolio and becoming a successful investor in the real estate industry.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE