Commercial real estate can be a highly lucrative venture for investors interested in expanding their investment portfolio. Investing in the real estate market is inherently different from the stock market, though. However, a lot of the same strategies still apply to this type of investing. Instead of stocks, you are using your money to purchase commercial property such as multifamily apartment buildings, shopping malls, shopping centers, office buildings, etc. The returns on this type of investment are typically high and can be between 6% to 12%. This can vary as per the economic conditions, the location of the property, the demand, and other factors. You can also enjoy tax benefits.
If this is your first time venturing into real estate investing, then here’s a handy guide that can help you out when you invest in commercial real estate.
Choose Between Crowdfunding and Investing in A Single Property
There are two ways to invest in commercial real estate. You can opt for crowdfunding or investing in a single properly. Crowdfunding involves the identification of an investment opportunity by a developer or real estate professional. They invite individual investors to contribute to the project’s capital and raise money. As an investor, you need to consider the sponsor or the company/individual that identified the investment, as well as the crowdfunding platform they are using to raise capital. Crowdfunding offers several advantages, such as the potential for higher returns, portfolio diversification, and the ability to invest in an asset that could be inaccessible to you. You don’t have to worry about becoming the landlord of the property, as well.
The second option is investing in a single property. This is more conventional, where you buy the property using a commercial mortgage and lease it out to tenants to generate returns. You can also sell the property later on when its price appreciates.
Consider the Property’s Location and Risk
If you are investing in a single commercial property, it’s important that you discern any characteristics that lend to the property’s attractiveness or vice versa. You should also take the area into account and see if there are any trends that could create problems down the road and cause the value of the property to fall.
Besides this, it’s important to remember that the risk assessment for commercial real estate is very different from what you might use for residential real estate. Even if two commercial buildings are located in the same area, their value could fluctuate independently of each other. To avoid this, you need to consider the risks that are unique to your property.
Understand How Economic Conditions and Market Trends Impact Property Demand
When it comes to commercial real estate investing, it’s also important to consider how the current market trends impact the demand for a property type. For instance, if you are looking to invest in shopping centers and malls, then you should consider the impact of eCommerce and online shopping on brick-and-mortar stores.
The same applies to restaurants and grocery stores. With more and more people ordering food, groceries, and clothes online, there’s a good chance that brick-and-mortar stores will not be able to generate sufficient revenue in the future. In this case, the value of your property could decline significantly, and you might not be able to generate a profit.
There’s also a possibility that your tenants will end up defaulting on their lease. In this case, you need to get your property insured, enabling you to recover from potential losses.
Make the Most of Technology
Technology is opening new gateways for investing in real estate. You can use platforms like Cadre to invest in institutional-level real estate. This platform uses machine learning and predictive analytics to match an investor to the right investments.
Other applications such as CrowdStreet and Fundrise also offer individual investors the ability to access commercial real estate investment properties. These are typically reserved for the private market. However, the availability of these platforms and tools allows more inclusion. Investors can also use these tools for establishing a professional network, exploring learning opportunities, and connecting with real estate investment professionals.
Consider the Impact of Leases
The length of a contractual lease on your property plays a defining role in commercial real estate investing. If your property has a short-term lease, it is more exposed to changes in the market and the economy. The price of the property could fall in the short term, and your investment could suffer.
Conversely, a long-term contractual lease protects you from economic and market volatility. You also get a source of fixed income with long-term leases, which drives up the value of the property in the market.
However, depending on the terms and conditions of the lease, you might not be able to increase rent based on growth in rental rates throughout the market. This means that while you will be protected if the rental rate goes down, you will also lose out on the possibility of charging a higher rent if the rate goes up.
Learn About Tax Benefits and Deductions
There are plenty of tax benefits and deductions to consider for commercial real estate properties too. For starters, the value of real estate depreciates over time. Commercial property owners can use this to receive an annual income tax deduction and get compensated for any renovations and repairs required to address the wear and tear on the property.
You can also make use of the 1031 exchange. This allows you to defer capital gains taxes by selling commercial property and reinvesting the money generated from the sale into another property or a group of properties that have an equal or greater value. The use of this tax instrument allows commercial real estate investors to have more capital at hand for investing in another property.
Wrapping It Up
If you want to invest in commercial real estate, you need to keep plenty of things in mind. These include choosing the right property, selecting how you want to invest, and considering the impact of taxes and contractual leases on your returns.