Commercial real estate (CRE) is a type of property that is only used for business or as a place to work. It is not used as a place to live, which is what residential real estate is. Most of the time, commercial property is rented out to tenants who use it to make money. This big category of real estate can include anything from a single storefront to a huge shopping center.
There are various types of commercial real estate, such as shops of all kinds, office buildings, hotel chains, shopping areas, restaurants, and health facilities.
Putting money into commercial real estate can make you money and protect you from the risky stock market. Investors can make money when they sell a property if it has gone up in value, but most of their money comes from the rent paid by tenants.
Before buying any commercial property, there are a few important things to think about.
If you’re planning to invest in commercial real estate, these questions will help you make sure you’re investing in something good and safe:
1. Cash Flow Or Appreciation?
Most commercial real estate investors hope to make money in one of two ways. Investors get their money back through cash flow or value growth. In some cases, investments with the highest return on investment can increase in value and bring cash.
It’s important to know whether you plan to get a good return on your investment through cash flow or appreciation. This difference will affect which properties you choose. Each type of investment has pros and cons.
Cash-flow investments bring in rental income every month. If you need a loan to make a cash flow investment, you’ll need to find a property that rents for more than your monthly installments and any maintenance costs.
To do this, you will need to find out how much rent is going for in your area and know a lot about the condition of your property. Cash-flow investments are easy to use, but they are harder to find. It typically means looking for a property that costs little but brings in a lot of money every month in rent.
If you can wait for your investment to pay off, you may not need a positive cash flow as much. With some patience, you will get your money back as the property’s value increases. This takes longer and comes with a little more risk, but it gives you more freedom.
2. How Much Risk Are You Willing To Take?
Investing in commercial real estate is a good idea, but there are some risks. Before making an investment, you should know how much risk you are willing to take. If the market goes down for a while, will you have enough money to stay afloat until the market gets better?
Consider low-risk investments if you wouldn’t be able to take care of yourself if the market went down. Check out low-cost properties in good areas. But if you can handle some risk, you might get a better return.
3. Is Liquidity A Priority?
Real estate is one of the investments that you can’t sell quickly. This means it’s hard to get out of the investment if you decide you want your money back. You can easily get out of a real estate investment early, but it’s not always easy and can mean losing money.
If you don’t want your money to be tied down for years, you might want to invest in something other than commercial real estate. Most of the time, investing in stocks is a much more liquid choice.
4. Which Industries Will You Go Into?
In commercial real estate, you can focus on a lot of different industries. Do you want to own retail space, medical offices, hotels, or space that can be used for different things? Every industry has its own needs and trends in the market.
This year, investors in commercial real estate have been flocking to data centers and storage space facilities. In 2020, data centers gave real estate investment trusts returns of more than 20%. Self-storage properties also gave good returns and are expected to grow a lot over the next few years. By 2025, the growth rate is expected to be a huge 134.79 percent per year.
When deciding what kind of commercial property to invest in, look for industries with high returns and high growth rates. Do your research prior to actually making an investment, because not all of them are the same.
5. What Are The Trends In The Market?
The most critical thing you need to do to be a successful investor is to understand market trends. You can look at global trends, but you should also pay attention to the trends in your own area.
The commercial real estate market is growing, according to research done by the commercial real estate company CBRE. According to their analysis, the amount of money invested in multifamily housing should reach $191 billion next year, which is a 33 percent increase from the amount invested last year.
What kind of area you invest in will make a big difference. Before making your final investment decision, make sure to look into both global and local trends. When you take the time to learn about investing, you’ll get much better returns.
6. How Will The Rules About Zoning Affect You?
To invest in real estate, you need to know what the rules are in your area. Zoning laws can affect your investment because they limit how you use your property.
If you want to own a mixed-use space that has both retail and living areas, you’ll need to find out if that’s allowed by the zoning. After researching the zoning laws in the area you want to invest in, you’ll know how you can use the space and how that will affect your finances.
7. Do You Have A Backup Plan?
Even if you have a lot of experience and a well-honed process for doing your due diligence, you will still run into problems at a commercial property. This is why investors need to have a backup plan since commercial real estate can’t be sold as quickly as other types of assets.
Investors who are more experienced will know how to reduce risk in a number of ways, such as by renting out office buildings to a number of smaller tenants instead of one or two large ones. This is part of their business plan and is built into the way they do business. In this situation, if one tenant stops paying rent, it won’t be as bad, and the property will still be able to pay its bills.
Key Takeaway
Still nervous about buying your first (or fifty-first) piece of commercial real estate? The nerves probably won’t go away any time soon, but if you ask the six questions above, at least you’ll know you’re asking the kinds of questions that will help you make smart, well-informed investment decisions.
