Investing in Commercial Real Estate
From apartments to offices and retail space to mixed-use properties, commercial real estate exists nearly everywhere and can offer an excellent investment opportunity. Investors in commercial real estate make money by managing the daily operations of the building, as well as leasing individual units and spaces to tenants and by the potential of appreciation over time in the property's value. Below we examine the first way commercial real estate investors generate income:
Examples of Investment Properties
- Office Buildings: The typical lease period for office buildings are between five (5) to ten (10) years.
- Apartment Buildings: Generally, the lease term for renting units in a multi-family apartment building are 12-months, yet sometimes are short-term leases on a month to month period. Multi-family properties have been on an extended run for 5-7 years.
- Industrial: The typical lease period in the industrial sector are at least five (5) years. Today, the industrial sector is one of the most favored sectors in all commercial real estate to invest in, owing in large part to e-commerce's growth, which has spurred an increased need for warehouses close to urban centers.
Earning Money through Appreciation in the Property's Value or through Value-Add Approach
Commercial properties can offer a return on investment as a result of their potential for appreciation in value over time. Conversely, commercial properties can lose value. Investors are likely to earn money if there is an increased demand for their property or a specific neighborhood, meaning tenants will pay higher rents for a desirable location and tenant mix. With increased demand, potential buyers will pay a higher price than an investor may have paid to purchase the property.
Another way investors can earn money in commercial real estate is through taking a more active "value-add" approach, making capital improvements to the property, upgrading the tenant roster by taking a proactive approach to property and asset management in order to boost its inherent value or income-earning potential.
Earning Money though the value-add approach
There are several ways an investor can earn money on a commercial real estate investment property using the value-add approach, including the following;
- Updating Appliances in common areas and amenities within a Multi-Family Apartment Building may allow you to charge higher rents.
- Rezoning a Neighboring Parcel from Residential to Multi-Family, allowing additional apartment buildings to be built.
Pros and Cons to Investing in Commercial Real Estate
There are both pros and cons to investing in commercial real estate. While commercial properties typically offer a greater financial reward than investing in a single-family home or a residential apartment, investment involves more risks, namely, a greater time commitment, need for professional help (i.e. property management expenses), bigger initial investment, etc. Alternatively, below are several of the pros when it comes to investing in commercial real estate:
- Income Potential: Compared to residential properties, commercial properties offer far greater earning potential. With a commercial property, the typical annual return on investment is between 6 and 12 percent, versus a single-family home, whose earning potential is usually only between 1 and 4 percent.
- Professional Relationships: Tenants of commercial properties are often small businesses. Likewise, owners of commercial properties operate and manage the property as a business. Accordingly, as Matt Larson explains for NOLO, "the landlord and tenant have more of a business-to-business customer relationship, which helps keep interactions professional and courteous."
- Price Evaluations that are More Objective: With commercial property, it is best to ask for the current owner’s income statement and base your offering price off the information on the income statement. Asking prices should be "set at a price where an investor can earn the area’s prevailing cap rate for the commercial property type they are looking at (retail, office, industrial, etc.)," Larson writes. In contrast, residential properties are more influenced by emotional pricing.
The experienced team of advisors at Verani Realty offers comprehensive and diversified services in the areas of Seller/Landlord Representation, Buyer/Tenant Representation, Investment, Marketing, Land Use Planning/Master Planning, and Development. Reach out to a commercial Advisor within our firm to help guide you through your investment property sale or purchase.
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