Commercial Real Estate Investing For Beginners

For beginners interested in commercial real estate investing, it's important to start by conducting thorough market research and due diligence. Understanding the local market trends, property values, and rental rates is crucial for making informed investment decisions. Working with a reputable real estate agent or property management company can also help beginners navigate the complexities of commercial real estate investing.

Developing a solid investment strategy and having a clear understanding of the risks and rewards associated with commercial real estate investing can set beginners up for success in this competitive but rewarding industry.

Types of Commercial Real Estate Properties

Explore the types of commercial real estate properties to recognize what would work best for your investment goals.

Office Buildings

During the pandemic, office buildings experienced massive changes in demand as many workers shifted to work from home. Today, people still head to the office for work, dental appointments, medical needs and accounting assistance. Well-managed and clean office buildings encourage tenant retention.

Retail Centers

Retail centers have multiple retailers ranging from boutique clothing stores to restaurants. Centers like malls and outlets allow people to browse and shop for items in a location where other options are only a few steps away.

Industrial Properties

Factories and manufacturing plants have a substantial amount of space. Large industrial properties such as warehouses are built on the outskirts of cities.

Multifamily Properties

Multifamily properties can include large apartment complexes to duplexes. Depending on the size of your property, consider the possible advantages and drawbacks related to hiring a property management company. Starting with smaller properties allows you to slowly grow over time.

Special Purpose Properties

Special purpose properties are typically created and used for a specific purpose. For example, a hospital building or medical facility could appeal to a certain type of potential tenant with strict space and design needs.

Factors to Consider When Investing in Commercial Real Estate

Weigh top factors such as location and tenant quality before investing in a commercial property.

Location

Location heavily impacts your bottom line. Research zoning regulations to understand if a property can support your business needs. Premium locations in the center of town or close to public transportation can attract more clientele and increase your visibility.

Tenant Quality

Quality tenants have a proven record of profitability and stability. For example, quality tenants pay on time and adhere to agreed-upon lease terms. Check the history of a potential tenant for previous evictions or bankruptcies.

Lease Terms

Commercial property lease terms usually range between two to five years. The exact term depends on the parties involved. Lease terms include basic property information and describe how the leased space can be used. Triple net lease investments require less managerial and financial effort because tenants pay rent, utilities, management fees and property expenses.

Physical Condition

Examine the physical condition of the property. Older properties require more frequent and expensive repairs. Properties with fewer amenities and more obvious signs of aging struggle to command top dollar compared to newer properties.

Market Trends

Consider larger market trends to see if a commercial property makes sense. For example, technology is increasingly influencing accessibility and efficiency as well as general management practices.

Financing Options for Commercial Real Estate Investing

When exploring the commercial real estate market, recognize the vast sea of commercial property financing opportunities ranging from traditional bank loans to private lenders. Speak with experts to understand the opportunities available to you.

Traditional Bank Loans

Banks offer loans that require a minimum of 20% for down payments on commercial properties. Keep closing costs in mind when deciding on a loan amount. The approval process usually has stricter credit score standards and requires proof of funds.

Small Business Administration (SBA) Loans

SBA loans can be helpful for smaller businesses because of favorable repayment timelines. However, SBA loans have more discerning eligibility requirements. According to the U.S. Small Business Administration, the eligibility requirements for an SBA 504 loan stipulate you must have a net income below $5 million after taxes for at least two years as well as have a strong business plan.

Private Lenders

Private lenders such as private equity firms and investment groups usually expedite the funding process. Alternative financing might include higher interest rates to compensate the lender for taking a risk on an unconventional borrower. Review the terms and conditions to decide if this is the right path for you.

Crowdfunding and Real Estate Investment Trusts (REITs)

REITs and crowdfunding platforms provide an alternative pathway to funding. Crowdfunding platforms differ from REITs. Publicly traded REITs navigate the real estate market without owning property. For smaller investors, crowdfunding platforms and REITs make it possible to invest with a minimal amount of capital.

Benefits and Risks of Commercial Real Estate Investing

Here are the benefits and risks of investing in commercial real estate that you should consider before taking your first step in.

Benefits

• High Returns: One of the key benefits of commercial real estate investing is the potential for high returns. Commercial properties typically yield higher rental income compared to residential properties, especially in prime locations. Additionally, commercial leases are usually longer in duration, providing investors with a stable cash flow over an extended period. This can be particularly appealing for investors looking for a reliable source of passive income.
• Property Appreciation: Moreover, commercial real estate investments offer the potential for property appreciation. As the property value increases over time, investors can benefit from capital gains when they decide to sell.
• Hedge Against Inflation: Furthermore, commercial real estate can serve as a hedge against inflation, as rental rates tend to increase with inflation, thereby preserving the value of the investment. In addition to financial benefits, commercial real estate investing allows investors to take advantage of tax benefits such as depreciation deductions and interest expense deductions, which can help minimize tax liability.

Risks

• Fluctuating Occupancy Rates: One of the main risks is the potential for vacancies, which can lead to a loss of rental income and increased operating expenses. Economic downturns can also impact the demand for commercial properties, resulting in decreased occupancy rates and declining property values.
• Upfront Capital Payment: Additionally, investing in commercial real estate requires significant capital upfront, making it less accessible to smaller investors.
• Complex Property Management: Moreover, managing commercial properties can be complex and time-consuming, requiring a hands-on approach to ensure the property is well-maintained and tenants are satisfied.

Tips for Commercial Real Estate Investing as a Beginner

Review the tips below to learn how to enter into commercial real estate as a beginner. Take your time learning about the industry while setting clear investment goals to confidently claim your future.

Educate Yourself

Learn about the larger market, different property types and unique investment strategies. Read books, attend seminars and take online courses to improve your knowledge base. When possible, ask to be mentored by a professional.

Set Clear Investment Goals

Before moving ahead, create clear investment goals that outline your anticipated return on investment (ROI) and timeline. Know your level of risk tolerance before closing a deal. Decide what type of property would work best with your investment goals.

Build a Strong Network

Meet with industry professionals such as top brokers, attorneys and investors to have a solid group of experts in your corner. Your contacts can direct you toward off-market deals before they are announced to the public. Working with experts expands your investing abilities while potentially giving you a headstart on the competition.

Conduct Thorough Due Diligence

Safeguard your funds by inspecting a potential investment. Conduct thorough market analysis and financial analysis while carefully examining the risks. Have property inspections and review tenant leases to uncover a property’s deeper history. The best way to understand the location of a property is to visit in person.

Partner with Experts

Work with reputable brokers and attorneys to mitigate risk. Longtime investors usually have years worth of experience and knowledge at their disposal. Their experience helps them to recognize patterns and possible deal loopholes. Working with experts allows you to learn while navigating the commercial real estate industry.

Analyze Cash Flow and Investment Returns

A successful commercial real estate property should provide a comfortable ROI while making enough income to cover expenses. Review information such as the financial analysis and the cost of financing alongside possible rental income to decide if a deal makes sense. Have multiple people review the projections.

Mitigate Risk

Diversify your portfolio by investing in properties with different tenants and locations. Spreading out your investments lowers your risk exposure and improves your chances of withstanding economic uncertainty. Review your insurance coverage and contingency plans to be ready for the unexpected.

Be Patient and Disciplined

Take your time looking for a real estate investment to avoid buyer’s remorse. Finding the ideal property can require many hours of research and evaluation. Have clear investment criteria and long-term goals to avoid getting lost in a buying frenzy.

Stay Informed and Adapt

The economy moves like the ocean with periods of rising and falling market trends. Stay ahead of the wave by researching regulations and economic trends. Be flexible enough to swiftly go with the flow and seize unexpected opportunities.

Seek Professional Advice

When learning how to navigate the market, find real estate professionals and use their expertise. Work with people that you trust to effectively execute your investments.

Investing for Beginners: Creating Commercial Cash

Stay true to your investment goals when exploring the opportunities available to a starting commercial real estate investor. Commercial real estate provides a unique opportunity to create cash flow from tenants while also benefiting from appreciation. With the right team of experts and properly researched deals, you could begin your journey to creating a real estate empire.

Frequently Asked Questions