Commercial real estate (CRE) continues to be a dependable source of income. In 2022, the U.S. CRE industry generated $1.2 trillion in revenue and $831.8 billion in personal earnings. Although commercial real estate investments can have high profit ceilings, their scale and complexity can seem daunting to novice investors.
Commercial real estate encompasses a wide range of property types, including office buildings, retail spaces, industrial warehouses, and more. Investing in CRE can be complex and intimidating, but with the right knowledge and strategies, it can be a rewarding venture.
Whether you are a seasoned investor or a newcomer to the world of CRE, this article will provide you with valuable insights and tips on how to make money in this competitive market. From understanding market trends to navigating financing options, this guide will walk you through the essential steps to success in commercial real estate investing.
Types of Properties Involved in CRE
Commercial real estate includes many property types, such as:
- Office buildings
- Shopping centers
- Retail space
- Industrial facilities
- Hotels and motels
- Healthcare facilities
- Restaurants
- Commercially zoned vacant land
The commercial real estate business varies from residential real estate in many ways besides purpose. Commercial properties are riskier investments because of the income mandate and frequent tenant turnover. There are more involved management duties in CRE, whereas residential property managers primarily focus on maintenance and upkeep.
Commercial real estate has far more variables and responsibilities. How can you navigate these tasks to turn a profit?
Strategies for Making Money With Commercial Real Estate
The commercial real estate market can be lucrative but difficult to master. Here are some strategies that can help you find success.
Building a Strong Knowledge Base
Commercial real estate is a volatile market. To increase your chance of success, prioritize learning as much as possible about the industry before investing.
You can find a lot of resources for commercial real estate education. Many books have been written on the subject. Educational institutions like the CCIM Institute offer courses tailored to those wanting to get into the business full-time.
Like all professions, commercial real estate has unique concepts, terminology and strategies. Full comprehension of CRE principles and vocabulary is key to future success. Focus on networking with industry leaders and workers who can help you understand all the details and nuances.
Identifying Profitable Commercial Real Estate Opportunities
Use all the valid tools you can to conduct market research on commercial real estate. There are many online resources to consult, but it’s always best to back up your findings with manual efforts.
Your CRE network will be helpful in this area, as will subscription services, public records, assessor’s offices and legal databases.
Some of the most important factors in identifying prime CRE opportunities include:
- Financial performance: Calculation of net operating income, capitalization rate, market rental rates and vacancy rates
- Risk assessment: Evaluation of the risk level regarding several factors, especially location, financing, legal regulations and the overall market
- Location: Assessment of local demographics, competitors, business growth, accessibility, zoning restrictions and local infrastructure
- Property: Research on property conditions, tenant quality, historical financial performance, market analysis and other factors
- Economic indicators: Analysis of market performance, employment rates, economic growth and entry and exit timing
- Legal and tax issues: Understanding the regulations involved with the property, including zoning, environmental laws, tenant and landlord rights and capital gains tax
Pay special attention to specific high-growth areas and emerging markets. These elements inform what opportunities may have the most potential for real income.
Securing Financing
Many different options are available for funding your commercial real estate investment, including:
- Traditional bank loans
- Commercial mortgages
- Private equity funds
- Joint ventures
- SBA loans
- Lease financing
It’s best to avoid structures that will expose your personal wealth to predatory lender practices, elevated risk and high interest rates.
A strong credit profile generally gives you access to more financing opportunities. Whenever possible, securing pre-approved financing can streamline transactions and boost your negotiation leverage. That makes it easier to work out terms and interest rates in your favor.
Effective Property Management and Tenant Relations
The objective of a commercial real estate venture is to attract high-quality tenants and build long-term, profitable relationships. Effective property management is the best way to achieve that goal.
Keeping the property in prime condition is just one aspect of retaining good tenants. Competitive and flexible lease terms, amenities, effective marketing, incentives and reactive management are some of the criteria prospective tenants care about most.
A tenant screening service does background checks on possible occupants, including credit reports, financial statements, references and rental history.
Investors in commercial real estate need to prioritize constructive relations with their tenants. Being practical and thoughtful about resolving disputes is a positive approach to dealing with landlord/tenant challenges.
Seek productive ways to settle disputes on property damage, late payments, lease conditions and noise complaints; keep all avenues of communication open.
Mitigating Risks and Ensuring Compliance
Commercial real estate regulations vary according to location, so knowing which ones apply to your property is crucial. Zoning laws, building codes, environmental regulations, land use restrictions, Americans with Disabilities Act (ADA) compliance and tax laws are a few of the most critical policies to understand.
While insurance can cover some liability, property managers are responsible for day-to-day risk management. Insurance companies generally require property owners and managers to protect their investments and mitigate risk.
Exit Strategies and Maximizing Returns
As with all real estate deals, investors in commercial real estate have many options for exiting positions to maximize profits and free up equity, including:
- Selling to another investor
- Refinancing
- Leasing
- Lease buyouts
- Sale-leasebacks
- Partial sale
- Conversion to a Real Estate Investment Trust (REIT)
Large-scale transactions like these carry considerable risk and volatility, so it’s important to widely explore all strategies to arrive at win-win results for all parties.
Commercial real estate can be very fluid in terms of market value and performance. For that reason, an investor needs to keep an open mind about adapting their exit strategies as needed. Keeping a close watch on market trends and conditions is a vital part of managing that flexibility.
Other Ways to Make Money in Commercial Real Estate
A few alternate strategies to straight CRE investment and management can generate substantial income.
Buy REITs
Real estate investment trusts (REITs) allow regular investors the chance to invest in multiple commercial properties as part of an investor pool. You can buy shares in REITs straight from a stock exchange, which means it’s a highly liquid investment.
Find Real Estate Crowdfunding Opportunities
Online crowdsourcing for funds is similar to REITs but is conducted in private forums and online platforms. It’s also more oriented toward specific projects rather than overall REIT portfolios and usually costs less to buy in.
Become a Limited Partner
Limited partners provide capital to CRE projects, sharing in a business’s gains and losses without having an active role in management decisions. Limited partners are so named because their liabilities are limited to the amount of their investment.
Invest in Private Equity Funds
Private equity funds collect working capital from multiple investors, such as limited partners, for acquiring and building commercial real estate assets. They are run by financial professionals responsible for investment decisions and portfolio management.
Is CRE Your Next Best Investment?
Knowing how to make money in commercial real estate involves careful analysis of opportunities within the market. It’s a complex sector where financing strategies, concepts, risk management and monitoring profits all come into play. While it’s not for the faint of heart, commercial real estate has proven to be a reliable revenue source for those who can master the business.
Frequently Asked Questions
What is the most profitable commercial real estate?
Multifamily residential properties generate the most income in the U.S., followed by retail centers and industrial properties.
Is commercial real estate passive income?
By definition, yes. Some investors may take more active management roles with their commercial properties, but generally, CRE owners delegate those responsibilities to other parties.
What is the average profit on commercial real estate?
The average annual return on investment in commercial properties hovers between 6% and 12%. However, factors like location, economic conditions and business income can affect profits.
