Commercial real estate comes with its own advantages and disadvantages, and there are unique opportunities to be found in its niches, many of which just may be in your local area.
If you’re ready to learn the basics of commercial real estate investing, and whether or not this method of investing is right for you, let’s get started.
What is Commercial Real Estate Investing?
Commercial real estate investing involves an investment in business buildings or non-residential real estate only used for business purposes.
Commercial real estate offers investors the opportunity to earn higher cap rates — the net operating income divided by the present market value of a property — than residential usually affords.
Another advantage of commercial real estate investing is the ability to benefit from other industries besides housing.
That said, there are some obstacles to face, including commercial real estate property generally requires a significantly larger investment than residential.
It will likely require professional property management, too.
There are certain property types that are subject to more economic risk than residential investing. The loss of a tenant may pose a threat as well.
Commercial vs Residential Investing: What's the Difference?
The most important difference between commercial real estate investing is the method of valuation.
Valuation of residential (including investment property not considered commercial multifamily) is based on comps, or comparison sales. Comparison sales are recent transactions of similar properties in similar areas.
While commercial real estate valuations can use a market-based methodology, they are more likely driven by net operating income and cap rates.
As a commercial investor, you will focus on the profitability of the commercial property, which isn’t the case with a residential property.
Types of Commercial Investments
This includes residential properties such as apartment buildings and also include mixed-use buildings (residential and retail).
Multifamily properties range from high-rise luxury apartments to subsidized mixed-income housing.
Multifamily generally works on yearly lease agreements and provides an investor diversification, meaning you should not be hurt by a single tenant leaving or falling into delinquency.
Similar to multifamily, office properties can range from skyscrapers to small medical buildings and include lease terms from 3-5 years.
Offices give an investor security with longer lease terms, but can face a risk if a single tenant who utilizes much of the space were to leave.
Retail may vary from small shopping plazas to, large malls or urban center properties.
Typical lease length is 3-5 years or longer.
This includes various property types such as:
- data centers
- cold storage facilities
Leases are longer-term, typically 5-10 years.
Commercial Investing: Getting Started
Because there is no one size fits all answer for real estate and commercial real estate investing, the best way to get started is to educate yourself on the various pathways of options that interest you in order to minimize the risk and maximize the profit.