Investing In Commercial Real EstateWhat Is Commercial Real Estate?
Jan 16, 2018,
Investing in real estate can be a way to earn passive income and increase your wealth. While plenty of investors have success in residential real estate, others make a move to commercial real estate to gain even more money.
As with any investment, commercial real estate has both risks and rewards. It’s not for everyone, as investing in it requires a good deal of work — especially in the early stages of the process. While there’s less risk in some cases, you typically need to put down more money upfront. Commercial real estate investing also usually takes longer than buying residential properties.
This guide to investing in commercial real estate for beginners will help you better understand what commercial real estate is and if it’s a good investment option for you.
Commercial real estate refers to property used for conducting a business. What form that business takes depends on the premises and area. Commercial real estate comes in a variety of types and classifications.
Here are a few of the most common types of commercial real estate.
Along with the different types of commercial real estate, there are a designations or classes to consider, especially when dealing with office buildings. Here are some examples.
Is investing in commercial real estate as easy as finding a property for sale, calling up a commercial real estate agent and making a deal? Well, yes and no.
Commercial real estate investing has some things in common with investing in residential real estate. But there are also some fundamental differences.
Are you wondering what the difference is between commercial vs. residential real estate investing? One of the most significant differences for investors is the way the two types of properties are valued. Square footage, particularly usable square footage, plays a prominent role when it comes to determining the value of a commercial property.
As an investor, you’re more likely to see a better return on investment if you buy a property with five rentable units than if you were to buy a property with one unit or a single-family home. There’s also slightly less involved in commercial real estate, at least in one aspect. If you buy a residential property suited to only one person or family, when that tenant moves out, you lose all your income until you find another renter.
But if you were to buy a five- or 10-unit property and one tenant moves out, you would only lose 10 or 20 percent of income from that property, at least until you find a new tenant.
Even if you don’t buy a multi-family commercial property, commercial real estate has some benefits over residential properties. The lease terms for office or retail spaces tend to be much longer than the rental terms for homes. When a company signs a lease on an office or store, it’s usually for at least five years, if not much longer. Some businesses sign 20- or 30-year leases. You’ll be secure in the knowledge that you’ll have a tenant for the long run.
The one drawback of investing in commercial real estate over residential properties is that banks and lenders tend to look at commercial properties differently. Even though you’re likely to earn more from a commercial property, your lender might see it as a higher-risk venture. That means you can expect to have to put down more upfront than if you were buying a home.
Another significant difference between commercial and residential real estate is the type of terms offered on mortgages. Generally speaking, it’s a lot easier to get a mortgage on a residential property than it is for a commercial one.
Often, lenders expect people or businesses buying commercial real estate to put down a much more substantial down payment. In some cases, that deposit can be up to 35 percent of the property’s value.
You also end up paying back a mortgage on a commercial property differently from how you’d pay back a home loan. With a commercial real estate loan, the lender might divide up payments on a 20-year schedule, but then put the loan on a five- or seven-year repayment schedule.
That means you’d make monthly payments based on what you’d pay over the course of 20 years for five or seven years. But once those five or seven years are up, your lender might expect you to make one big, balloon payment for the entire amount remaining on the loan.
Investing in commercial real estate isn’t a project you need to complete on your own. In fact, it’s often in your best interest to have a team of experts around you to help you with every step throughout the process.
As you would when buying a residential property, step one of getting into commercial real estate is making sure your finances are in order. In this stage, hire an accountant to look over your books and ascertain what you’d gain or lose if you were to buy a particular property.
It also means you must work with a lender to learn more about mortgages for commercial properties and whether you’d qualify. You also want to hire a lawyer to help you with all the paperwork and to help you through the negotiation process. Your lawyer can also explain any tricky concepts and keep you from signing documents that aren’t in your favor.
Finally, you’ll want to find a commercial real estate agent or broker. Your agent can help you locate properties, schedule showings and guide you through the process of making an offer.
When it comes to finding the right commercial property for investment, one thing trumps all the rest — location. If a property you’re looking at is in a less-than-ideal area, it will be difficult for you to find people or businesses to lease it. Even if a property in an out-of-the-way area seems like a steal, if you can’t find people to occupy it, it will be a money-losing proposition for you.
Usually, the more centrally located a property is, the better. If you’re looking for office space to invest in, you’ll have a much easier time finding tenants for a building located in the heart of a downtown area than you will for a building located in an exurban area or a more remote suburban area.
Property located near many amenities, such as schools, hospitals and shopping centers, is also a good pick, even if it’s not in the middle of downtown.
Of course, location isn’t everything. You want to make sure the property doesn’t have too many skeletons in its closet. For example, you want to know how the property is zoned and how easy — or difficult — it would be to change the zoning, if needed.
It’s also worth considering the age of the building before buying. Usually, newer buildings will be in better condition than older ones. They are also more likely to have up-to-date amenities and features tenants want.
That’s not to say an older building isn’t worth investing in. For the right price, it can make sense to renovate and fix up an aged property completely. It’s all about how much effort you want to put into it. Consider whether you’d rather spend more upfront for a turnkey, ready-to-lease property, or if it would be worth it to put some time and effort into repairing a worn-out, outdated property.
When checking out properties, get to know the current tenants and the businesses in the buildings or properties adjacent. Your agent can ask them what problems, if any, they’ve had with the building, what they like about doing business — or living — in that area and how long they plan on remaining.
Once you’ve found a property that seems to be “the one,” the next steps are very similar to the process when buying residential properties.
You’ll want to work with your real estate agent and your attorney to figure out what the best offer amount is, then your lawyer can draft up a letter of intent.
Even if the seller accepts your offer, the process of buying the property isn’t over yet. Now it’s time to check up on the property with due diligence. You’ll want to order a title survey to find out the exact boundaries of the property, as well as the location of easements and the history of the building. You’ll also want to hire inspectors to assess the condition of the building to make sure there are no deal-breaking issues with it.
Although investing in commercial real estate can be a reliable way to improve your assets portfolio and build wealth, a lot can go wrong if you rush headfirst into it. These commercial real estate tips and tricks will help you make the best choices for your own needs and enjoy the best return on investment possible:
If you’re already comfortable investing in residential real estate, you might not see the advantage of switching over to or at least trying your hand at commercial real estate. While you might want to continue to own and manage residential properties, giving commercial real estate a try has many benefits.
We have more than 3,000 Coldwell Banker Commercial real estate professionals around the world. Our teams of real estate agents are experts in their local markets and can help you find the right property to invest in. We offer a range of commercial real estate types, including retail, office, land and multi-family homes.
To learn more about what we can do for you, contact a Coldwell Banker Commercial real estate agent in your area today.
BOSTON (May 17, 2023) – The Metro Boston Group, a leading real estate firm, is proud to announce the expansion of its commercial sales services into the Greater Boston neighborhoods and South Shore markets. This expansion comes in response to recent successes and client demand for a greater presence in these areas. To lead this expansion, Karim Evans has been appointed as commercial sales advisor. With his wealth of experience in investment acquisition, sales, leasing and asset management, Evans is well-suited to support local businesses and help The Metro Boston Group target the highest and best-use potential of its clients. “Our efforts are dedicated to assisting small to mid-size clients who are often overlooked by larger national and regional real estate companies. Traditionally, these are non-institutional owners, investors, family-owned trusts with generational assets, and developers who are searching for the full level of service they deserve,” said Albert Bouchie, broker advisor of The Metro Boston Group at Coldwell Banker Commercial. “Karim's skills and commitment to building thriving local economies align perfectly with our goal of serving Main Street-Down the Street commercial property owners and investors and helping them reach their full potential.”Evans will be responsible for expanding The Metro Boston Group’s brand awareness by leveraging his extensive market knowledge and client base. He is committed to generating long-term capital appreciation for his clients’ investment portfolios and is always available to answer any questions about the commercial real estate market."We are excited to have Karim on board as our commercial sales advisor,” said Bouchie. “His personal interest in supporting local businesses and dedication to customer service make him a valuable asset to our team.” For more information about The Metro Boston Group's commercial sales services, please contact Karim Evans at (857) 763-7771 or firstname.lastname@example.org. For more information about The Metro Boston Group, please visit www.cbcboston.com.About Coldwell Banker Commercial AffiliatesColdwell Banker Commercial Realty, an affiliate of Coldwell Banker Commercial®, provides commercial real estate solutions serving the needs of owners and occupiers in the leasing, acquisition and disposition of all property types. With a collaborative network of independently owned and operated affiliates, the Coldwell Banker Commercial organization comprises almost 200 companies and more than 3,000 professionals throughout the U.S. and internationally. For additional information, visit www.cbcworldwide.com. ###
On this episode, we're joined by Deborah Shames, Communication and Presentation Trainer, Keynote Speaker, Author, and CEO of Eloqui. Deborah uses her experience directing over sixty award-winning films to make her business clients more genuine, effective, and successful. It doesn’t matter whether they are delivering a keynote address, speaking to a Board of Directors, or pitching for new business. She co-wrote 3 books on communication and public speaking, including the business best-seller "Own the Room." And because Deborah ran a successful film company in Sausalito, CA for fourteen years, she knows how difficult it is for women to stand out and succeed. Her latest book she wrote is "Out Front: How Women Can Become Engaging, Memorable and Fearless Speakers."