In commercial real estate, property is exclusively meant for business purposes. The property is leased to tenants who use them to run their businesses. Examples of commercial real estate include office spaces, strip malls, convenience stores, restaurants, and hotels among others. Industrial properties, considered a subset of commercial real estate, may have zoning and licensing authorities applicable to them. The other three subsets of which the commercial real estate industry consists include office, retail, and multifamily dwellings. Office spaces can be further categorized into the following classes:
- Class A: These spaces are the best when it comes to aesthetics, quality, location, and age.
- Class B: When it comes to price, these spaces are not as competitive as the first category because they are older. They are often a target of real estate investors looking to do a restoration.
- Class C: These spaces often need maintenance performed and are usually located in less attractive areas. They are the oldest properties with most being over 20 years old.
Learn Everything You Need to Know About Property Classes.
Investing in commercial real estate requires more funds and sophistication than investing in residential real estate. Besides earning investors’ income, commercial real estate also provides capital appreciation. A forecast of the commercial real estate lending industry by CBRE Group Inc. says that all the four categories of the industry – industrial, office, retail, and multifamily properties – have a positive outlook and the income returns are bound to remain healthy. However, they didn’t expect any major appreciation in values.
Investing in commercial real estate can be a little bit tricky compared to other investments. It also offers benefits such as liquidity, profitability, unique cash flow, tax, and diversification that other investment options might not. Here are tips on how you can preserve wealth and create growth in commercial real estate.
Related: Commercial vs Residential Real Estate Investing: Which Is Best for 2020?
Improve the Value of the Investment Property
There is cutthroat competition in the commercial real estate industry. You always need to stay ahead of the game by ensuring that the value of your property keeps appreciating instead of depreciating. One of the ways to improve the value of your property is by undertaking periodic upgrades so that it stays attractive to potential clients. A sudden demand for commercial property in your area could also lead to an increase in value, though you will still need to upgrade to stay competitive. Appreciating the value of the property will also give you an upper hand when you are ready to sell it off.
Increase the Income from Rent
Rent provides a consistent stream of cash flow for commercial real estate investors. Although some businesses own the premises they operate from, most businesses opt to lease their spaces. The lease rates are usually quoted in annual rental dollars and charged per square foot taken up. The lease can be for a year, 10 years or even more. For retail and office spaces, the lease period for commercial real estate lending is usually between 5 and 10 years. Studies show, however, that tenants prefer to go for long-term leases for large spaces and in a rising market environment.
For commercial real estate, there are four types of leases;
- Single-net lease: Instead of the property owner, it is the tenant that pays the property taxes on the premises.
- Double-net (NN) lease: The tenant not only pays the property taxes but also any insurance on the space.
- Triple-net (NNN) lease: The tenant is responsible for the property taxes, insurance, and undertaking maintenance of the premises.
- Gross lease: The tenant only pays the rent agreed on, with the property taxes, insurance, and maintenance costs being met by the property owner.
The only downside to long-term leases is that you will miss out on the opportunity for higher profit margins should lease rates in your area increase in the nearby future.
Related: What Are the Best Ways to Make Money in Commercial Real Estate for Rent?
Earn Income from Ancillary Services
You don’t have to restrict yourself to primarily earning an income from the property. You can make secondary income from ancillary services on the premises. Additional investments such as vending machines and tuck shops in office buildings can earn you huge profits. Look at them as a mini-business within the bigger investment where you already have a group of customers to serve.
Minimize Tenant Turnovers
Every property owner, especially commercial property owners, wants their property fully occupied. Minimizing vacant spaces helps you to maximize the rent collection front. However, tenant turnover is a commercial property owner’s worst nightmare. This is because unlike residential real estate, you have to adapt the space to the specifications of each tenant in commercial real estate. For example, a fast-food restaurant may want to rent space that was previously used as a yoga studio. It is often advisable for property owners to find real estate management firms that are specialized in commercial real estate to be in charge of managing the property, finding and retaining tenants, overseeing leases, and coordinating the upkeep of the property. This will also help the owner adhere to real estate laws and regulations which vary from state to state.
Commercial real estate is a lucrative investment that can grow your finances and also hedge your wealth when the stock markets become volatile. There are two ways in which you can invest in the commercial real estate industry:
- Direct investment: Acquire ownership of the property. To invest directly, you need to have considerable knowledge of the industry as it is usually high-risk. Alternatively, you can hire a commercial real estate firm to acquire properties on your behalf. It requires you to have a huge amount of capital.
- Indirect investment: You can also invest in the industry through purchasing market securities such as Real Estate Investment Trusts (REITs), exchange-traded funds, and buying shares in companies, such as banks and realtors, that are in the commercial real estate sector.
As long as you properly maintain the property, offer attractive rates on leasing and keep it up to date, you will realize an appreciation of your capital investment. The only downside to investing in commercial real estate is the numerous legal requirements you have to keep up with in order to get the go-ahead from the authorities concerned. You will have to put into consideration the property taxes, maintenance responsibilities, and the mechanics of purchasing involved in commercial real estate.
This article has been contributed by Brett Farmiloe.