Commercial real estate investing can offer substantial returns and portfolio diversification. Before you get started, you may want to research different types of commercial properties, including office buildings, retail spaces or industrial properties, and consider the benefits and drawbacks for each type of investment. A financial advisor could help you identify the right types of commercial real estate investments for your portfolio, and determine how much to invest.
5 Benefits of Investing in Commercial Real Estate
Investing in commercial real estate offer many benefits, from generating rental income and tax advantages to diversification and asset appreciation. These factors make it an attractive option for investors seeking long-term growth and stability. Here’s a closer look at five general benefits:
- Income potential: Commercial properties typically offer a higher return on investment due to their larger lease amounts and longer lease terms than residential properties. Businesses are more likely to commit to multi-year leases, providing investors with a stable and predictable income stream.
- Appreciation: Commercial real estate often appreciates in value over time, especially in prime locations with growing economies. The appreciation potential can be significant, offering investors the opportunity to increase their equity and overall net worth.
- Diversification: Commercial properties often perform independently of other investments, such as stocks and bonds, providing a buffer against market volatility. Diversification helps mitigate risk by spreading investments across different asset classes
- Inflation hedge: As inflation rises, the value of commercial properties and rental income typically increases as well. This helps investors maintain their purchasing power and protect their investments from the eroding effects of inflation.
- Stability: Commercial properties often attract long-term, stable tenants, such as businesses and corporations. These tenants are less likely to default on their leases compared to residential tenants. The stability and reliability of commercial tenants contribute to consistent rental income and reduce the risk of vacancies.
5 Types of Commercial Real Estate
Commercial real estate encompasses a wide range of property types, each serving different purposes and offering unique investment opportunities. Here’s an overview of five main types of commercial real estate properties:
- Office buildings: These include single-tenant properties, small professional buildings, skyscrapers, and everything in between. Office spaces are categorized as Class A, B, or C based on their quality and location, with Class A being the highest.
- Retail spaces: This category covers properties such as shopping malls, strip malls and standalone shops. Retail properties are designed to host businesses that sell goods directly to consumers. Location and foot traffic are important factors for these properties.
- Industrial properties: Industrial real estate includes warehouses, manufacturing facilities and distribution centers. These properties are essential for production, storage and shipping of goods, often located in industrial zones or near transportation hubs.
- Multifamily buildings: This type encompasses apartment complexes, condominiums and smaller multifamily homes. These properties generate income through residential leases and are typically located in urban or suburban areas.
- Mixed-use developments: These properties combine two or more types of real estate, such as residential, commercial and industrial spaces within a single development. Mixed-use properties offer versatility and convenience, often located in urban areas.
How Much You Need to Invest in Commercial Real Estate
Investing in commercial real estate requires a substantial amount of capital, which varies significantly based on the type and location of the property. Generally, commercial properties are more expensive than residential ones due to their size and the potential for higher returns. The cost can also vary by the location and the local real estate market.
The initial costs of investing in commercial real estate include the down payment, closing costs and potential renovation expenses. Typically, down payments for commercial properties range from 20% to 30% of the purchase price. For example, if you’re looking at a property priced at $1 million, you might need $200,000 to $300,000 upfront. Closing costs, which cover fees for appraisals, inspections and legal services, can add another 2% to 5% to your initial outlay.
Beyond the initial purchase, investors must budget for ongoing expenses such as property management, maintenance, insurance and property taxes. Property management fees can range from 3% to 10% of the rental income, depending on the level of service. Maintenance costs vary widely based on the property type and condition, but it’s prudent to set aside a portion of the rental income for unexpected repairs and regular upkeep.
These costs are the reasons that commercial real estate investments are typically reserved for groups of investors who are backing a commercial real estate investment company or for those with an ultra-high net worth.
How to Find Commercial Real Estate Investments
Whether you’re a seasoned investor or just starting, knowing where and how to look for deals can significantly impact your success. Here are five common places you might be able to find your first investment:
- Real estate agents or brokers
- Online marketplaces
- Through networking
- Public records or auctions
- Direct mail campaigns
Bottom Line
Finding commercial real estate properties to invest in requires a strategic approach and access to various resources. Whether you’re seeking stable income, diversification or long-term appreciation, commercial real estate can offer different opportunities if you’re willing to invest the time and effort.
Tips for Investing in Real Estate
- Investing in real estate takes expertise and time. You may need the help of a financial advisor to manage your investments and create a long-term investment plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re financing a real estate investment, consider using our mortgage calculator to help you estimate what you may need to budget for your project.
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