What Types of Commercial Real Estate Can You Buy?
Whether you’re interested in investing in a portion of a property or planning for 100% ownership, commercial real estate offers several options for dividends and profits.
Your main source of income will be collecting rent from your tenants, whether you buy shares in an office building or an entire warehouse.
In addition, you’ll be building equity. When it’s time to sell, you may end up with a handsome profit.
Before you begin viewing properties, be sure you’re familiar with the different types of CRE properties, including their pros and cons.
Your Four CRE Options
There are several types of commercial real estate properties, each with its own set of advantages and disadvantages.
Retail real estate is where people go for new shoes, an afternoon latte, or when shopping for groceries or a manicure. Retail tenants are diverse and can be anyone from a tattoo studio to a five-star restaurant.
Although some investors avoid retail investments because of the growth of e-commerce, there are still opportunities. Consumers cannot get haircuts, purchase a manicure, or take their romantic interest to dinner through Amazon.
A successful CRE pick will depend on the property’s location. For example, a large supermarket or “mega center” near your property will create higher levels of traffic.
If you’re interested in retail mall space, look for anchor stores. These are big-name department stores that bring more traffic to the area and boost neighboring retailers’ sales.
Founded in 1901, Nordstrom is an anchor store at several prestigious shopping malls.
Pros: A common commercial lease structure, triple-net or NNN, enables property owners to pass their taxes, maintenance costs, and insurance premiums to tenants.
Cons: The retail market can be fickle. This means that landlords run the risk of leasing to tenants whose goods or services may suddenly lose popularity, forcing them out of business.
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This includes storage facilities, warehouses, and distribution centers used for the production, storage, and shipping of goods.
- Since this type of CRE stores equipment and products, an industrial property won’t require the same level of upkeep.
- However, it’s recommended that you research a potential tenant’s products before a lease is signed to minimize possible delinquencies.
Pros: Industrial properties are popular with newcomers to CRE investing as the tenants’ basic needs are less complex than those in an apartment complex.
Cons: Many properties purchased by beginning investors are single-tenant properties. This means there may be no-income gaps between tenants.
When economic factors affect consumer demand, this may result in a decrease in the need for industrial property for storage, especially for non-essential items.
These include all types of apartment complexes (except those with two to four units).
- Luxury properties may carry a bigger price tag for investors, but they will collect higher rents.
- Some experienced multifamily investors search for lower-priced properties to renovate, as post-renovation rents will be higher.
This West Coast apartment building appeals to tenants who prefer the area’s traditional architecture.
Pros: These are reliable sources of rental income, especially when residential property sales are slow. People need a place to live, and you have what they need.
Cons: Investors will need to spend more time and cash, as your tenants will be more demanding than warehouse inventory.
This CRE investment can be anything from a high-rise building in a big city, to a single-tenant office in a rural area. In addition, co-working spaces have taken hold in hundreds of cities.
While managing office CRE is the most challenging, this investment is popular with investors prepared to take on additional risk in exchange for higher rewards.
Here’s why: if an investor signs a long-term lease with a tenant who needs most of the space available, this creates a lucrative income stream.
Also, if an investor buys a half-empty property at a lower price and brings in enough tenants to fill 80% to 100% of the space, this can push the property’s value way up.
Pros: Experienced CRE investors sometimes create a fast, lucrative payoff by selling an office building leased to reliable long-term tenants.
Cons: Office CRE is considered the most volatile. The trend towards remote work makes it difficult to predict future performance.
After you decide which type of CRE is best for you, it’s time to look at your financing options.
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Options for Financing CRE Property
If you have the cash to purchase a commercial property, congrats! However, chances are you’re planning something else.
In that case, here are several ways to begin your CRE investment.
Real Estate Investment Trusts
Commonly known as REITs, these enable you to buy shares in a property at an affordable price ($5,000 or less). They’re popular with CRE investors.
- It’s also easy to change your investment outlook: Just sell your shares when you’re ready.
- However, your income is limited since someone else is doing property management. Also, some REITs charge high fees.
Another funding option is crowd-funding.
Join the Commercial Crowd
A growing number of online crowd-funding platforms are specializing in commercial real estate, including:
- RealtyMogul is a platform that enables you to research hundreds of CRE options across the United States; and
- Streitwise is a platform that pitches itself as a “professionally-managed, tax-advantaged portfolio of real estate assets.” Streitwise is considered a good choice for conservative investors.
If you’re unsure of choosing the right financing or the right property, it’s time to think about enlisting the services of a CRE broker.
Why Work With a Broker?
A reputable CRE broker will share knowledge and resources to ensure your purchase goes smoothly. Here are some benefits of going the broker route:
- Market intel: Brokers have access to listings, comps, and other data. This enables them to tell you when a property is priced fairly, and when it’s not.
- Negotiation: When it’s time to get serious, your broker can take over negotiations or be present when your seller is preparing a contract.
- Street cred: If you’re new to CRE investing, having a broker represent you tells property sellers that you’re serious.
As with any investment, it’s vital that you do your research, take your time, and decide upon your preferred levels of risk. Happy investing!