Hey there, real estate investor: Are you ready to take the plunge from residential to commercial?
Come on in – the water’s fine. Especially if you prepare yourself by doing some research to sail the seas of commercial real estate investment. DRK and Company offers the following information to consider when it comes to commercial property investments:
Maybe you’ve been involved in the residential real estate market for years and are wondering if commercial real estate is right for you. A commercial property, by definition, is set up to house commercial interests. It could be a retail outlet, factory, medical facility or warehouse – businesses that pay you to give them a space to make money. Ideally, your building can house multiple tenants, offering more than one income stream.
There are three different classes for any business property:
- Class A: New, high-quality space in desirable location
- Class B: Older buildings with potential that need relatively minor upgrades
- Class C: Tougher-to-fill space that needs major improvements
If you’ve never invested in commercial property, it may seem intimidating to get started. Here are a few ways one may get into the market:
- Real estate investment trust (REIT): This is an easy, hands-off way to have a stake in a commercial property. You buy an REIT and have rights to a small part of the property. A company owns and operates the property, while you simply collect your share of profit – think of it as owning a share.
- Co-investing: Going in with other investors is an ideal way to get started in commercial real estate investments. Each of you is responsible for your share of the property – nothing more, nothing less. Profits are split evenly among investors, while you split responsibilities such as tenant lease agreements and the building’s needs.
- Private money lending: This passive form of investment lets you serve as the bank in a property deal – your money helps developers build projects.
Types of Properties
Of course, there are many different types of business properties. Understanding the demand and the considerations to make for each will help you determine which type is right for you:
- Office: Properties that house cubicles, conference rooms and a water cooler or two are the most common type of commercial real estate. These spaces may include a single tenant or be a skyscraper stacked full of tenants.
- Industrial: These large buildings may be used as a warehouse or factory, generally in the manufacturing industry. The demand for warehouses has been on the upswing as online-based companies need space to house their products prior to shipping.
- Retail: Another popular commercial type, these can be found in a variety of locations and for a variety of businesses, including restaurants, bars, family-owned businesses and large department stores.
- Multifamily: Many residential property real estate investors make the natural progression to multifamily units, which are considered commercial properties if they contain at least four units. As an investor, you must consider the higher tenant turnover rate typically experienced with these types of units than other commercial properties dealing with businesses.