Investing in Commercial Real Estate: Part 1

Many investors believe that all commercial real estate is too complicated for them or that you need a million dollars to get started. Neither is true. It’s possible to invest in commercial real estate with zero investing experience and an average salary. Commercial real estate can be a safer and easier investment than single family homes.

Commercial real estate encompasses a wider range of properties than many beginning investors realize.

For our purposes, commercial real estate meets two requirements:

1. Land and improvements purchased with the intention of providing profit. The profit can be derived from either leasing income or capital gains at the time of sale.
2. Not a residential property of four units or less. Single-family homes may meet the previous requirement, but do meet this requirement. Duplexes may be good real estate investments, but are not considered commercial property.

Avoid letting your preconceived notions get in the way of investing in commercial properties. Commercial real estate can be an excellent business for those with the interest to learn the necessary information and steps.

“In the real estate business, you learn more about people, and you learn more about community issues, you learn more about life, you learn more about the impact of government, probably than any other profession that I know of. “

– Johnny Isakson

Any type of real estate has the potential to be a good investment opportunity. Certain types of commercial investments are riskier than others, but commercial properties can offer greater financial rewards than investing in smaller residential properties.

Commercial real estate has several advantages over residential investing activities:

1. There’s much less competition. There are many homebuyers competing for single-family homes. Most real estate investors are more comfortable with smaller residential properties. If you can get over your discomfort, you’ll find there’s less competition for commercial properties.
   
2. Significantly higher income opportunity. Leasing commercial real estate is much higher in cost per square foot than found in residential real estate.

• Many single-family properties rent for less than 50 cents per square foot.
• An office in a high-rise building might cost over $100 per square foot.
• Single family properties typically return 1-4% on an annual basis.
• Commercial properties return an average of 6-12%.

3. The risk of vacancies is lower. If you’re ever owned rental homes, a vacancy can be devastating. A few months without a tenant can be quite expensive. However, a vacancy in a 25-unit apartment building is only a loss of 4% of your rental income.
4. Prices are easier to evaluate. Commercial real estate prices are normally based on the income they provide. An office building, shopping center, or apartment building is priced as a business. Businesses are priced on income and profit. Residential real estate prices are based on several other factors, including how desirable the property is to any interested buyer.
5. Sellers are more flexible and less emotional. A piece of commercial real estate is a business. By default, the owners are business people. Homeowners are more emotional when making decisions regarding the sale of their home. Commercial real estate owners view everything as a business decision.

• Commercial real estate owners can also be very flexible on price and terms. Everything is up for negotiation.

6. More potential for capital gains. There are commercial properties available that cost over $100 million. A 10% appreciation on $100 million beats the heck out of 10% of $100,000. Larger investments have the potential to provide larger returns.

Commercial investing can overcome many of the limitations of investing in single-family homes. Commercial properties are easier to appraise, the vacancy risk is lower, and the potential for large gains is greater. Consider these advantages before deciding on whether or not to pursue these investing opportunities.

“Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk.”

– Armstrong Williams

Thanks for reading! Stay tuned for the rest of this series, going live over the next few weeks. And as always, give us a holler if you want to chat about your own CRE investing journey.