Investing in Commercial Real Estate - A Primer
Posted: June 28, 2018 by Anna Jotham
If you’re thinking about an investment in commercial real estate, you no doubt want a solid foundation of understanding on the potential pros and cons, the classifications of the properties and financing. And some helpful hints from the experts to get you on your way would be great too.
You’ve come to the right place.
Your guide to commercial real estate investment information
As experts in commercial real estate, we’ve pulled together this basic primer on investing in commercial real estate. This information can help you make thoughtful, informed decisions from a place of basic knowledge about the considerations for this investment opportunity.
The types of commercial real estate investment to consider
It may seem that the sky is the limit when it comes to investing in commercial real estate, but you may be interested in exploring the eight common categories of commercial properties.
1. Multi-family properties—these can include apartment buildings or condos with more than five units.
2. Hotels and hospitality—interested in hotels or resorts? This may be the category for you. It can include motels, hotels, resorts and inns.
3. Retail—retail properties can include malls, such as enclosed shopping malls, strip malls, or shopping plazas. This category can also include stand-alone shops, restaurants and grocery stores.
4. Office space—from small, single-level buildings with offices to awe-inspiring (and neck straining) skyscrapers, office buildings of all varieties fit into this category.
5. Agricultural—it may surprise you to know that big farms may be considered commercial real estate, particularly if the owner does not live on the property.
6. Undeveloped land—land that will be rented out or used to generate income in some way may also be considered commercial real estate.
7. Nonprofit—yes, buildings used by organizations that don’t make a profit can also be considered commercial real estate. These may house hospitals or schools or other nonprofit groups. As long as the owner charges the organization rent, it falls into this category.
8. Industrial—factories, data storehouses, shipping companies and other warehouses fall into this category.
Now that you have an overview of the types of commercial real estate that are available, let’s examine the classifications.
Classifications of commercial real estate
There are several classifications of commercial real estate that you will want to know about.
• Class A are the best properties, in great locations, with premium features and amenities.
• Class B are properties that are older than Class A properties, and therefore are a little more dated. They may also have tenants who pay rents that are below average.
• Class C properties are typically more than 20 years old and in need of renovations and improvements.
• Class D-F properties are rare, and there isn’t much difference between them. Class F are frequently among the most dilapidated and intended to be condemned.
Understanding mortgages for commercial real estate
As a potential investor in a commercial property, you may be expected to have a substantial sum of money for a down payment on your purchase. According to, “Investing In Commercial Real Estate,” on www.cbcworldwide.com, that could be as much as 35 percent of the value of the property. That’s no small consideration, and it’s admittedly quite different than investing in residential real estate.
In addition, repaying a mortgage loan for a commercial real estate investment is done differently than you would for say, a residential loan. For example, a lender might take the payments needed for a 20-year repayment schedule but put them on a five- or seven-year schedule. The result: you may be asked to make a balloon payment on the remaining portion of the loan when that five to seven years is up.
Finding the ideal commercial real estate property for you
Once you have an idea of the type of commercial property you would like to invest in, and how much you can afford, you’ll want to identify the commercial property that is right for you. Here are some tips to help you on your way.
• Get to know the current tenants and businesses in the commercial real estate property.
• Familiarize yourself with the adjacent properties, and have your real estate agent do some investigation into potential issues with the building and the area, along with plans for future changes.
• When you’ve found what seems to be the ideal property, work with your lawyer and your real estate agent to put together an offer and draft a letter of intent. If the offer is accepted, you’ll need to order a title survey and property inspections. You’ll also want a clear picture of the property’s history and the location of easements.
Essential tips for getting the best return on your commercial property investment
When it comes to investing in commercial real estate, you want to make sure you’re getting the best return on your hard-earned investment. Here are some essential tips to keep in mind.
1.Be wary of a deal that seems too good to be true. Saving money upfront doesn’t always mean it’s a great deal in the end. Doing your due diligence is a non-negotiable to protect your investment.
2.Work within your means, and resist the temptation to outspend your budget. To do that, you’ll want to add up all of the associated costs of the investment: from taxes through repairs and the mortgage loan costs.
3.Comps aren’t worth a thing. Looking at comparable properties won’t necessarily mean the investments are comparable. It’s all about how much income the property can generate. Keep that in mind when you’re looking at a property; if it brings in more income, it will likely cost you more to invest.
4.Know when to walk away. Always have a plan just in case the deal goes south. Hopefully you won’t need an exit plan, but if you do, it could save your skin.
5.Use your crystal ball. OK, we don’t mean a real crystal ball. Just do your research and know what’s on the horizon for the location you’re considering. Anticipate future development and how it will impact your intentions for the property, as well as the value of the commercial real estate. Know how the neighborhood is changing: is it growing or are people moving out of the area? These factors are vital to knowing the potential for your investment.
6.Remember maintenance and upkeep. No building stays in plum condition by accident. Plan for upcoming expenses associated with repairs and maintenance.
7.Surround yourself with the right team. From lawyers to inspectors to the right commercial real estate agent, having the right people working for you is key to finding the ideal commercial real estate investment.
The benefits of investing in commercial real estate are many
From appreciation of properties to longer lease terms, to the many income options and the relative ease of working with commercial tenants, you can find many benefits to investing in commercial real estate. Of course, no investment is entirely without risk, but when you compare the potential ROI and the likely lower expenses than investing in residential real estate, it’s easy to see why commercial real estate investing is an attractive option.
To learn more about the opportunities to invest in commercial real estate, contact us to connect with a skilled Realtor with expertise specific to your needs. We’re ready and eager to help you find the investment property you’ve been looking for.
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