Are you interested in learning the basics of how investing in the world of commercial real estate works? Using commercial real estate as a possible alternative asset certainly isn’t anything new to those with money, but if you’re like many investors, if you’re new to it personally, then it can be quite the mystery to you. Having said that, commercial real estate truly is all around you as you go through your daily routine. Every office space, every apartment building, and every office you visit or drive by is a piece of commercial real estate.
Commercial real estate can help you earn money in two different ways. The first is income, and the second is appreciation. The ownership and operation of a building can generate income for you, whereas appreciation happens from the value of the property going up over time. The entry requirements into commercial real estate are typically high for many investors, given the extra time, expertise, and capital necessary, particularly compared to the residential or housing real estate sector. Still, there are opportunities for those willing to save, sweat, and do the legwork.
While it can take many specific forms, commercial real estate is the broader term used for any real and physical property that is used with the intention of generating some kind of profit. Common or frequent examples of commercial real estate might include warehouses, apartment buildings, malls, hotels, medical or centers, farmland, industrial properties, and office buildings.
In a historical sense commercial real estate investing has proven successful as an alternative asset to stocks and bonds, often an area of investment that investors would turn to after starting off in equities so they could diversify their portfolios and enjoy risk-adjusted returns. However, for all the millions of investors that have delved into it previously, successful or otherwise, there are still quite a few that don’t know how real estate works out as its own investment vehicle.
There are notable differences between something like commercial real estate investment and more traditional avenues of investment, like the aforementioned stocks and bonds. Those frequently get traded on their own secondary markets, whereas real estate proves to be a more scarce resource which holds intrinsic value because it is a hard asset. You’ve likely heard of the ‘buy low and sell high’ attitude of many stock traders, which reflects the fact that quite a few stocks get bought simply for their selling potential instead of their capability to produce income, although dividend stocks can prove an occasional exception.
Commercial real estate usually follows a very simple investment strategy, which is all underpinned by the constant assumption that any given area will have an underlying and inherent demand for its real estate. An investor could buy a property and then make their money in a pair of ways. The first would be through leasing out or renting the property, or even subsections of it, to tenants that pay for their usage. The other way is through appreciation, which would happen if the property value rises over time. Keep reading to take a deeper look into both of these investment opportunities.
In the case of rental income, there are numerous kinds of tenants who can provide income streams. Each means various types of needs in terms of property management, customized arrangements, and lease agreements. For instance, an office location might mean you need parking spaces and cubicles for an accounting firm or IT start-up. Each company or business would pay its rent, often through lease terms ranging from five to 10 years. Apartment buildings would be homes to multiple families or individuals and roommates. Leases can vary in length of term, but typically won’t go over a year; some might even be monthly. Smokestacks and warehouses would be classified as industrial options, where things are made, manufactured, stored, or distributed. Such properties typically don’t located in an area where the land would be more desirable for retail or residential purposes.
The other opportunity where possible returns might present themselves is because the property value might go up during the time period in which an investor owns it. It should be noted that while that’s the general national trend, properties can certainly lose value. Even the most experienced and savvy investors (and their strategies that you might follow) can suffer losses given external or broader economic forces that can rear their ugly heads. Still, real estate proves to be a unique and even scarce asset class. The simple truth is, it’s not all that easy to create more land. What the planet has is simply what’s available. Inside a major urban area, demand will drive scarcity up even more. If demand goes up, or simply goes up around the property you own, then you might be able to charge tenants higher rents and sell to possible buyers for more than you paid for it originally.
You can also contribute to the appreciation of a property on your own. An active approach for adding value can mean making physical improvements that enhance the power of a property to generate income or even boost its intrinsic value. If you own an apartment complex, then putting in new appliances and updating the interiors can mean you might charge more rent for nicer rental units. If your pockets are deep enough, you might even successfully get an adjacent piece of land rezoned from retail to multi-family, letting you expand with more apartments.
Outside of dividend stocks, investments in commercial real estate typically means the investor can enjoy stable streams of rental income. Commercial real estate benefits from being a hard asset which is already a scarce resource. It’s got intrinsic value on its own, and will typically appreciate in total value with the passage of time. Broader economic growth is typically what drives up values in commercial real estate. In the past, average investors have not been able to tap into direct investment into commercial real estate given the high levels of capital required. However, the Internet has meant groups of investors can party up together, and a number of mutual funds let investors put funds into this sector without actually directly involving themselves with any specific projects. Learn more about investing from the professionals at 3cre.com.