The amount of capital required to engage in commercial real estate varies significantly based on property type, location and investment strategy. Some investment opportunities may require a few thousand dollars as a minimum, while others demand millions.
Core investors typically prioritize income over capital gains, favoring a stable cash flow over long-term appreciation. However, new investors can enter the market by investing in coin-operated laundries or other lower-risk properties.
1. Office Buildings
The most profitable commercial real estate investments tend to be those that have multiple tenants, like multifamily apartments or self storage facilities. When you have more tenants, you can split the property’s taxes and maintenance costs with them. That allows you to generate a greater cash flow and lowers your risk profile.
Office buildings are another popular investment choice, ranging from small single-story suburban offices to massive skyscrapers that can hold dozens of businesses. Unlike other types of real estate, office spaces are often leased on an extended basis, which gives you the opportunity to earn income for years to come.
Warehouses, also known as distribution centers, are large industrial spaces that function as the central hub for a company’s national or regional inventory. They’re a great asset class for investors because they typically provide low overhead costs, and long-term leases that protect against inflation.
Retail space is a challenging area to invest in, as online shopping has taken a toll on brick-and-mortar stores. However, high-quality malls that house major national brands are still a great option for investors who can find the right locations. It’s also important to keep in mind that the commercial real estate market is cyclical, so it’s vital to perform your research and stay ahead of industry trends. This will help you identify opportunities and beat the competition.
2. Retail Space
While the conversation around e-commerce has suggested brick and mortar retail is dying, it’s important for commercial real estate investors to realize that many people still want to visit restaurants, stores, and other shopping venues. This type of real estate typically offers a high level of return with consistent income as well as potential growth over time.
One of the most common ways to invest in commercial real estate is through a long-term buy and hold strategy. This involves buying a property and holding it for the long-term to maximize the cash flow from it. Investors can implement this investment strategy with everything from single-tenant net properties to skyscrapers and even distressed shopping centers. This strategy is a good fit for investors who want to limit their involvement in the day-to-day operations of the property and instead hire a professional management team to oversee everything onsite.
Another way to invest in commercial space is through REITs (real estate investment trusts). These companies are similar to mutual funds and can be a great way for those new to investing to diversify their portfolio without having to own the property themselves. However, it’s important to keep in mind that returns and growth can be impacted by market fluctuations as well as the performance of the specific property you are invested in.
3. Industrial Space
Industrial space offers investors impressive returns, significant monthly cash flow and a solid hedge against stock market volatility. However, there are a few key things to consider before investing in this asset class.
Unlike other commercial properties, industrial spaces can be used for multiple purposes. This allows industrial landlords to maximize their net operating income by repositioning the property depending on the demand of the market. If, for instance, a warehouse is no longer meeting the needs of an e-commerce distributor, it can be converted into office space and advertised as such to attract a new tenant.
In addition to being flexible, industrial spaces have a shorter development cycle than other real estate assets. This is largely due to the fact that they are typically located in port cities, which have existing infrastructure and labor pools that can help businesses get up and running quickly. This type of real estate is also attractive because it provides tenants with a passive income that they can write off on their taxes, giving them more flexibility than other types of investments.
In general, investors are predicting strong growth for the industrial space in the years to come. This is partially due to the fact that e-commerce distribution and warehousing are expected to grow exponentially over the next decade, driving demand for industrial space.
4. Multi-Family Complexes
While the majority of commercial real estate investors focus on office buildings and multifamily apartment complexes, these are not the only property types that can generate significant cash flows for savvy investor. Other investment properties that make excellent commercial real estate investments include strip malls, warehouses, mixed-use spaces and even hotel properties. Depending on the property type and the location, these types of commercial real estate investments can generate excellent returns.
It is important to research the property market before investing in any commercial property. The local economy and job growth rate are important factors to consider. If the economy is going through a recession, it can be difficult to find tenants for an office building or retail space. Likewise, if a company is in trouble and decides to close up shop, it will affect the demand for that area.
Investing in commercial property requires a larger upfront investment than investing in single-family homes, but the return on investment can be significantly higher. This is especially true if the property is located in an area with high population growth or in a growing industrial sector.
When you are ready to begin investing in commercial property, it is recommended that you consult with a licensed professional to ensure your investment strategy aligns with your goals. While some investors prefer to stick with single-family home investments, those that enter the CRE market often find that it provides greater returns, tax benefits and instant portfolio diversification.