What Is Commercial Real Estate? 5 Things to Know
Commercial real estate is one of the most lucrative investments in today’s investor market. For this reason, it’s on the wish list of many investors. However, before running to purchase real estate, you need to know what you’re getting yourself into.
But what is commercial real estate, and what do you need to know before investing your money? Unfortunately, most investors don’t know much about the real estate industry. In this article, we will help you understand more about commercial real estate. Read on below to understand more.
What Is Commercial Real Estate?
Commercial Real Estate (CRE) is a piece of real estate property that is exclusively used by companies, retailers, and other people in the service industry for business purposes. The property provides businesses with a workspace to help them generate income.
Commercial real estate properties are leased to tenants who are business owners. These properties include grocery stores, malls, office complexes, retail shops, and factories.
5 Things You Need to Know About Commercial Real Estate Properties
Purchasing a commercial real estate property isn’t the same as buying a residential one. Thus, your approach to the market will change significantly. Instead of looking for your dream home, you will be looking for a property that will offer you the highest return on investment (ROI).
The search for a commercial property may take longer than when buying a home. However, there are numerous things you should know before rushing to purchase your first commercial property. These include:
1. There Are Two Types of Commercial Real Estate Investment
Commercial real estate investment is one of the most lucrative endeavors. It also has a significant return on investment for investors who know the market well. Commercial properties may serve as an alternative for investors who don’t want to invest in the volatile stock market.
There are two ways you can make money in commercial real estate; renting your property and selling it after it appreciates in value. Below are the two types of real estate investment:
Direct Investment
A direct commercial real estate investment is where an investor buys a property and becomes the landlord. Then, they lease the property to individuals who want to use it for commercial or residential use. However, this is only suitable for investors who know about the real estate industry.
The good news is you can also hire a property management company with ample knowledge about the rental industry. A commercial real estate investment is considered a high-risk investment. However, when done right, it can be very rewarding.
Indirect Investment
Indirect investment is where the investor does not directly purchase the property. Instead, they invest in the industry through different securities, including industry-related stocks, exchange-traded funds (ETF), and Real Estate Investment Trusts (REIT). You can also invest your money in corporations that directly benefit from the real estate industry, such as realtors and banks.
2. The Industry Is Very Volatile During Economic Recessions
In case of an economic recession, small businesses are affected the most. For instance, it was reported that over 1.8 million startups and small businesses closed down during the 2007 Great Recession. In addition, the real estate industry is also affected when businesses close down because they cannot pay their rent.
During an economic downturn, every business is looking for ways to reduce its operating costs. If the business is too small, the owner may consider terminating their lease and allowing their employee to work from home. Thus, investors will be fighting a losing battle, trying to get the businesses to sign a longer lease.
3. Commercial Real Estate Has a Higher Potential For Making a Profit
As an investor in the commercial real estate sector, you will be handling more rentable space per square footage. This means more renters and increased income.
Most investors don’t know how to manage their properties, especially when they become landlords. Thus, it’s advisable to get a property manager to handle your rental properties. This means that you will no longer have to deal with the daily tasks of managing the property and its tenants.
4. It’s More Expensive to Invest in Commercial Real Estate
It's more costly to purchase commercial real estate properties than residential ones. It is quite easy to find an inexpensive residential property. Commercial real estate investments are capital intensive as the property will be sitting on a larger piece of land than an average home.
There are also very few commercial properties for sale in the market than there are residential ones. Joining this sector also means you will be competing with bigger fish such as crowdfunds, well-experienced investors, and REITs.
These are companies and individuals with better access, more specialized knowledge, expertise, and connections in the industry than an average investor. Unfortunately, this makes it relatively easy for you to lose out on great opportunities to such major players.
5. Commercial Real Estate Has Longer Lease Agreements
When renting a residential property, the lease term could be six months to one year. However, commercial properties have longer leases than residential ones. Businesses often sign 3 to 5-year leases, and some even opt for 15 to 20-year leases.
A lease is an agreement between the tenant and the building owner where the tenant agrees to pay rent and occupy the space for a specific period. Longer leases mean that the investor will have more reliable and steadier cash flow.
While many investors prefer longer leases due to the reliable cash flow, a bad and corrupt tenant could turn your extended lease agreement into a curse. In addition, evicting a bad tenant before the expiry of their lease can be quite expensive and challenging. For this reason, most experienced investors often take their time when selecting a tenant.
Are You Ready to Invest in Commercial Real Estate?
Investing in real estate is not an easy endeavor. First, you need to take time and learn about the market and find the right commercial real estate agent to help you with the process.
Most people know very little about commercial real estate. So what is commercial real estate, and what do you need to invest in the industry? For answers to these questions, please schedule an appointment with us today.
At Live Love Durham, we will work hard to help you fulfill your dream of becoming a commercial real estate investor. You can rely on us to put your needs first.