Commercial Real Estate Investing: The Ultimate Guide

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Contributor, Benzinga
December 26, 2023

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As residential real estate markets around the country continue to have amazing real estate investing opportunities, there comes a time to step it up and consider commercial real estate investing for some serious cash flow.

In 2022, the estimated value of the global commercial real estate market was 35 trillion USD, up from almost 34 trillion U.S. dollars the year before. The sector remains posed for impressive growth, with estimates suggesting that the commercial real estate market is estimated to grow at a CAGR of 3.3% between 2022 and 2027.

With a massive opportunity for passive income and enhancing your investment portfolio — not to mention the many types of commercial real estate there are to explore — becoming a commercial real estate investor is both a highly profitable passive investment and also a step into a much bigger world of real estate investing.

Benefits of Commercial Real Estate Investing

Commercial real estate investing has increasingly become popular over the years due to the numerous benefits it offers. One of the most prominent being the potential for long-term cash flow. Commercial properties generate rental income that can provide a steady stream of revenue for many years. Moreover, payments from commercial properties is typically higher than from residential properties due to the lengthy lease terms and stable tenants, making it a reliable source of cash flow for several years.

Another benefit of commercial real estate investing is the potential for capital appreciation. Over time, commercial properties have the potential to increase in value, which can result in significant profits when sold. Additionally, the ability to depreciate commercial properties over a number of years offers tax benefits to investors, reducing the amount of taxes paid on rental income and capital gains.

Investing in commercial real estate also provides diversification benefits to investors. Unlike stocks and bonds, where returns are dependent on market performance, commercial real estate investing allows investors to have more control over the investment and its performance. There are many different types of commercial properties across multiple geographic regions that can further diversify your investment portfolio, reducing exposure to any one specific market or economic sector.

For any investor who has been wondering why they should invest in commercial real estate, the answer is simple. It’s a much larger scale than investing in residential real estate.

How Investing in Commercial Real Estate Works

With commercial real estate investing, investors buy properties that are intended for business use, such as office buildings, shopping centers, warehouses, and hotels. The main source of cash flow in commercial real estate comes from rent payments made by businesses that occupy the space. Unlike residential real estate, commercial real estate is not subject to rent control, which provides an opportunity for investors to generate high rental income.

Investing in commercial real estate also involves some unique risks. For example, if a key tenant decides to vacate the property, the cash flow from the property could be heavily impacted. Additionally, commercial properties generally require a larger investment than residential properties, making it more difficult for new investors to enter the market. However, if done correctly, commercial real estate investing can be highly lucrative and provide a reliable source of passive income.

How To Invest In Real Estate

Hear from top real estate investment platforms CrowdStreet, Origin Investments, Modiv and Q.ai to learn more about how to invest in commercial real estate.

Types of Commercial Real Estate Investments

Entering the commercial real estate market as an investor can be overwhelming and confusing. The best thing investors can do is to narrow down what type of commercial real estate investment property they’d like to begin investing with. Generally, commercial real estate is any investment property larger than a single-family home that is used to generate a profit. This can be in the form of capital gains or rental income from the tenant.

Investment properties can be in:

  • Office Buildings: Investing in office buildings involves owning and leasing out space to businesses. It can range from single-tenant buildings to multi-tenant office complexes.
  • Retail Properties: Retail properties include shopping centers, malls, strip malls, and standalone retail buildings. Investors earn income by leasing space to retailers, restaurants, or other businesses.
  • Industrial Properties: Industrial properties encompass warehouses, distribution centers, manufacturing facilities, and logistics hubs. Investors can benefit from long-term leases with industrial tenants and the growth of e-commerce and supply chain demand.
  • Multifamily Properties: This category includes apartment buildings, condominiums, townhomes, and other residential complexes. Income is generated through rental payments from tenants.
  • Hotels and Hospitality: Investing in hotels can involve owning and operating full-service hotels, limited-service hotels, resorts, or vacation rentals. Income is derived from nightly room rates and additional services provided.
  • Medical Buildings: Medical properties cater to healthcare providers, such as hospitals, clinics, medical offices, and specialized treatment centers. These investments can provide stable income due to long-term leases and the demand for medical services.
  • Mixed-Use Developments: Mixed-use properties combine residential, commercial, and sometimes even recreational or cultural spaces within a single development. These projects offer opportunities for income diversification and potential synergy between different uses.
  • Self-Storage Facilities: Self-storage facilities provide individual storage units for rent. These properties can offer steady income and low operating costs.

Knowing which types of commercial real estate you would like to invest in is half the battle. Next, home in on just how involved you’d like to be. Depending on the investment strategy you choose, you can be as involved or not involved in the process as you’d like.

For example, you can simply invest money and let a company do the rest, such as in real estate investment trusts (REITs) where you earn dividends. Or you could own commercial property and lease to commercial tenants where you earn generate income. You also could really dive right in and invest in owner-occupied real estate. Owner-occupied real estate is where you either live a property as well as renting it out (multifamily housing) or run your own business out of a commercial property that you own.

Types of Commercial Leases

If you choose to invest in commercial real estate with commercial tenants, you must know the types of leases that are commonly used:

  • A triple net lease (NNN) is popular among commercial landlords. The tenant is responsible for base rent plus taxes, insurance and maintenance. This type of lease is more favorable to the landlord.
  • A single net lease is a lease more favorable to tenants, who pay a base rent plus a portion of the property taxes and all of the utilities. The landlord covers the building expenses and maintenance.
  • The modified gross lease is a more negotiable lease, where the landlord and tenant share the expenses for the building and negotiate who is responsible for what. This way tenants pay an agreed-upon fixed amount, which includes their share of the maintenance. They are usually also responsible for their own utilities.
  • The gross lease is a commercial lease based on the square footage of a facility. The most straightforward of leases, the landlord quotes a fixed amount per square footage, including all other expenses, and the tenant agrees. This lease is for a specific period of time and is subject to increases over time, but for tenants, it is the easiest way to budget their rental expenses.

Commercial Real Estate Investment Strategies

There are numerous ways to start investing in commercial properties. The most common real estate investment strategies are:

Buying real property

This is simply buying a commercial property, getting a tenant and collecting rental income. It’s easy to do and an easy start to continued cash flow. With financing options like bridge loans and other commercial loans, you don’t always need cash to get started.

Investing in REITs

With real estate investment trusts, you don’t have to be an accredited investor to invest — anyone can do it. Investing in a REIT is investing in a company that owns and operates income-producing real estate. With this strategy, the investor does not physically own real estate but invests in shares of the company. This way, the company does the work and the investor reaps the benefits.

Crowdfunding

This is a great strategy for beginner investors to get startup capital. It’s a form of alternative financing that raises money from several investors to start a project or small business. In this case, a “crowd” invests money and that money can be invested into commercial real estate. As an investor, you can either work on raising the money to invest or be part of the crowd and invest your money in a commercial opportunity.

These are all great options to diversify and grow your investment portfolio. To help decide on the best investment opportunity for the most impressive portfolio, consider an asset manager. Many financial institutions are happy to help you mitigate risk and find the best options for you. They generally work with investors of high net-worth or big corporations.

How to Get Started in Commercial Real Estate Investing

While commercial real estate investing can be lucrative, but it's important to have a solid plan and do your research before diving in. Here are some tips to help you get started.

Assess Your Financial Situation

You'll need to have a significant amount of capital to invest in commercial real estate, and it's important to have a plan for financing your investments. Consider your current income, savings, and credit score, and decide how much you can afford to invest.

Develop an Investment Strategy

Define your investment strategy based on your goals and research. Determine the property types you want to focus on (e.g., office, retail, industrial), preferred investment size, target returns, and risk tolerance. Consider whether you want to invest directly in properties or through real estate investment trusts (REITs) or syndications.

Seet Out Commercial Real Estate Investing Opportunities

Once you've decided on the type of property you want to invest in, start looking for potential investments. You can find commercial real estate listings online, work with a real estate agent, or network with other investors. When evaluating potential investments, be sure to consider factors like location, market trends, and potential for future growth.

Make Offers and Close Deals

Once you identify a suitable investment property, make offers that align with your investment strategy and conduct negotiations with the seller or their representative. Engage with professionals to guide you through the purchase process, including legal due diligence, contract negotiations, and closing procedures.

Decide which kind of lease works best for you and your situation and how much to charge while taking care of your expenses and also being competitive in the current market.

Manage and Monitor Your Investments

Actively manage your commercial real estate investments by monitoring property performance, tenant relationships, market conditions, and financial statements. Implement effective property management strategies, and consider outsourcing property management if needed.

Best Commercial Real Estate Investing Opportunities

The best commercial real estate investment opportunities are subject to whether you as the investor want to own real property or not.

Becoming a real estate investor and owning real property is a great investment opportunity. As the owner, you have the final say in how things are run, what changes are made to the building, who you accept leases with and you directly earn the passive income.

You can either manage the property yourself or hire an outside person or property management company to do it for you. As the landlord though, you are responsible for a lot of the maintenance of the actual building itself — like the roof, heating and air conditioning units and yard and lobby maintenance.

With a REIT or crowdfunding, however, you don’t have to take on the responsibilities of owning a real property, and yet you still reap the benefits of investing in commercial real estate. Investing this way allows you to own a share in a property, or portfolio of properties, with a company that does all the work for you. The company owns manages and maintains the property. You have much less risk because there is no buying and selling real properties and no maintenance you must do.

Benzinga has done the research to find the best commercial real estate investment opportunities available. You can check out our top real estate investing platforms below.

Researching Commercial Real Estate

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  • Visitation trends
  • Foot traffic figures
  • Cross-shopping habits
  • Co-tenant information
  • Combined metrics using these figures and more

Search the city, state and ZIP, look anywhere in the country and collect information that will help you move, add a business office or seek out new opportunities.

Understanding Commercial Real Estate Investing Returns

Commercial real estate can offer excellent returns on your investment. You can expect much higher returns with commercial real estate than with residential real estate. The returns are affected, however, by things like the purchase price, supply and demand, the overall economy and which sector of commercial real estate you have invested in as well as the strategy used. 

Choosing commercial real estate with multiple tenants such as multifamily housing decreases overall risk and helps to maintain a consistent cash flow from rental income. An increase in property value is a necessity for growth in real estate investing, and luckily, well-maintained multifamily housing in good areas does just that. 

Choosing publicly-traded REITs yields high returns because of the long-term approach and understanding of market cycles. Investing in REITs as an accredited investor or simply a beginner investor can set you up with impressive returns if you’re in it for the long haul. 

Commercial leases on most commercial investment properties also offer great returns because these leases are generally for 5 to 10 years. Investors know exactly how much money to expect each month and can plan accordingly. 

Final Thoughts

Commercial real estate investing offers a wealth of opportunities for individuals looking to diversify their investment portfolios and generate passive income. While it requires careful planning, research, and financial assessment, the potential rewards can be significant. By educating yourself about the market, defining your investment goals, and building a strong network of professionals, you can navigate the world of commercial real estate with confidence.

Frequently Asked Questions

Q

What is commercial real estate investing?

A

Commercial real estate investing is the process of purchasing and managing real estate properties for the purpose of generating income. These properties typically include office buildings, retail spaces, warehouses, and industrial parks.

Q

How is commercial real estate investing different from residential real estate investing?

A

Commercial real estate investing generally involves larger properties and higher overall costs, but it also typically produces higher returns than residential real estate. Additionally, commercial real estate investing often requires more specialized knowledge and experience, and has a longer timeline for generating profits.

Q

What are some of the risks associated with commercial real estate investing?

A

Like any investment, commercial real estate investing carries risks. These may include a decline in property values, a downturn in the local economy, fluctuations in interest rates, changes in zoning laws or building codes, and unexpected expenses like maintenance or repairs. To mitigate these risks, it’s important to conduct thorough due diligence before investing, work with experienced professionals, and have a solid understanding of the local real estate market.

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