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.
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.
Why Invest in Commercial Real Estate
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.
Of course, investing at all is beneficial to your future (if done correctly), but investing in commercial real estate can bring your portfolio — and cash flow — to a whole new level. Instead of 1 single-family residential property, invest in a multifamily property and have multiple tenants paying rent under 1 roof. Or, explore the many types of commercial real estate and decide what’s best for your real estate business.
To succeed in the world of commercial real estate, you do need to be willing to take some risks, which can exponentially increase your cash flow and give you passive income for years to come. Commercial real estate investors should also have a mindset with long-term goals.
Your real estate assets can become your livelihood — not just a hobby that happens to make a little passive income — but rarely does it happen overnight. Capital appreciation happens over time, with highs and lows throughout the investment. Enjoy raking in the rental income, and after a few years if it’s not for you, wait it out and sell at the height of the market for optimal capital gains.
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Types of Commercial Real Estate
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: central business district (CBD) and suburban offices, medical offices
- Industrial buildings: manufacturing spaces, warehouses, storage facilities
- Retail: regional malls, strip malls, retail centers with anchor tenants
- Multifamily housing: apartments ranging from duplexes to high-rise buildings, including affordable housing
- Hotels: full service, boutique, extended stay
- Mixed use: a combination of commercial properties
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 rental 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
Many commercial real estate investment opportunities are out there. 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.
Commercial Real Estate Trends
The commercial real estate industry in the United States has changed over the last year and a half. Because of the global pandemic, there have been recent changes to commercial real estate trends — like the fact that commercial real estate values are still down by about 6% from last year.
However, certain types of commercial real estate are bouncing back — they’re just adjusting and adapting to the new normal. The need for multifamily housing as well as affordable housing has increased because of the pandemic. The need for industrial real estate such as warehouse space has also grown. Fulfillment facilities in all areas are needed now more than ever to keep up with the major uptick in online shopping and the demand for quick shipping. Businesses are bringing their workers back to in-person or hybrid schedules — they still need office space but are choosing smaller spaces to save on rent and further analyze their needs.
While vacancy rates in commercial real estate, in general, are still high, it’s important to remember that the shifting that occurs during times like these can take you in a new direction, and investors have to be ready to revise their plans.
Investing in smaller office spaces, smaller retail spaces, multifamily apartment buildings and warehouse space can help commercial investors get ahead of the game while interest rates are still low.
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How to Get Started in Commercial Real Estate Investing
Commercial real estate investing is for anyone to start at any time. There are so many ways to get into it, with varying degrees of involvement and up-front money needed. Becoming a commercial investor just takes 3 key components: research, money and tenants.
- Research the area you’re looking to invest in. Is it an urban area or a suburb? What other commercial real estate is there? Is there a need for more? How are other businesses doing in that area? Your investment property needs to be in the right location in order to generate worthwhile income as a passive investment.
- How would you like to invest? If you go the REIT route, decide how much money you’re willing to invest and determine what kind of returns you can expect. Look into commercial loan types or crowdfunding if you are thinking about purchasing multifamily properties or other types of investment properties that need a large down payment. Calculate your operating expenses and figure out your net operating income.
- Line up your tenants. 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.
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.
- Best ForAccredited Investors
- Best ForNewer accredited investors
- Best ForSmall Account Real Estate Investing
- Best ForFarm Investing
For Accredited Investors Only
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.
Pros and Cons of Investing in Commercial Real Estate
Of course, investing in commercial real estate comes with pros and cons. It just depends on which type of strategy you are using to invest.
Traditional Commercial Real Estate Investing
Income potential: The potential to earn passive income being a landlord for commercial real estate is huge — much more than in residential real estate.
The triple net lease: Most commercial landlords use this type of lease. The lessee pays all of the expenses, including taxes. These leases are generally for 10 years with rent increases built right in.
Limited actual work: As the landlord for a commercial property, there is very little for you to do or maintain, especially with a triple-net lease in place. If you really have to, you can hire a property management company to take care of things you don’t want to be bothered with.
Risk: All sorts of risks are involved. Being the property owner leaves you with a lot of liability for accidents on your property, as it is a public space where anything can happen. There’s also the risk of your commercial tenants not being able to pay their rent or going out of business completely. Also, commercial real estate is a highly illiquid asset. If things go bad and you need to sell quickly, chances are you won’t be able to — at least not at the price you want.
Real Estate Investment Trusts
Great returns: REITs provide high returns and long-term capital appreciation while being less volatile than most traditional stock options.
No actual work: You will never get a midnight phone call that there’s flooding, the heating system broke or the roof is leaking. With REITs, you don’t own real property. You own a share in a company that owns and maintains real properties. As an investor, you are just investing your money and will never have to actually do anything for a real property.
Impressive portfolio: REITs are a great way to diversify your investment portfolio.
Lack of control. The nice part of REITs is that you don’t have to do much. That also means you don’t have much control. Investors in REITs give the control to the company they are investing in with no hands-on opportunities.
Slow growth: REITs are long-term investments. The growth rate is slow, and investors will make more money if they leave their money in for more than 5 years.
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